Effect Of Auditor Independence On Quality -Myassignmenthelp.Com

Question: Discuss About The Effect Of Auditor Independence On Quality? Answer: Introducation As per section 250(1), Marketing Professional Services of the International Ethics Standards Board for Accountants, if a Professional Accountant in Public Practice requests for obtaining work through advertising his expertise and qualifications, there is a possibility of possible risks to conformity with the basic principles. According to section 250(2), the professional accountant shall not degrade his /her profession while advertising his expertise or qualification. The accountant should be fair and sincere in his dealings. The accountant shall not make a mountain out of a molehill for his services, qualifications or expertise. So, in this case, the Berowra Accountants are advertising a special in the local paper that they guarantee to provide their clients with a tax refund .It is a wrong practice to guarantee tax refunds. They can plan the tax savings and tax planning. So, there is a violation of section 250 Marketing services in the mentioned case (International Ethics Standards Board for Accountants, 2016). As per section 210(1), Professional Appointment, of the International Ethics Standards Board for Accountants, the professional accountant in public practice shall evaluate the prospective client before accepting the offer to provide expertise and services. The risk of non-compliance of the basic principles may arise due to ambiguous issues pertaining to the client. According to section 210(4), the professional accountant shall gain full knowledge and comprehend the client fully. He/she should also evaluate the owners, managerial personnel, governance and commercial activities. The accountant should secure the clients assurance regarding the improvement of the corporate governance practices and internal control procedures. According to section 220(1), Conflicts of Interest, of International Ethics Standards Board for Accountants, a professional accountant shall recognize the situations which could pose a threat to Conflicts of Interest. So, in this case, Jamie Harvey is an auditor for a chartered accounting firm has been offered to be the treasurer of the local athletics club .It is against the ethical principles of section 210 and 220. Hence, Jamie cant be the treasurer of the local athletics club (Glover Prawitt, 2014). According to section 290(1) Independence Assurance Engagements of International Ethics Standards Board for Accountants, the professional accountants shall be independent of their clients. So, in the given case the Pymble Accountants has carried the audit of Monlee Ltd. and the final payments are dependent upon receiving the appropriate report (PWC, 2013). There is a violation of the ethical principle under section 290 as it is unethical on the clients side to influence the results of the analysis of the financial statement. So, the auditors should decline such offer from the clients side (International Ethics Standards Board for Accountants, 2016). According to the section 230(1), Second Opinions of International Ethics Standards Board for Accountant, if a professional accountant have been asked to deliver a second opinion on the auditing and accounting matters, by or on behalf of the company which is not his/her client may pose a threat to compliance of the basic principles. If the professional advice provided by the latter accountant is not based on the same set of information which were made available to the former, it may pose a threat to compliance with the auditing principles (Patrick, Vitalis Mdoom, 2017). So, in this case, where Winton Accountants have submitted the working papers of audit of Motoring Services Company after its completion to Chadwick Chartered Accountants for the quality review of the audit work is against the ethical principle. According to section 230(2) of International Ethics Standards Board for Accountants, they should first evaluate the probability of any risks and implement the precautions to minimize them upto a significant level. Kaveh et al. suggests that accounting emphasizes on stating the facts and the consistency of the financial statements in an impartial manner. Through Independence, the auditor states that he has performed his task in an unprejudiced way. The auditor should express an honest and fair opinion pertaining to the financial statements. He /she should not be affected from the influence of the client entity. His judgment shall not be prejudiced by any relationship between them. In the given case, the auditors are facing Self Review Threat in which one of the members of the auditor team Jane Davis has been the past employee of the client entity. So, she should not be appointed as a part of the audit team. It would affect the independence of the auditing team (Nawaiseh Alnawaiseh , 2015). As per CPA (2014) the Management Threat occurs when the audit firm performs the work regarding the judgments and decision making which should be the accountability of the management. In the given case, John Darrow, the Audit Manager of Darrow Associates Accountants, has received the accounts of Winmalee Ltd. which has the optimistic approach of the valuation of development expenditure capitalized in the intangible assets. It might have an impact on the firms performance. The management should adopt the pessimistic approach while assessing the value of the development expenditure capitalized in the intangible assets. It is the managements duty to adopt the right approach while valuing the development expenditure. Also the auditors are facing the threat to integrity as per section 110 Integrity of the ICAEW Code of Ethics. Integrity implies not only in adopting fair dealings but also fairly communicating with the client entity while conducting the audit (ICAEW, 2013). So, the auditors are facing the Management Threat as well as Threat to Integrity. In the given case, the chocolate company invited the auditing firm to visit its seconds chocolate shop where defective chocolates were sold at a discount and to join its social club, before the completion of audit. This may result in Self Interest Threat to the independence of auditors. It occurs when the auditing firm or its members can take the undue advantage from the financial interests or self- interest from the client. With regards to the mentioned case, the client entity is trying to affect the independence of the auditors by offering discounted products and hospitality so that they can produce good report of its financial statements. As a result, the auditors are facing Self- Interest Threat to their independence (Ali Nesrine, 2015). As per Section 570 of the Auditing Standard ASA 570 Going Concern, the accountability of the auditors is to assess whether the firm has the capacity to continue as a successful entity and financial report should be prepared accordingly. So, in the given case, as per ASA 570, the auditor would give a Qualified Opinion. As the company is running short of funds to pay its debts and it has been asked by the bank to repay its overdraft within a month. All the other attempts to obtain the funds have been failed. So, the company is facing the threat to operate successfully in the near future (Auditing and Assurance Standards Board, 2015). Though the auditors have not found any substantial misstatements in its financial report but there seems to be a threat to its existence. The auditors will mention the commissions made by the company in the additional paragraphs and the reasons of their Qualified Opinion (Wickramasingha . Nanayakkara, 2015). In the given case, where the difference between LIFO and FIFO is calculated which has led to material misstatements affecting the stock. The auditor shall produce an Adverse Opinion in this regard. As per Australian Auditing Standard ASA 405 Evaluation of Misstatements Identified during Audit, the auditors shall form their view regarding the financial reports .They must analyze whether the accounts are free from substantial mismanagements (Auditing and Assurance Standards Board, 2015). In the given case, the factory located in Melbourne was valued five years ago. The same amount is included in the balance sheet, assuming that the market values have remained same during the past five years. In this case, the auditors will give a Qualified Opinion regarding the financial reports of the Victorian Manufacturing company. They will mention their qualifications in the extra paragraph (PCAOB, 2017). References Ali , O. M. Nesrine, A. (2015) Factors Affecting Auditor Independence in Tunisia: The Perceptions of Financial Analysts. Journal of Finance and Accounting. 3(3), pp.42-49. Auditing and Assurance Standards Board (2015) Auditing Standard ASA 450 Evaluation of Misstatements Identified during the Audit [Online]. Available from: https://www.auasb.gov.au/admin/file/content102/c3/ASA_450_Compiled_2015.pdf [Accessed 19th January, 2018]. Auditing and Assurance Standards Board (2015) Auditing Standard ASA 570 Going Concern [Online]. Available from: https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 15th January, 2018]. CPA (2014) Provision of accounting services to an audit client: Example of Threats and Safeguards [Online]. Available from https://www.cpaireland.ie/members/technical-resource/ethics/ethical-standards-for-auditors/accounting-services-examples-of-threats-and-safeguards [Accessed 18th January, 2018]. Glover, S. M. Prawitt, F.D. (2014) Enhancing Auditor Professional Skepticism: The Professional Skepticism Continuum. Current Issues in Auditing. 8(2). pp.P1P10. ICAEW (2013) Integrity [Online]. Available from https://www.icaew.com/en/technical/ethics/integrity [Accessed 19th January, 2018]. International Ethics Standards Board for Accountants (2016) Handbook of the Code of Ethics for Professional Accountants. New York: International Ethics Standards Board for Accountants. Kaveh, M., Khalili, M. , Ghorbani , A. Soroush, M.( 2014) Professional Ethics in Accounting and Auditing. World Essays Journal. 1(2),pp. 85-93. Nawaiseh, M. A.L.AI. Alnawaiseh, M.(2015) The Effects of the Threats on the Auditors Independence. International Business Research. 8(8),pp.141-149. Patrick, Z., Vitalis , K. Mdoom, I.(2017) Effect of Auditor Independence on Audit Quality: A Review of Literature. International Journal of Business and Management Invention. 6(3), pp.51-59. PCAOB (2017) AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances [Online]. Available from https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf [Accessed 19th January, 2018]. PWC (2013) Point of View [Online]. Available from https://www.pwc.com/gx/en/audit-services/publications/assets/pwc-pointofview-mandatoryrotation.pdf [Accessed 19th January, 2018]. Wickramasingha, S.R.M. . Nanayakkara, K.G.M. (2015) The External Auditors Opinions and The Stakeholders Purposes: An Empirical Analysis in Sri Lanka. Kelaniya Journal of Management.4 (1), pp. 31-49.