Auditing Theory and Practice for Familiarity Threat- myassignmenthelp

Question: Discuss about theAuditing Theory and Practice for Familiarity Threat. Answer: Introduction As per the IESBAs Code of Ethics for the Professional Accountants the conceptual framework requires the professional accountant to evaluate, mention and identify the threats to comply with the fundamental principles. The approaches of conceptual framework assist the professional auditor to comply with ethical requirement of the IESBA Code and serving the public interest (Clarke et al. 2017). Familiarity threat The familiarity threat arises where the auditor has a close or ling relationship with the client company. as in the given case, Lola Payne, the previous auditor of Dockland allowed to act as the accountant of the company as the accountant of the company resigned and the client is not able to up to date their accounting records (Hayes, Rick, Philip Wallage, and Hans Gortemaker 2014). As Lola Payne acted as the auditor of the company it will be regarded as she had a close relationship with the company that will raise the familiarity threat and it may affect the objectivity of the professional. Further, the ex-auditors engagement as the accountant of the client company will have an impact on the independence of the auditor. Further, as per IESBA, 2 years cooling off period shall be there to reduce the negative impact of engaging ex-auditor as an employee of the company. Therefore, in the given case Lola Payne shall not accept the offer of engagement as the accountant of the client compa ny as it will violate the professional ethics and will have an adverse impact on the independency of the auditor (Houghton, Keith, and Tom Campbell 2013). Materiality The materiality concept is crucial for the auditor as well as the clients. However, no agreed-upon guidelines are there with respect to numeric or any specific criteria to determine whether any fact is material or not. Generally, the term audit materiality is defined as the top level of misstatement as per the judgement of the auditor but can be tolerated by the financial statement users. Here in the given case, during audit of Dockland Lola found that client understated the profit after tax in the tax return of the previous year. However, even afyter discussing the matter with the management; they were not willing to take the corrective action. After that Lola decided informing the ATO (Australian Taxation Office). However, the auditor is to carry out his audit and as per his findings issue the report as qualified or unqualified and he is not supposed to take further steps like informing the third party for the materiality. Therefore, in the given case, Lola shall issue the qualifie d report and shall not inform the ATO (Australian Taxation Office) on his own otherwise it will violate the professional ethics (Clarke et al. 2017). Self-interest threat This threat arises when there is a chance that the financial interest or other interest will influence the behaviour or judgement of the auditor inappropriately. Professional auditor may find himself in a situation where he or his close family members or his employees may offered free gifts, preferred treatments or hospitality that will give rise to the self-interest threat. Here in the given case, the auditor, Lola Payne, after completion of the fieldwork, offered free tickets by Client Companys managing director to show his appreciation with respect to audit job (Mostafa Mohamed, Diana, and Magda Hussien Habib 2013). An offer by a client for hospitality or gifts to the audit team member gives rise to self-interest threat with respect to the objectivity as the offer may influence the judgement or opinion of the auditor. However, the value of the gift and intention of the client must be analysed before reaching any conclusion. Therefore, the value of six tickets is to be measured her e to reach any judgement. Further, dealing with inducement or offers is not a simple issue to deal with even when there is a clear-cut solution. Decision to reject or accept the gift or offer will solely depend on value, intent and nature of the offer. However, to maintain the professional independency Lola Payne shall not accept the offer otherwise it will have an impact on maintaining his independency (Blankley et al. 2012). Audit fees The threat of self-interest may arise if the audit fees remain due for long time, especially when the fees remain unpaid before issuing the following years audit report. Normally, the client is required to make the payment for the audit fees before the audit report is issued. However, if the fees is not paid even after the issue of the audit report, it will give rise to self-interest threat (Sarwoko, Iman, and Sukrisno Agoes 2014). Further, the audit firm shall consider whether unpaid fees can be regarded as equal to the loan to the client as the significance of unpaid fees may prevent the firm from reappointment. Here in the given case, the partner from Joyce Mark is unhappy as the client Dockland is taking too much time for payment of audit fees and they decided taking $ 5000 from the trust fund that the audit firm holds for the client. Moreover, the audit firm intends replacing the amount as soon as the client make the payment of audit fees. Taking the money out from the clients fund is violation of auditors professional ethics and it will give rise to self-interest threat. Further, whatever decision may be taken by the audit firm regarding the audit fees must be discussed with the management of Client Company. Therefore, taking out $ 5,000 from the clients fund as the unpaid fees will violate the professional ethics and impact the auditors independence (Erah, Dominic Ose, and Famous Izedonmi 2012). Conclusion and recommendation From the above discussion, it is recognized that in all the above situations the auditor is violating the professional ethics that will have an impact on the independence of the auditors. Therefore, while carrying out the audit, the auditor shall not involve any any such activity that will reduce the independence level of the auditor. References Blankley, Alan I., David N. Hurtt, and Jason E. MacGregor. "Abnormal audit fees and restatements."Auditing31, no. 1 (2012): 79. Clarke, Brian, David Gilchrist, Roger Simnett, and Ken Trotman. 2017. ADVANCED AUDIT AND ASSURANCE. Ebook. 2nd ed. Victoria: Deakin University. Erah, Dominic Ose, and Famous Izedonmi. "Non audit services and auditors independence in Nigeria."International Journal of Business and Management Tomorrow2, no. 7 (2012): 1-8. Hayes, Rick, Philip Wallage, and Hans Gortemaker.Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed, 2014. Houghton, Keith, and Tom Campbell.Ethics and auditing. ANU Press, 2013. Mostafa Mohamed, Diana, and Magda Hussien Habib. "Auditor independence, audit quality and the mandatory auditor rotation in Egypt."Education, Business and Society: Contemporary Middle Eastern Issues6, no. 2 (2013): 116-144. Sarwoko, Iman, and Sukrisno Agoes. "An Empirical Analysis of Auditor's Industry Specialization, Auditor's Independence and Audit Procedures on Audit Quality: Evidence from Indonesia."Procedia-Social and Behavioral Sciences164 (2014): 271-281. Thibodeau, Jay, and Deborah Freier.Auditing and accounting cases: Investigating issues of fraud and professional ethics. McGraw-Hill Higher Education, 2013.