Question

QUESTION 2  ( 12 marks)

The following situations refers to threats to the Auditor’s independence.You are asked to state what  
the different threats to the Auditor’s independence are and explain how these threats impact on the  Auditor’s independence and any other implications for yourself and your firm.

SITUATION 1
Enid Blyton has been working as an auditor for the Anthony Don Chartered Accounting firm for the past four years and has just started an audit on the Green Thumbs environmental company, a small newly listed public company which has just listed as a public company one month ago.The 
Green Thumbs environmental company  has just started using a new contractor to dispose of its toxic waste .You know that this new contractor has won tenders in the past and there have been several unfavourable articles about this contractor in the local press.
Your Audit Manager ,Peter Don , has stated that it is your responsibility just to provide an opinion
on the financial statements with the emphasis being on providing an opinion on whether the financial statements are true and fair and whether there are any material misstatements.

SITUATION 2
Jean Douglas has just started to do the audit on the latest financial statements and has just made the following notes from your opening interview with John Dooley,CEO of Dooleys.
John has apologised for not making the final payment of 30% of the prior years audit fee but has explained that he will ensure the cheque is written once he is happy with the progress on the current audit. At this stage John Dooley has advised that the firm will be able to start deliberations 
about the selection of Auditor for the following year.The Dooleys audit comprises forty percent of the annual audit fees for the firm .
John has advised that they will be providing a free trip to Europe for an Auditor from the Audit firm and his partner once the audit is successfully completed.
Jean is concerned with several aspects of the current audit as Dooleys do not appear to be following the accounting standards in their valuation of inventory  as they are not taking into account the reductions in fair value of inventory and the impact on the financial statements is material.    

Answer 1

Independence means a state that allows a person to provide opinion free of mind without being affected by any views and advices or pressures of others.

Auditor's independence ensures creditibility of auditor's work that how honestly he presents a view about the financial statements of the clients.

As investors before investing in any business read the fianancial statements thourughly and rely upon the opinion submitted by auditors.

But auditor suffers from various threats before expressing their opinion.

Some of these threats are as follows:

1.Auditor himself has a self interest in the project.

2.Auditor by making accounting adjsutments in the books of accounts of the client and self reviews the accounts so that that financial statements reflects a true and fair picture.

3.Client has given any references and auditor is having any social contacts with those references.

4.If the auditor is leaving the organisation and performing audit in as a favour for the manager or employer.

5.Advising threat.

6.If the auditor is having personal relationship with the client and if not giving the qualified report then can lose that client.

SITUTAION 1:

In this situtaion as audit has just started the audit of the environment company and the company has hired the contractor who is not having a good reptation and goodwill in the market.

As it is also clear that the contractor has won all the tenders in the past.

So therefore in this scenario the auditor is bound to give a qualified report and report all the material miss-statements as the auditor in under pressure of his audit manager Peter Don on who has asked him to submit the a true and a fair view on the finanacial statements.

SITUTAION 2:

Inspite of knowing the facts that the audit fees is still unpiad by John Dooley Company and also they are not following the accounting statndards in correct valuation of the inventory that can have a material impact on the financial statements of the company.

The auditor is suppose to report a true and a fair view but in this scenario the auditor is impacted from self interest threat or a personal interest threat as the auditee company has offered the auditor a trip to Europe and also interest in the form of audit fees still unpaid by the auditee company.