The auditor must always carry out substantive procedures on material items. Inspection means looking at documentation, books and records or assets. Auditors should obtain an understanding of the entity and its environment, including internal control, sufficient to identity and assess the risks of material misstatement in the financial statements whether due to fraud or error. Explain the purposes of the auditor’s observation of the client’s physical inventory count? (10 marks). Besides, lack of IT control in a computerized environment may cause the level of control risk faced by auditors is high. Audit procedures for stocks worth less than costs are as follows: Enquire from management as to how they account for and identify such inventories, including the assumptions they made about the age, conditions and value of the inventories. However, the loan facilities are scare. Framework) defines independence as a. 4. For example: Design: the control systems are suitably designed to detect and correct significant departures from the matter of accountability or material misstatements in any assertion. Independence of fact. Independence of mind 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. ? Review events after period end for item affecting the entity’s ability to continue as going concern. That is the audit should ensure all sales and purchases are well recorded and all the inventory at year end is included on the statement of financial position. Do you have a 2:1 degree or higher? as epistemic independence, essentially the possession by the auditor of a knowledge base independent of the audited party. counting staff are using pencils to record down inventory counted. Discuss whether the facts in any of the situations above give rise to threats to independence. Registered office: Venture House, Cross Street, Arnold, Nottingham, Nottinghamshire, NG5 7PJ. For example, consider yourself a … In obtaining an understanding of the entity, the auditor should consider and stay alert to obtain evidence as to whether any events or conditions and related business risks which may occur and cast significant doubt on the entity’s ability to continue as a going concern during the auditing. As an external auditor, the audit procedures that I would take is I will ensure that client’s staff are following instructions during the inventory count. The definition of independence does not require the auditor to be completely free of all the factors that affect the ability to make unbiased audit decisions, but only free from those that rise to the level of compromising that ability. This will cause the stock obsolete and the obsolete stock may be overstated in the Financial Statements. The partners are the linchpin here. You shorten one leg of a stool, it starts to wobble. Regulators have commented on the recent activities of the large firms and their impact on that fourth leg of the stool. An informed outsider can readily conclude that the auditor’s objectivity is maintained for such accounts. The first, and most important, is the professionalism of the audit partner. How does an auditor keep an “independence state of mind?”, As James Doty, chair of the Public Company Accounting Oversight Board, noted in December at the AICPA SEC current developments conference, “This is about human nature…. 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. (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. by Jacobson, Peter D. Abstract- The American Institute of Certified Financial Accountants is carrying out a reevaluation of the rules concerning audit independence.The move is intended to tackle the ethical aspects of audit independence in relation to issues such as objectivity, integrity, and economic interest. The auditor should also inquire management as to its knowledge of events or conditions beyond the period of assessment used by management that may cast significant doubt on the entity’s ability to continue as a going concern. If the liquid shoe polish still cannot sell, then dispose the liquid shoe polish. According to Doty, the PCAOB’s auditor oversight programs promote high-quality independent audits and keep the auditors focused on their roles as gatekeepers who protect investors. 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. Inspect sales, marketing and other reports, and review the extent to which inventories which are worth less than costs have been reduced to net realizable value (NRV) in prior years. One of the examples is occurrence, where a transaction or event took place which pertains to the entity during the period. How wobbly will that stool become before we see its impact on audit quality? Audit independence: concept and application. The fourth leg is the culture of the accounting firm, the tone at the top. Auditor independence has been debated for decades and is in the news again. So, to be independent, one must have the courage of conviction. The risk for auditors to audit the Financial Statements will increase when the management of the company would use an aggressive accounting tactics to manipulate the Financial Statements. Bhd. What is Auditor Independence? 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. 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