Introduction:
As an audit manager of ‘Clarke & Johnson’ I
am really happy for providing best service to’ Luxury Travel Holidays’. My
audit partner Geoff has also helped properly to provide successful service. LTH
wants to reappoint us for auditing again. According to Geoff, Michael and Annette
are needed for accountant of our firm. After making conversation with the CEO
of LTH, Michael and Annette the potential outcome regarding audit work are
explained in this assignment. Auditing work is a comprehensive job which is
made by an Audit firm very carefully. Different challenges come in this
activity. These are discussed in this topic. On the other hand, the audit plan
regarding the MSL Company has also explained here.
Identification and Assessment of Challenges regarding Auditors’ Independence:
LTH Company is really happy with the performance
of CJ audit firm. This is why they want to reappoint Geoff in their company. It
is undoubtedly a good indication to the company. CJ's performance is good and they have
successfully made interaction with LTH Company in respect to the auditing of
their books of accounts. In order to justify it as challenge or not, we need to
understand regarding the independence of an auditor. An auditor will
impartially judge the accounts book in a company. He has to prove that he has
no relation with any employees of the client company (Knechel & Saltario, 2016).
In such a way auditing work can be done in an unbiased manner. The main
challenge to Geoff is to maintain consistency in relation and conducting audit
work in existing company. Otherwise, there is no threat to the company. LTH
Company is completely satisfied with CJ's auditing job. So, they do not want to
appoint other firms as auditor. Geoff must accept the offer and if CJ is
successful again in their performance then their goodwill will be increased.
The main area which is to be focused is consistent performance then there will
be no threats to CJ.
The second conversation may create partiality as
the LTH Company provides some special benefits to Geoff and his family members.
It is true that the company is happy with audit but if they give extra
advantages then they may propose to make evaluation in favor of LTH. In order
to make transparency, it is needed to maintain a limitation with two companies.
An auditor is professionally doing his job. So he has to be equal to each and
every client. So, in this case, there is a chance of affecting the performance
of CJ audit firm. We need to be conscious in respect to this matter. Geoff may
accept this benefit but he has to show professional attitude to the LTH
business enterprise. If he cannot maintain his relationship properly with the
client company, CJ firm’s condition will be deteriorated.
In third case, Michael must be rejected from the
audit team. For the independence of the auditor, any personal relation or any
interaction with client firm is fully prohibited. This prohibition is mandatory
as per corporation act. As Michael's father is having direct relationship with
LTH, Michael cannot be considered in the audit team. So, In order to protect
partiality and avoiding the violation of rules of the audit, this is not
acceptable to CJ firm. If Michael is included in the audit, it will be a
serious threat to the CJ. Auditor’s independence will be full hampered in this
case.
As Annette was on a temporary assignment in LTH
Company, the inclusion of Annette in Audit team may arise some small problems
but he can be considered. As his relation was for the very short duration with
LTH, his inclusion does not hamper the audit performance of CJ firm. So, it may
not be considered as serious challenge to the CJ audit firm. Annette is
efficient in tax calculation process. So, he can provide a better contribution
in audit work.
Safeguards
of Threats:
Auditor's independence is very much essential for making right
judgment of statements of accounts in a business organization. Auditors'
perform their duty within specified rules. Every auditor faces some challenges
in their audit work (William, Glover & Prawitt, 2016). So, proper
safeguards to overcome those threats are very important for them. Solutions of
threats mentioned above are given below.
- In order to make consistency in the work, Geoff needs
to comply with all rules in respect to audit. If the audit is not done
properly after reappointments that will negatively affect the CJ audit
firm's performance. Geoff must make a professional and impartial judgment
at the time of evaluating accounts statements (Cao et al. 2015).
·
Michael
must be avoided in the audit team in order to make the transparency. Before
conducting the audit, declaration in respect to the independence of audit work
must be done properly. So, any personal relationship with client hampers
auditor's independence (Kachelmeier, Majors & Williamson, 2014).
·
Geoff must
act professionally in order to maintain independence. A professional attitude
is very much essential for providing safeguard to the Auditor. Extra benefits
given by any company to an auditor must be justified properly (Patriarca et al. 2017).
·
Annette
should be considered for conducting audit work but making a limitation. Vital
responsibility must not allocate to him. For keeping protection in respect to
the auditor's' independence, it is very important part. Independent judgment of
financial records must comply with some specific rules and regulations (Johnstone,
Gramling & Rittenberg, 2013).
Business Risks to MSL:
There are so many business risks in case of
running any business enterprise. If an organization cannot be run properly, it
is difficult to manage the consistency. Two business risks are identified by
our company Crampton & Hasaad in formulating the audit plans. These are
clearly explained below.
Strategic
Risk: It is very important risk
in respect to any business. MSL company purchases spare parts from US, China
etc. Business world is always changing. In order to compete in the market,
strategies are always changed by every business enterprises. US and China may
get a better contract and change their policy. This is a threat to the MSL
business enterprise. IF they cannot continue their business with existing
customers then future will be uncertain. MSL Company must change their strategy
for purchasing spare parts. They have to engage with other countries which want
to make business with them. It is very difficult to any organization to change
the strategical planning effectively. They have to improve the interactions
with suppliers properly. If they can increase their relationship correctly then
it will be a positive indication regarding operating performance of MSL
organization.
Financial Risk: Financial risk is the key factor which must be considered
any business plan. In conducting audit work financial risk has been identified
as very vital issue of MSL Company. Their operating activities must be done in
an effective and efficient manner so that can provide a standard to compete in
the market properly. In order to increase earnings, expenses must be given
priority. Proper financial control is very much essential to make a ceiling in
incurring cost. Cost effectiveness is most important part of perfect
competition. For growth of an enterprise, it is needed to given priority on
cost control. The company must deal with this financial risk accurately. If the
return on investment cannot earn properly then it is difficult to run the
business efficiently. They must make interactions with alternative suppliers.
Audit Risk against each Business Risk:
Two audit risks associated with the above two
business risks are explained below.
Control Risk: Control risk is associated with strategic risk. For
formulating new strategies changes are needed to be adopted. These sudden
changes may hamper the operational activities of the business. This type risk
is attached with control risk. The auditor must identify the areas in which
changes are made and provide recommendations whether any strategy is essential
for a company or not (Vargo et al.
2014). Strategical decision making is very crucial part of an organization. So
for final implementation, the plans must be reviewed correctly.
Fraud Risk: Fraud risk is associated with the financial risk of a
company. Financial risk arises when operating activities cannot be done
efficiently. It hampers the revenue portion of a business enterprise. Sometimes
different companies manipulate their earnings in order to exert the good
financial performance (Habib et al.
2014). ‘Fraud' is detected by the auditors. Fraud risk is very much important
to detect. An auditor is appointed in a company to judge the financial
statements correctly. So, MSL Company must maintain a transparency in
maintaining books of accounts. If there is no fraud in the company, it
indicates the future growth potentiality. Transparency makes the goodwill of an
organization.
Conclusion:
Auditing is a mandatory part of every company.
If the performance of an organization is not judged periodically, it is
difficult to identify the situation of an organization. An enterprise cannot
improve them if right assessment is not made. So, it is very essential to
conduct the audit for every organization. Whether it is profit or nonprofit
making, it does not matter. LTH and MSL Company can improve their performance
by making audit properly.
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