The importance of independence and impartial in auditors


As an auditor, the role of the auditor must to be independent and impartial when they transmit out their work, therefore this will give objective view on the financial statement of an entity. (ACCA, 2007/2008).

Independence in auditing meaning is taking an unbiased viewpoint in the performance of audit test, the evaluation of the issuance and results of audit reports. For example, if the client advocate by auditor, then the auditor would not consider as independence. (ACCA, 2007/2008)

Objectivities are a state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of independence from those influences which could impair objectivity. (ACCA, 2007/2008)

The objectivity matter of independence is the auditors are able to provide objective assurance on the "truth and fair" of the financial statement which set by director. Besides that, the public interest, the companies are public entities, it is requiring to disclosure all the information. (ACCA, 2007/2008)

Question 1 (b)

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i) Self- Interest Threats

This threat can happen from ownership of a financial interest in the assurance client or close family or other interest of member. (Messier, Boh, 2004). For example, the Company AIA is audit by auditor, but at the same time, the auditor is holding the shares of the company AIA, this will causes self-interest threat occur, because the auditor might be obtain some confidential info from the company AIA to buy the shares.

ii) Self-Review Threats

This threat will occur when the judgment or product of a precious engagement needs to be re-evaluated in getting conclusion on the assurance engagement. (Messier, Boh, 2004). For example, the decision of business or data to generate financial statement is subject to validation or review by the same persons, therefore the self-review will occurs.

iii) Advocacy Threats

This threat will occur when a one company or a member of the assurance team acts as an advocate or a promoter on behalf on an assurance client. For example, the auditor acting as an advocate on behalf of an assurance and provide the information in order to protect the client. (ACCA, 2007/2008)

iv) Familiarity Threats

This threat will occur when member of the assurance team becomes too sensitive to the client's interests because of close relationship with the client or its officers. (Messier, Boh, 2004). For example, the auditor is not allowed auditing work for the client who closes relationship, such as family member, this is because it will influence the decision of the auditor.

v) Intimidation Threats

This threats will occurs they might be deterred from acting independence and objectivity by threats from the client. For instance, if the clients want to change the audit report without any reasonable reason, the auditor disagree to follow, but some of the auditors in order to protect their job, they might be follow what the client say, therefore the intimidation threats will occurs. (Messier, Boh, 2004)

Question 1 (c)

Matters 1:

Identify Possible Threats

In this situation, a partner of the audit company, Ivan & Co, Ms Cake holds the shares of the client company, G.O Roamin. This may possible self-interest threat and may arise of the independence audit team in this situation because the partner of the audit firm inherited share of the client. (ACCA, 2007/2008)


The possible may seem significant because Ms. Cake is a shareholder in the partner of the firm and also is client of the company. Beside that, the financial statement holding by Ms. Cake is a direct investment. (ACCA, 2007/2008)


For the safeguards is maybe necessary is the remove or transfer Ms. Cake to another audit team, and disposal the direct interest of the client company. Beside that, Mr. Ivan also can involve an additional professional account not involved in the assurance engagement to evaluation the work done by the member or advice when necessary.

(ACCA, 2007/2008)

Matters 2:

Identify Possible Threats

In this situation, Mr. Ivan has been offer an extended hospitality by a client company which is a substantial discount on holiday in Bali. This may give arise to possible familiarity and self-interest threat and the independence of the audit team. (ACCA, 2007/2008)


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The threats is significant or not is depends whether the hospitality extended to Mr. Ivan was within normal commercial term or it is the client are always offer to their own staff or auditor. If the gift and hospitality is not client's normal commercial term, as a result, the thereat will become a significant. (ACCA, 2007/2008)


Mr. Ivan should seek the permission from management or another partner before accepting hospitality from client. Beside that, the audit firm may have policies, procedures to prohibit staff or partners from accepting gift and hospitality. (ACCA, 2007/2008)

Question 2 (a)

Test of Control

In order for evidence of authorization on purchase requisitions and order, the auditor should text the numerical sequence through using pre-numbered order forms by Presto Company. (ACCA, 2007/2008)

In order to ensure the good received notes, the auditor can test goods received notes for verification of quantity, quality and condition. (ACCA, 2007/2008)

To ensure the suppliers' invoice with purchase orders, the auditor can test the supplier invoice of price, quantities and comparison with order and Goods received note. (ACCA, 2007/2008)

To ensure the suppliers' invoices for evidence of matching suppliers invoice to Goods received notes. (ACCA, 2007/2008)

For suppliers' monthly statements, the auditor cans comparison of supplier statements with purchase ledger balances. (ACCA, 2007/2008)

Substantive Procedures

Check from the purchase ledger accounts to the list of balances and vice versa and cast the list of balances. (ACCA, 2007/2008)

Comparing supplier statement with year-end purchase ledger balances, and check from Goods received note before year end. This is wanted ensure the purchase invoice are posted to purchase ledger. (ACCA, 2007/2008)

Checks the schedules of accruals are fairly calculated and the sample of purchases recorded in the books to supporting documentation and have allocated to the correct account. (ACCA, 2007/2008)

Check whether valid debts are recorded in purchase ledger by inspecting credit notes. (ACCA, 2007/2008)

Review the term of sale of major supplier to confirm that liability not provided for does not exist or are immaterial. (ACCA, 2007/2008)

Question 2 (b)

To determine that a confirmation is necessary, the auditor will write to supplier and get the confirmation. The first reason is if the client has weak internal control, supplier statement may not be available to examine. Therefore, the confirmation may be used as a main source of evidence. (Messier, Boh, 2004).

Secondly, is the account balance appeal to be irregular or the nature or size of balance or transaction is abnormal. For example, the liabilities nor recorded and the regular supplier with small or zero balances and a sample of other accounts are confirmed in addition to large-value account. (ACCA, 2007/2008)

In addition, if the suppliers' statements are unavailable or incomplete, therefore the auditor should send the confirmation to verify. Beside that, the auditor will send the confirmation if the client deliberately trying to understate the payables. (ACCA, 2007/2008)

Lastly, if the supplier does provide the relevant information, therefore the auditor not needs to send the confirmation to verify.

Question 3

To: Mr. Peter, Director of Electra Trading Sdn Bhd

From: Jeff & Kelvin Audit Firm

Subject matter: Auditor's responsibility to consider fraud in an audit of financial statement

Fraud is a criminal deception made by the employee of the company where it comprises the use of deception to get the unjust or illegal financial advantage and the intentional. The auditor is necessary to plan audit to detect fraud and error with reasonable expectation if there are significant misstatements in financial statement, (ACCA, 2007/2008)

Fraud it can be classified two types, such as fraudulent financial reporting, this fraud arising misstatements or disclosures or omissions of amount in financial statement intended to take in users of the financial statement. The fraudulent financial reporting might involve act such as manipulation, falsification of records or document, misrepresentation affecting the financial statement and intentional misapplication of accounting policies. (Messier, Boh, 2004)

Secondly is misappropriation of asset, also name as defalcation, involving to steal the company's assets and where the theft causes the financial statement to the company to be misstated. For example, embezzling the receipts, such as divert to private bank accounts. Beside that, stealing assets of the company, such as cash or inventory. (Messier, Boh, 2004)

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In order to decrease the audit risk to a sufficiently well in low level, the risks of material misstatements in the financial statement due to fraud must consider by the auditor. When the auditor face the risk factor in the audit work and to determine the possibility of that fraud, the auditor must have attitude of professional skepticism, which involves the questioning attitude and supporting conclusions and opinions with appropriate relevant audit evidence. (ACCA, 2007/2008)

The auditor's responsibility to undertake the risk assessment procedures, firstly, the auditor must making inquiries of management about all the related information of the client and its environment such as organization structure. Secondly, the auditor should increase the assessment of audited risk and carefully examine any financial statement account items or transaction that may involve estimates or subjective judgments by management. Beside that, the auditor can use the ratio analysis to consider unusual or unexpected relationships in the financial statement. (Messier, Boh, 2004)

Where the fraud results in a financial statement the auditor should inform to the top of management as soon as possible. (ACCA, 2007/2008).

If Fraud involve in top management, which have a significant role, the auditor should think whether should breach his professional duty of confidences, therefore the auditor should take legal advice. (ACCA, 2007/2008).

Question 4 (a)

Auditors will have to carry out the substantive audit test to verify the trade accounts receivables at the year end. Firstly, aging analysis or more known as aged trial balances is the list of all the receivable account at the balance sheet date. In this aged balance sheet, "it included the individual customer balances outstanding and a breakdown of each balance by the time passed between the date of sale and the balance sheet date" (Arens, et al, 2003) .Having a test in aged trial balances is an important thing during the audit process. It could check out whether there is a mistaken figure between the general ledger and the account receivable master file. (Arens, et al, 2003)).

The second step of the substantive audit tests is a confirmation of accounts receivable. Auditors will write to client's customers to obtain confirmation of outstanding balances. The auditor should document completely the decision not to gather such evidence because of the importance of accounts receivable confirmations. (Arens, et al, 2003).

There are two types of confirmation letter will be sent out to client's customers. First is a positive confirmation, which is a customer is asked to confirm to the auditor direct if agree with the balances. Second is negative confirmation which is a customer is a asked to respond if disagrees. (Messier, Boh, 2004).

The procedure that could be reviewed to check the bad debts and by using these procedures, the auditor could be confirming up the valuation of the debts. Examine the client correspondence with customer; solicitor or any debts collection agencies are one of the procedures that could verify the valuation of the debts. In order to ensure that sales transactions are record in the correctly accounting period, they are suggested to check invoices and credit notes to sales ledgers. (Messier, Boh, 2004)

Analytical reviews of sales are of the method to verify the account receivable. This analytical review is use to examine the fairness of the account. It usually will use on the sales, account receivable, provision for bad debts, bad debts and sales return. The auditor must check the inventory turnover days whether it stated correctly. Comparison percentage must be done in the bad debts and sales return for this year and previous year. (Messier, Boh, 2004)

Lastly procedures is a sales cut-off, it is to ensure the sales are completely recorded. Check goods outwards and returns inwards notes around year end to ensure that invoices and credit notes are dated in the correct period and invoices and credit notes are posted to the sales ledger and nominal ledger in the correct period and review material after date invoices and ensure that they are properly treated as following year sales.

(ACCA, 2007/2008)

Question 4 (b)

The verification of trade receivable by direct communication is the normal means of providing audit evidence to prove that receivables represent bona fide amounts due to the company. (ACCA, 2007/2008)


Where there is a situation the customer does not agree with the balances there are a few reason would lead to these disagreement. On of the reason is cut-off problem, the client's record maybe not recorded in current sales but recorded in the future sales. (ACCA, 2007/2008)

Second, client may have not updates the accounts records. For example, client may have been received the payment from customers, however, there have not updates these transaction in accounting record. In addition, customer is not agreed the balance is because they have been paid payment. However the client has not received the payment due to problem of cash transit which is normal timing difference. (ACCA, 2007/2008)

Third was the disputed between the client and customer. This disputed appear when the provision for bad debts does not calculated approximately. (ACCA, 2007/2008)


Under ISA 505, requires the auditor to perform alternatives procedures where the confirmation letter does not reply by customer, the auditor will send a second confirmation letter to follow up the process. If still not response, auditor has to get client permission to telephone the customer or applies some alternative procedure to follow up. Second, the auditor would review back the cash receipts after the date of year end to examine whichever the customer of client has been paid the outstanding amount if the balances have been cleared. (ACCA 2007/2008)


If the balances are agreed by customer, the auditor would have to check back the cash receipt after the year end to make sure that the debt does appear to be collectable and considering the adequacy of any provision made for a long outstanding debt.

(ACCA, 2007/2008)