Independence Audit and Audit Engagements

Question: Discuss about the Independence Audit and Audit Engagements. Answer: Introduction Audit and ethics are closely related to each other. It is very important for an auditor to maintain the professional ethics and skepticism. People rely upon the financial statements audited by auditors and they make all their investment decision based on those statements. Thus, it becomes very important that the auditor should be independent while giving views on the financial statements of the clients. Only then, the views given by auditor would be beneficial for the general public, as it will not be affected by any hidden interest to purposely manipulate the financial statements. Here, we will deal will certain situations faced by Fellowes and Associates that imposes threat on its independency (Wahab, Zain Rahman, 2015). Audit Engagement Audit Engagement deals with the audit of financial report for a financial year or for a half year, according to the guidelines of the Corporations Act, 2001; and audit of financial report for any other purpose (Blay et al., 2014). An auditor should accept the audit engagement only after agreeing to the basis under which audit is required to be executed. The terms of audit engagement must be clear between the management or those charged with governance (TCWG) and and the auditor (AAUSB Pronouncements, 2016). Auditors Independence The independency of auditor is an essential aspect for an audit engagement as it is meant for the public interest. The auditors independence comprises of the following (CAANZ. Kemp, 2016): Conceptual Frameworks for the Auditors The auditors should adopt the conceptual framework methodology to ensure the independency (AAUSB Pronouncements, 2016). Identify the various threats to the independence of auditors. Analyze the magnitude of all the identified threats. Apply the safety measure to eradicate the risk or lower it within acceptable limits. Significant Threats for the Auditors One of the most significant threats for auditors is having any self-interest in the audit client. The self-interest is created due to having some financial interest in the audit client. In case of Fellowes and Associates, two conditions are highlighted. One of the member (accountant) who intends to be the part of 2014 audit team own share in HCHG, which is the holding company of TCCL. The interest of accountant is immaterial to him. Fellowes and Associates valued the intellectual property of HCHG, which includes intangible assets valuing $30 million in the Consolidated Balance sheet. The value of intangible assets is material for HCHG. These two conditions focus mainly on: holding the financial interest in the audit client (TCCL) directly or indirectly, and whether such interest is materialistic. The threats that are imposed by these two conditions are discussed below: The financial interest arises when the member of audit team or his immediate family or a firm has a direct control or indirect materialistic control (DeFond Zhang, 2014). Here the main points to be considered are that the effect should be direct or if it is indirect, it should be material. However, in case of first situation where the accountant has owned shares of HCHG, it will not have any threat on the firm because the accountant owns the share of holding company thus it is an indirect interest. As given, the effect is not materialistic. Therefore, the overall impact of this situation cannot be risky for Fellowes and Associates. Further, as per Section 290.112 of APES 110 (2008), if the member has interest in the entity in which even the audit client has interest, such an interest will be significant only if it is materialistic. Providing the valuation services to audit client will give arise to threat of self-review. The threat depends on the materiality of effect of such valuation, the reliability of data on which such valuation is based, interference of the client in such valuation and the extent of disclosure regarding it in the financial statement. In this case, the audit firm has performed the valuation service in HCHG, which has significant material effect in the consolidated balance sheet. Thus, it will have a threat on the firms independency while performing the audit of TCCL. Actions to Prevent Potential Threats The last part of the conceptual framework is to take steps that will eliminate the potential threats. As discussed above there are two main threats that could arise (Tam, Zwar Markham, 2013): threat of self-interest and threat of self-review. The actions to prevent the risks are listed below: Self-interest threat: Though there is very less probability of this risk as the interest in not material, however, if the other members still feel that there is possibility of the risk the following step can be taken: Reduce the amount of investment in the shares by an amount that the treat ceases to exist or decreases to acceptable level Eliminate the member having such interest from the audit team. Self-review threat: following steps can be taken to reduce the threat: Including a member in team of audit did not take part of the valuation of intangible assets. Arrangements should be made in such a way that person involving in the valuation service does not take part in the audit engagement. By following these steps, the potential threats could be reduced to acceptable level. Conclusion This report brings into light various potential threats that are faced by Fellowes and Associates and elaborates the steps taken to overcome them or eliminate them up to acceptable level. The independency of auditor is the most crucial phenomenon and it cannot be compromised ("New auditors, but same risk", 2016). It is essential for every auditor to follow the conceptual framework as discussed in the report above before taking up any audit engagement. The auditor will be liable for violating the professional ethics if it is discovered that the auditor is dependent. Thus, Fellows and Associates must follow the conceptual framework even in future to reduce such risk of potential threats. References AUASB - Pronouncements. (2016). Auasb.gov.au. Retrieved 26 December 2016, from https://www.auasb.gov.au/Pronouncements.aspx Blay, A. D., Notbohm, M., Schelleman, C., Valencia, A. (2014). 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