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Audit independence is defined as an auditor attitude in making decisions during the audit and financial reporting without outside pressures and biased Bartlett, 1993. Adding up, the independent auditor is likely to be any bias with the appropriate client during audit time and should appear to be objective to those relying on the results of the audit (Maury, 2000). Similarly, auditor independence refers to the auditors' ability to maintain an objective and impartial mental attitude throughout the audit (Sridharan et al., 2002). Without independence, if auditor's make a decision, that audit has no value. As a result, an auditor must maintain their independent and exist to professional ethics.
On the other hand, the current audit environment changed rapidly and increased many outside management pressure on the audit independence. The greatest potential risk to the independence, losing the client including survival in auditing professional and more likely to that auditor may compromise the audit independence which may affect sustainable success and preserve to stay in business and existing achievement have shown that their auditors who committed to the long term thriving of the professional. In the audit environment, decisions involving moral issues are made every day in diverse situations such as the relationship between client and the auditor, procedure for securing audit jobs, modalities of audit fees settlements, and issues of honesty and integrity in the discharge of audit responsibilities.
The fact of case NTGSL
The former partner of Audit Company was a director of NTGSL until the last financial year. In the mean time, the business services division of Audit Company has provided tax and business advice and the NTGSL more likely to continue to provide same service in the future.
The potential threat to the independence of the auditor is due to close relationship with the company's management and director. According to the AUST290.41.6 this is a familiarity threat which might compromise the objectivity and independence of us in role as an auditor. Because of former partner of the firm being a director of the assurance client that exert and significant influence over the subject matter of the assurance engagement. Similarly, non assurance services and assurance services to the same client may create perceived and real threats to independence. The important of any threat such as the Self-interest threat and self- review threat to independence which may arise during an audit time and the corresponding safeguards which should be adopted to avert them. Both threats should be explicitly considered and documented where an audit client has offered non-audit work.
Hance, our audit firm should not continue as the engagement partner as it poses the threat of familiarity and self interest review due to close relationships with the managers and providing non audit service to the same business organisation.
The significant ethical problems in accounting standard have become accounting scandals arise such as Enron and WorldCom have damaged people's confidence and credibility that resulted in massive criticism towards businesses (Frohnen and Clarke, 2002)
The ethical issue related in NTGSL is being investigated by the government authority in relation to the level of toxic waste and the breaching the law of licensing of the tenement. Moreover, the NTGSL cutback some staff in relation to slump in resources price and the errors in creditor payments including duplicate payment to some creditors has been identified.
The ethical issue related to the confidentiality of information acquired in the course of providing professional services to a NTGSL. During an audit, the auditor is accountable for all information that receives regarding the business and financial of NTGSL because of privacy issues. This information needs to be kept confidential and cannot be disclosed without proper authorization unless there is a legal or professional obligation to do so. However, it is required that an auditor should inform the authorities should there be a breach of the law. The other ethical issues are possibility of illegal acts and liability. The illegal acts could raise the public interest that represent in a common law duty which overrides the auditors duty of confidentiality to the client. NTGSL is investigated by the government authorities in relation to the illegally dump toxic waste and specific exploration expenditure at on business site could resent in great social harm. So, in such case the auditor consult legal advisor as to whether the matter should be reported to the government authorities.
What are appropriate processes for undertaking a client assessment and accepting an audit engagement?
Auditors are not required to undertake an audit for every entity that requests one. Common sense may dictate that acceptance of all engagements would increase the firm's revenue. However, engagements can introduce risks to the audit firm. Therefore, the audit firm will make a decision on whether they wish to accept or continue with a client after consideration of the risk to the firm. These decisions will be based on identify any threats to compliance with the fundamental principles, evaluate their significance and when necessary apply safeguards to eliminate them or reduce them to an Acceptable Level.
ASQC 1 Quality control of firm that perform audit and review of financial reports, and other information and other assurance engagements (ISQC 1) requires that an audit firm should establish client evaluation and acceptance that ensure that the firm accepts audit engagements only where it has considered the clients integrity and where it is competent and is able to meet the ethical requirement.
Prior to taking on any client an audit firm will consider the level of risk and client evaluation. To gather all the information that could result in risks to the firm, acceptance procedures are undertaken. Some of the procedures performed to assess the risks to the firm from taking on a client are required by law, regulations and standards. The procedures that our audit firm should apply in deciding whether to accept this prospective audit client would ordinarily include the following:
Evaluate an audit firm's independence with respect to the prospective audit client NTGSL.
Ask the prospective client the need to make inquiries with the exiting auditor, requesting that to supply all information that should be made available to enable the proposed accountant to make a decision as to whether to accept the audit engagement.
In the undertaking client assessment, the auditors seeks reasonable inquiries of the predecessor auditor obtain information about the integrity of management, disagreements with management as to accounting principles, the reason for the change in auditors, and any other matters affecting the decision of whether to accept the engagement.
Seeks more information other appropriate third parties such as bankers, legal counsel, investment banker and other business community on the subject of the history of the prospective client and the reputations of its management and directors that conduct business and with the prospective client NTGSL.
Make inquiries with management, reviewing credit agency report and analyzing previously issued audit report and previous annual report in order to assessing legal and financial stability of the NTGSL. Our audit firm may attempt to identify and reject prospective client NTGSL that pose a high risk of litigation. These may include NTGSL whose operation investigations by the authorities, the outcome of which could adversely affect the viability of the business.
Obtain knowledge of the client's business activities and business environment. The information may include the poor condition of important account records, inspection of internal documents and records, accounting and audit guides, registration statements, interim financial statements, income tax returns, and credit reports.
Consider any special problems or unique risks likely to be associated with the engagement.
We feel that the decision to accept this client depends on the degree of risk the firm is willing to accept. Since all other information indicates that NTGSL is organizational of integrity, the acceptance of the client is appropriate, if the auditors recognize the high risk of the engagement and increase the extent of their auditing procedures accordingly. At the first indication of inappropriate behavior on the part of NTGSL, the firm should resign from the engagement.
Discuss the issues you would consider when planning the audit and undertaking assessment of the internal control.
During the planning stage, an assessment is made of the risk that a material misstatement (significant error or fraud) could occur in the client's financial statements. By understanding where the risks are most significant, an auditor can plan their audit to spend more time where the risks are greatest. During the planning stage, an auditor will gain an understanding of their client, their client's internal controls, their client's business environment, their client's corporate governance environment, and their client's closing procedures. An auditor will identify any related parties, factors that may affect their client's going concern status, and significant accounts and classes of transactions that will require close audit attention to gauge the risk of material misstatement.
ASA 300 Planning an Audit of Financial report requires that an auditor plan their audit to reduce audit risk to an acceptably low level. Audit risk is the risk that an auditor issues an unmodified or clean audit opinion when the financial statements are in fact materially misstated. The planning stage involves determining the audit strategy as well as identifying the nature and the timing of the procedures to be performed. This is done to optimize efficiency and effectiveness when conducting an audit. Therefore, in planning an audit, we would consider each of the issues of NTGSL:
Obtain an understanding of the business environment of NTGSL ( investigated by the government authorities regarding to the breach of rules and regulations)
Determine the materiality of matters ( Creditors have complained about the error and time taken to Process the payment)
Assess acceptable audit risk and inherent risk ( error in payment processing systems and financial stability may reduce the slump in the resources price)
Obtain an understanding of the NTGSL internal control structure ( lack of experience accountant and financial controller )
Develop preliminary audit strategies for significant assertions
Auditors should also perform analytical procedures as part of the planning process as well as consider the risk of fraud. On audits planning process where the risk of misstatement is comparatively high, the auditors ought to compensate by increasing the effectiveness of their audit procedures. An auditor may design more effective and efficient procedures, increase the number of items selected for testing, or perform more procedures at the balance sheet date rather than at an interim date. They may also add an element of unpredictability to the procedures.
Assessment of the internal control
This question is intended to challenge students to think about internal controls from a broader perspective than simply the technical details of, for example, what basic controls are, how they operate, and how to test them. Rather, this question is designed to get students to consider the role of internal controls in assuring high quality financial reporting and solid business decision making. Recall that Milacron had the following internal control weaknesses:
The financial control department of NTGSL lacked the technical expertise to deal with many of the complex accounting issues.
There was improper segregation of duties regarding the accounting for, and control, of payment system;
Having such internal control weaknesses is not unethical, per se. Rather, management's lack of stewardship as evidenced by these weak controls is what is questionable. Auditors will not view weak controls as an ethical risk factor if management is quick and willing to address the problems. But, if the auditor identifies weaknesses, brings them to management's attention, and management still does not apply the resources necessary to correct the problems, then the auditor might start to question the ethical intent/stewardship of management
Audit Independence, Quality, and Credibility: Effects on Reputation and Sustainable Success of CPAs in Thailand, By Baotham, Sumintorn; Ussahawanitchakit, Phapruke
Academic journal article from International Journal of Business Research , Vol. 9, No. 1
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