Audit Assurance Risk Assessment & Effective Reporting

Question: Discuss about theAudit Assurancefor Risk Assessment Effective Reporting. Answer: Introduction In the first situation mentioned above, it is very clearly being stated by the CEO of luxury travel holidays that they would not reappoint the Clarke and Johnson as the auditor if the auditor would not help them in gaining more business by giving a lecture about the well-doing of the company in the coming seminar. In the given case, the Clarke and Johnson being the independent auditor are not allowed to express an opinion on the financials of the company wherein they are being forced to do so with the fear of losing the engagement (Niemi Sundgren, 2012). In the second situation, the CEO of the company is offering an in-kind gift in addition to the audit fees being paid to the auditors only with the want of smooth audit. By the term smooth audit, the CEO meant an unfair audit opinion to be presented to the stakeholders of the company. It is a case of familiarity threat. Since the auditors have long association with the CEO of the company the CEO is trying to mould the opinion of the auditors (Wright Charles, 2012). In the third situation wherein it has been mentioned that as a part of the auditors who would be conducting the audit, an accountant will be a part whose father is a financial controller in the Luxury Travel Holidays Company. This is a case of familiar threat. Here Michael would be reviewing the work of his father. He would definitely not report any wrongdoing which might have been conducted during the normal operations of the company by his father or by the other employees of the company as it would lead to loss of job by his father as well as the other employees of the company (Baldwin, 2010). Hence in the present scenario fair opinion of the auditors is not at all expected and would definitely result in the unfair audit opinion. In the fourth situation, it has been mentioned that Annette was on assignment for making the tax calculations and preparing the entries of such for inclusion in the financials of 30th June 2015 of which the Clarke and Johnson have been appointed as the auditor of the Luxury Travel holidays. In the present case, Annette has been chosen to be a part of the audit team and hence she will have to review her own work done. The biggest independence threat that is seeming to arise is self-review threat. One simply cannot review, judge, analyze the work done by oneself. It is always a compulsion and a necessity to get the work done reviewed by a person other than oneself (Christensen, 2011). In the case of engaging for the audit of a company has been very specifically mentioned that the external auditors should not take up any other engagement of the company being audited. For the first situation, there are safeguards which can be taken by the auditors to avoid the above situation. The safeguard is the auditors who would be going to conduct the audit of the company will have to be correctly identified and selected as no person can be auditor in the company wherein they have any financial interest or personal interest (Roach, 2010). For the second situation, the likely safeguard that is available is a rotation of the senior personnel of the audit team for the present client. Also, an effective communication can be forwarded to the CEO or any other senior member of the organization regarding the firm's policies of non-acceptance of such gifts. For the third situation, it has been very clearly mentioned in the SOX Act that the auditor is not allowed to function in the role of the management. However, the auditor should discuss this issue with the independent audit committee and report the advocacy threat of promoting the client as is identified in the above case. For the fourth situation, however, there is a safeguard to be applied in such a scenario. The work done by Annette should be reviewed by some other chartered accountant so that an independent opinion could be achieved in respect of this issue. Annette should not be a part of the audit team who is going to conduct an audit for Luxury Travel Holidays. Hence the safeguard should compulsorily have to be applied (Ruhnke Schmidt, 2014). As per the case mentioned above, the product demand was unable to be assessed with respect to the service of maintenance that is provided by the company for the customers for a period of 2 years from the product purchase. In tune to this, the potential risk that the company carries is the understatement, as well as an overstatement of the spare parts. Secondly, the risk of fraudulent activities and theft cannot be ignored. In the initial case where the product has a warranty of two years, MSL needs to evaluate the quantity in tune to the spare parts purchase as it is procured from far flung areas and hence time taken is high in this regard (Tepalagul Lin, 2015). Therefore, the management needs to be effective in this area because the working capital will get blocked ultimately leading to funds issue. The company will not only block their fund but they will lose the opportunity cost as the interest will be forgone. In this scenario, the financial statements will be affected because o f the wrong forecast. Hence, this will have a strong bearing on the position of the company in terms of combating the competition because the wrong anticipation will not help the company in keeping sufficient quantity of the parts. Further, space will be occupied as the parts will be needed after a period of two years (Heeler, 2009). The second risk that haunts the company is fraud and theft. As the company will send it products to different countries around the world and when provides dedicated services to customers around the world, the risk is bound to pop up. The audit needs to consider this risk as it increases when the company is engaged in practices relating to the purchase of equipment (Mock et. al, 2013). The audit risk that appears, in this case, is that of the financial statement misstatement. As it is directly linked to the sale of the product, the auditor needs to ascertain whether the products sale price needs to be declined by the spare parts cost or needs to be reflected in the profit and loss account by way of an expense. Further, it needs to be noted that the spare parts cannot appear under the headstock in the trade as the spare parts will come under the ambit of liquid assets (Hoffelder, 2012). However, there are various spare parts that are not considered under the equipment maintenance and will be highlighted as the spare parts sale. The maintenance contract needs to be paid special emphasis because, through the presence of the maintenance contract, the auditor is able to know the spare part type and consider whether it is charged as an expense and the spare parts that will yield revenue of the company. The revenue of the company will undergo a vast change and wrong information will be depicted if the spare parts that need to be charged as an expense are billed as revenue and this will affect the shareholders of the company. On the other hand, there will be an understatement of the profit if the spare part that needs to be billed as revenue is charged as an expense (Hoffelder, 2012). This will lead to wrong tax payment to the government and ultimately a decline in the dividend will be witnessed. When it comes to the second risk type that is theft or fraud, a strong evaluation of the mechanics needs to be done by the company. As they do not appear on the payroll it needs to be provided special emphasis. The spare parts are carried by them and they might get utilized by the customers, however, there is a strong chance of theft of the spare parts (Cappelleto, 2010). Therefore, the auditor should evaluate the fact that whether the spare parts, as well as the equipment, is under the ambit of the insurance policy or not at the time when the equipment, as well as the spare parts, were purchased by MSL and at the point of sale. The insurance cost needs to be taken into consideration by the auditor. Another important view that must be followed is whether the company is wrongly entering into an agreement with the contractors to steal the products and claim insurance out of it. The time taken by the mobile contractors is huge and hence there appear a chance to tamper the financials of the company. This will ultimately hamper the trust that is present for the auditors (Horngren, 2013). Therefore, it is of utmost necessity that the auditors should visit a location that is remote in nature so that the costs can be evaluated as billed by the contractors of the mobile operators. References Baldwin, S 2010, Doing a content audit or inventory, Pearson Press. Cappelleto, G 2010, Challenges Facing Accounting Education in Australia, Melbourne Christensen, J 2011, Good analytical research, European Accounting Review, vol. 20, no.1, pp. 41-51 Heeler, D 2009, Audit Principles, Risk Assessment Effective Reporting, Pearson Press Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group. Tepalagul, N. Lin, L 2015, Auditor Independence and Audit Quality A Literature Review, Journal of Accounting, Auditing Finance, vol. 30, no. 1, pp. 101-121. Wright, M.K. 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