The sales manager of the client tells her there is a sale (at a substantial discount) on new cars that is limited to long established customers of the dealership. It should not be treated as authoritative or accurate when considering investments or other financial products. Listed below are the reasons why auditors need an understanding of the client’s environment, including its internal controls. counting staff are using pencils to record down inventory counted. This will cause the stock obsolete and the obsolete stock may be overstated in the Financial Statements. Assertions about account balances at the period end. This protection is augmented by the PCAOB’s outreach efforts to audit committees. Any information produced by the computer system for management relating to inventories need to be checked. Looking at the relationship between the auditor and the client, every individual may perceive an arrangement differently, and this is where professional judgement comes to the fore. Disclaimer: This is an example of a student written essay.Click here for sample essays written by our professional writers. Besides, I will ensure that the box of liquid in this inventory is written off and not saleable anymore. The duty to report on the truth and fairness of the financial statements is the primary duty associated with the external audit. Firm leadership must consistently demonstrate that it values audit quality and independence as Priority 1. And so do the regulators. Besides, the management’s attitude, whether are they reliable and trustworthy in the business is suspected. So does the accounting student in his auditing class. Audit partners need to hear clearly from firm leadership that quality, including independence, is the most important part of their job, that no client is too big to lose, that the partner has the firm’s full and unwavering support when he or she is appropriately challenging the client on accounting and disclosure matters. Example: A comparison of gross profit percentages month by month for a company could be performed and any unusual fluctuations investigated as these could indicate errors such as omission of sales, loss of inventory or other errors. An important aspect to keep in mind is balance – how the auditor, as an “independent third party,” develops a good working relationship and provides great client service while maintaining independence. Control Risk is the risk that material misstatement that could occur in an assertion and that could be material, individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entity’s internal control. Phar-Mor, Inc declared bankrupt because the company contributing to the frauds and ability to cover it up for so long. It is essential for auditors to understand the client’s environment, including its internal controls because the knowledge of understanding of the client’s environment will guide auditors to build up or maintain a good professional relationship with the client. Auditors are expected to provide an unbiased and professional opinion on the work that they audit. From the inspection of some bottles in an open box, you find the liquid has hardened in most of the bottles. Info: 4764 words (19 pages) Essay Audits are important for many reasons. This is because by using pencil to record down inventory counted is showing not a good count instruction. With this purpose in mind, Gaynor . Nevertheless, financial aspect will be taking into consideration if the company is facing financial problems. If the external auditors are not independent of their shareholder, for example, if they hold shares in the companies that they audit, their ability to form an objective opinion on the financial statements will be impaired. Question: 1- Describe An Audit Committee And Discuss How An Audit Committee Can Help An Auditor Be More Independent. Independence of mind. 4. Regulators have commented on the recent activities of the large firms and their impact on that fourth leg of the stool. Besides, the auditors should ensure that the condition of the stock are clearly stated during the stock count, such as identify evidence of damaged or slow moving inventory because it is useful for the further evaluation of the inventory. Bhd. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs. There are 2 types of independence, that are independence of mind and independence in appearance: The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby, allowing an individual to act with integrity, and exercise objectivity and professional scepticism. If the auditor is seen to be independent but is really not independent, then the audit reports will have credibility, but if later events reveal that the auditor did not act independently, the outside parties could suffer a loss from relying on an inappropriate audit opinion. This also wanted to prove that the actual stock record data are as per the stock count. Auditor independence top of mind at SMSF Association conference Tahn Sharpe January 15, 2021 Recent amendments to the rules around auditor independence will be a key legislative theme at this year’s SMSF Association National Conference according to the representative body’s deputy CEO and director of policy and education, Peter Burgess. Inherent Risk is the susceptibility of an assertion to a misstatement that could be material individually or when aggregated with misstatements, assuming there were no related internal controls. The company would needs a bank loan to finance the director ambitious plans. For example, consider yourself a … To the user of financial data, that signature on an audit opinion means a whole lot more. Independence requires integrity and an objective approach to the audit process. Not only that, observation of stock count is to ensure that all the stocks held in the warehouse are particularly owned by client, that is right and obligations assertion. The concept requires the auditor to carry out his or her work freely and in an objective manner. Your email address will not be published. One of the examples is occurrence, where a transaction or event took place which pertains to the entity during the period. Any stock held for 3rd party, ensure it is properly separated from the client’s stock and inspect the agreement between the 3rd party and client regarding about the stock held. This allows the auditor to mitigate the risk of material misstatement due to fraud.Salil Bhandari, Founder & CEO, BGJC & Associates Q: Is there independence of auditor? Auditor Independence is. This could be from individuals within the company, either orally or in written representations, or in formal written requests to third parties. The DOL rules apply to all employee benefit plan auditors, the AICPA rules also apply to those auditors who are members of the AICPA, and the SEC's rules apply to auditors of plans that file on Form 11-K with the SEC. Example: A relevant example would be to send a standard confirmation letter to the company’s bank, (a) Explain what is meant by the term audit risk? Real independence refers to the actual independence of the auditor, also known as independence of mind. The aspects of client’s environment and internal controls are as follow: Industry, regulatory and other external factors, including the reporting framework, Nature of the entity, including selection and application of accounting policies, Objectives and strategies and related business risks that might cause material misstatement in the financial statements, Measurement and review of the entity’s financial performance. ISA 500 Audit Evidence requires auditors to ‘obtain sufficient, appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion’. This is because by providing sufficiently reliable conclusion arriving by way of using the sampling procedures. Describe the concept of ‘sufficient appropriate’ audit evidence and explain why external auditors are not expected to gather all information in order to express an opinion on the truth and fairness of the financial statements of an entity. In addition, external auditors must be also be seen to be independent because if they are not, the owners of the business will not have confidence in the audit reports that the audits issue. High-quality audits enhance the reliability of the financial reporting process by investors Each proscribed service or activity in Rule 2-01(c)(1) to (c)(5) of Regulation S-X begins with the phrase, “An accountant is not independent if…”. This will indicate that the management’s integrity is doubtful and mismanagement may be occurred. It is also will lead to an increase in the inherent risk and will cause the difficulties for auditors to analyze Financial Statements in a volatile industry due to no consistency in Financial Statements. Reading the investment company most recent financial report, Roslan is surprised to learn that the company’s ownership in his client has increased dramatically. Analyse and discuss cash flow, profit and other relevant forecasts with management. The crucial issue is the extent to which the auditor cooperates with the manager in pursuit of their self-interests. (c) The following situations may violate ethical codes imposed by regulatory bodies such as the MIA By-Laws (On Professional Conduct and Ethics): Roslan, an audit partner, owns material amount of shares in a trust fund investment company, which in turn owns shares in Roslan’s largest audit client. Registered Data Controller No: Z1821391. For example, the audit client pays the auditors fee, so complete independence is impossible and not necessary to meet the frameworks definition. An independent auditor is a certified public or chartered accountant who examines the financial records of a company with which he is not affiliated. For example, failing to qualify when the financial statements contain a material error. Auditors are expected to provide an unbiased opinion on the work that they have performed. Form my point of view, it seems less significant in terms of threats because the trust fund is indirect investment in the client. An auditor who lacks independence virtually renders their accompanying auditor report useless to those who rely on them. If you need assistance with writing your essay, our professional essay writing service is here to help! The ISA says ‘irrespective of the assessed rick of material misstatements, the auditor should design and perform substantive procedures for each material class of transactions, account balance and disclose’. It is usually used as a means of gathering evidence about the internal controls in a company. This may give arise to possible self interest and familiarity threats. The Phar-Mor provide misstatement of margins, inventories, and earnings in reports to management and in general ledger and financial statements (to cover up other misstatements), and Diversion of assets to affiliated companies via manually written checks (nature of disbursements falsified when recorded in books and records). Auditor Independence Resource Center The AICPA, DOL, and SEC all have rules regarding auditor independence. Washington, D.C. 20549 PERSONS PROVIDING TESTIMONY John D. Hawke, Jr., Comptroller of the Currency J. Michael Cook, former Chairman and CEO, Deloitte & Touche Rick Antle, Professor of Accounting, Yale School of Management John C. Coff… The auditor must always carry out substantive procedures on material items. Today’s audit partners, seeing the dynamics of the auditor/client relationship change after SOX understand this as well. Lastly, I will follow up to observe whether the staff are using pen subsequently during the inventory count and observe the condition of the stock properly to ensure it is clearly stated as per during the stock count, as it is useful for the evaluation of the inventory. Jay Bornstein is a retired partner of Ernst & Young who writes and consults on auditor independence matters. Published: 24th Apr 2018 in Before: ARTHUR LEVITT, Chairman ISAAC HUNT, Commissioner PAUL CAREY, Commissioner LAURA UNGER, Commissioner United States Securities & Exchange Commission William O. Douglas Room 450 Fifth Street, N.W. ?2- Distinguish Between Independence In Appearance And Independence Of Mind. There are four major protections against this risk, four legs to the stool. This in-turn will cause the Financial Statements may be subject to manipulation by existing auditors when they auditing the company as management is bias. Whether tomorrow’s audit partners and firms can maintain their “independence state of mind” in light of the changing dynamics of their firms is the challenge that lies ahead. Besides, lack of IT control in a computerized environment may cause the level of control risk faced by auditors is high. The company hires the auditor to provide investors assurance that the presentation is true.” Inspection means looking at documentation, books and records or assets. Last but not least, there is a misappropriation to a specific ascertain for a cash transactions or account balances in the. Self-review and familiarity are two of five "threats" to independence that accountants guard against under their professional standards. Sufficiency and appropriateness are interrelated and apply to audit evidence obtained from both tests of control and substantive procedures. 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