Name: Yahye Ahmed(Final Version)

Course Code: ACCT 3504

Professor: Muhammad Khalil Hashmat

Assignment: Case Study

The independence of auditors guarantees impartial and accurate balance sheet audits,

resulting in trustworthy financial performance statistics. Auditors must refrain from

investing, lending money, or receiving gifts from their clients in order to preserve their

independence. This strategy encourages accurate financial reporting and increases

public trust in audits(ICAEW, 2019). Independent auditors are better suited to handle

audit procedures with objectivity and honesty, offering shareholders of the company an

informed, unbiased assessment(CPA, 2015). In order to avoid perceived bias such as

close personal or professional ties with firm management which might cause

misconceptions, auditor independence is essential(SEC, 2018).

There are five main risks to the auditing profession that could jeopardize the

independence of an auditor. Every team member needs to review these threats prior to

an audit. The auditor should create protections or leave the assignment if they are found

to be compromised. This guarantees the auditor's independence. Regarding their audit

work, auditors are supposed to offer a professional and objective assessment(ACCA,

2018). For those who depend on them, their accompanying auditor report is worthless

due to their lack of independence. For example, if the auditor has a close relationship

with the CEO of ABC Company, the potential investor would be less likely to believe the

audited work(NEIU, 2014). Information dependability and the integrity of the financial

markets are jeopardized by this. Due to the possibility of skewed audit findings, banks

would be hesitant to grant loans to businesses and investors would be hesitant to

provide cash(Yellowbook, 2023).

The first threat that I would like to discuss is self-interest. Conflicts of interest arise when

an auditor's interests deviate from those of the client, endangering the impartiality and

independence of the auditor. Auditors may give priority to their own interests while

taking into account the interests of all parties involved in an audit. In order to minimize

self-interest, auditors may choose to reject individuals who bring up these issues with

clients or, in the event that they are unable to resolve them, may decide to end their

involvement(TOOTH, 2018). Auditors may have to think about ending their involvement

if they are unable to overcome these obstacles(NEIU, 2014). Kristy Amen has a

personal relationship with the client and it poses a self-interest threat to her

independence and objectivity. She has accepted a loan from ABC Manufacturing INC.

Kristy even has a husband who is the finance manager at ABC Manufacturing INC. ABC

Manufacturing INC has loaned her $10,000 due to some financial issues that she is

been dealing with until she can improve her money situations. This could create a self-

interest threat to her independence and objectivity. Kristy getting the loan could help her

improve her financial hiccups so she can proceed with the audit process. This could

also create a conflict interest between the auditors and the client making it difficult for

the auditor’s objectivity and independence.

Another threat to auditors’ independence is self-review. Due of their strong relationships

with clients and their capacity to offer services beyond auditing, like accounting and tax

preparation, auditors frequently encounter self-review hazards. Because of this, there is

a chance that auditors will assess their earlier work, particularly when preparing
financial statements and conducting audits(Safety, 2021). Auditors can minimize this

risk by assigning different teams to each task and refraining from double-checking their

work. Auditors may have to end the relationship if they are unable to handle the

pressure of self-evaluation. By establishing clear expectations and precise

communication, this risk can be reduced(TOOTH, 2018). Kristy Amen was requesting

for a loan in order to solve her financial situations especially since the fact that her

husband is the finance manager of the ABC Manufacturing INC. The self-review that is

on this situation is based on ethical concerns related to auditor independence,

objectivity, and integrity. Kristy asking for a loan could affect the credibility of the audit

process. Hashim Nasir wanting to secure a hefty loan could raise a huge concern for

the auditor’s objectivity and independence.

The next threat I would like to discuss is advocacy threat. When an auditor pushes a

client to the extent where it compromises their neutrality, that poses an advocacy

hazard. This might happen if an auditor is helping to sell a business and gives a positive

report to raise the asking price. Auditors who act as clients' representatives run the risk

of having their independence compromised by advocacy(TECH, 2017). They run the

danger of doing so by openly endorsing their clients or serving as advocates. Another

potential danger is the client-auditor connection. Safety measures are implemented to

mitigate the hazards of familiarity and advocacy. Auditors could have to choose

between continuing their current audit contracts and assisting customers(TOOTH,

2018). Hashim Nasir has been negotiating with the bank manager about the loan. This

could create an advocacy threat in terms of promoting the client’s interest. Nasir is
actively promoting the client’s interest in obtaining the additional funds. This way Nasir

could prioritize in help the client getting the loan instead of the integrity of the audit

process.

Familiarity threat is another good example when it comes to threats to auditors’

independence. An auditor faces a familiarity threat if they have too much familiarity with

the staff, executives, or directors of a client company, which could compromise their

neutrality(TOOTH, 2018). This may also happen as a result of the intimate working

connection that exists between auditors and clients, which may lead to auditors

possessing an excessive amount of managerial information. The longer the parties have

known one another, the more likely it is that this danger will reduce participation. Auditor

relationships with long-term clients should be avoided, and team members should be

rotated often to prevent this(Yellowbook, 2023). Kristy Amen’s relationship with the

client of the ABC Manufacturing which happened for seven years could possibly lead to

a familiarity threat. This could create a lack of professional skepticism in terms of

evaluating the company’s financial statement.

Lastly, there is intimidation threat to discuss. When management or directors intimidate

auditors and prevent them from functioning impartially, this is known as an intimidation

threat. Risks can also arise from direct client threats, in which clients exert influence

against auditors(TOOTH, 2018). The objectivity and independence of auditors may be

jeopardized by these threats. Threats of intimidation can have disastrous results; thus,
auditors need to be ready to leave such circumstances. On the other hand, auditors can

sometimes avoid intimidation by keeping clients from acquiring power. This

methodology aids in preserving their impartiality and independence in their work. The

intimidation threat regarding this situation is based on the relationship between the

auditor and the client(NEIU, 2014). Kristy Amen who is the member of the audit team

has a husband who happens to be the finance manager of the ABC Manufacturing INC.

Hashim Nasir who is the engagement partner is eager to securing a hefty loan for ABC

Manufacturing INC. Kristy getting the loan could create with a relaxed payback plan and

it could not only create a conflict interest but it could also influence her objectivity and

independence as an auditor. Overall, Kristy requesting the loan would certainly affect

the auditor’s objectivity and independence over the client’s personal. Personal links,

monetary reliance, and large financial stakes for the audit company and the customer all

contribute to the intimidation danger, which could make it more difficult for the audit

team to carry out its tasks impartially and independently.

In order to limit or eliminate threats to independence, the PA should set up safeguards,

such as client, firm, legislative, and regulatory protections, and make sure they are

either completely eliminated or lowered to manageable levels(Easy Accounting, 2013).

The PA should identify safeguards to eliminate or reduce threats to independence,

including professional, legislative, or regulatory safeguards, client safeguards, and firm

safeguards. Protections such partner rotation, remuneration, client income limitations,

and forbidden services are provided by the profession and the law(Safety Culture,

2021).
In order to ensure a balanced approach to business operations, provincial practice and

CPAB inspectors perform independence reviews, looking at quality control procedures

and engagement level independence. Policies banning particular services and

promoting moral behavior are examples of client safeguards. To prevent auditors from

dictating accounting policies, having competent accounting staff is essential(Easy

Accounting, 2013). An active committee that is accessible to both internal and external

auditors is a sign of a sound corporate governance framework. Generally speaking,

incorporation acts mandate that the committee consist of independent outside

directors(Safety, 2021).

Several safeguards should be implemented in order to ensure the integrity and

independence of the audit process. In order to guard against familiarity threats and

preserve objectivity, the audit team members must rotate on a regular basis. After

working for the customer for seven years(Easy Accounting, 2013). Kristy Amen

deserves to be rotated off the contract. Auditors need to disclose relationships with

clients or financial arrangements to identify such risks and put the appropriate measures

in place. Auditors need to assess potential threats and necessary safeguards. Biases or

lapses needs to be detected by the audit engagement without the team members

getting involved. Finally, the firm should ensure strong policies regarding in order to deal

with the conflict of interests including the fact that Kristy was willing to accept the loan

which would cause to create the conflict of interests between the audit members and

the client.
Auditors employ audit procedures as a means of gathering trustworthy information and

evaluating the financial health of a business. They support the assessment of a

company's financial statements' veracity and accuracy. Consistent application of these

protocols fortifies an organization's fiscal standing, augmenting its credibility with clients,

the marketplace, and possible financiers(Wall Street, 2018). Audit procedures known

as substantive methods rely on concrete proof, including financial statements, books of

accounts, and transaction records, to offer a high degree of accuracy and a definitive

understanding of the situation. Important papers like building rent deeds and land

registry are also a part of these techniques(Methodology, 2022).

Tests and investigations of financial data are conducted as part of analytical audit

procedures, which examine connections between financial and non-financial data.

Auditors review financial statements and base their conclusions on data from prior

years. Depending on the audit area, several procedures might be used, such as

comparing the financial data of two distinct entities or two sets of financial statements to

gather audit evidence(Wall Street, 2018). The auditor tests the design, procedure, and

efficacy of the company's internal control system, looks for discrepancies between goals

and accomplishments, and determines how beneficial the control systems are for the

organization as a whole(Reciprocity, 2018).

An inquiry is a fundamental audit process where auditors interview staff members to

obtain oral testimony. This evidence is insufficient, and more proof or supporting

documentation is needed. In order to obtain information and dispel any questions,

auditors may speak with personnel from the finance department or outside sources. But
this evidence is insufficient to support itself on its own(Methodolgy, 2022). Just like

inquiry, confirmation calls for justifications regarding an organization's transactions;

however, confirmation is verified through direct interaction with external sources or third

parties, such banks, suppliers, or consumers, which are connections within the

company(Reciprocity, 2018).

By verifying that an organization is following current business practices or measures,

the audit process offers insight into internal operations and how they affect the

corporation as a whole(Wall Street, 2018). Usually, auditors observe other people

carrying out a certain task, like comparing acquired goods with GRN, in order to get

insight into internal procedures and their possible effects(Methodolgy, 2022).

References:

Auditor independence. ICAEW. (2019, April). https://www.icaew.com/technical/trust-

and-ethics/ethics/auditor-independence

Auditor independence matters. SEC Emblem. (2018, July 12).

https://www.sec.gov/page/oca-auditor-independence-matters

CPA professional conduct: Auditor independence - harmonized rule of professional

conduct (rule 204) - CPA Canada. Cpa. (2015, June).
https://www.cpacanada.ca/the-cpa-profession/cpas-and-what-we-do/what-cpas-
do/professional-conduct-auditor-independence-rule-204

ACCA, M. D. K. (2018, April 1). Five threats to Auditor Independence. Accounting and
Finance. https://tothefinance.com/five-threats-to-auditor-independence/

Independence and objectivity. NEIU. (2014, July).

https://www.neiu.edu/about/university-leadership/president/administrative-offices/
internal-audit/independence-and-objectivity

Auditor independence - what is it, rules, importance, examples. (2018, January).

https://www.wallstreetmojo.com/auditor-independence/

Leita. (2023, November 17). Independence is required of a CPA performing Yellow

Book Audits. Yellowbook. https://yellowbook-cpe.com/independence-is-required-
of-a-cpa-performing.html

Delgado, E. (2013, November 23). Safeguards in auditing. Safeguards in Auditing.

https://easyaccountingforstudents.blogspot.com/2013/11/safeguards-in-
auditing.html

Cobb, M. (2017, June 6). Adobe Acrobat Chrome Extension: What are the risks?:
TechTarget. Security. https://www.techtarget.com/searchsecurity/answer/Adobe-
Acrobat-Chrome-extension-What-are-the-risks

Audit procedures - what are they, types, examples. (2018a, January).

https://www.wallstreetmojo.com/audit-procedures/

Easy inspection solution - get started for free. SafetyCulture. (2021, April).
https://safetyculture.com/

Audit procedures   // . Audit procedures. (2022, October).

https://methodology.eca.europa.eu/aware/PA/Pages/Planning/Audit-
procedures.aspx#:~:text=An%20audit%20procedure%20is%20a,capture%20a
%20range%20of%20data.
What are audit procedures for internal controls? - reciprocity. (2018c, June).
https://reciprocity.com/resources/what-are-audit-procedures-for-internal-controls/