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Question 1

Threats to auditor independence

Answer 1

Self interest
Self review
Advocacy
Familiarity
Intimidation

Question 2

Threats to auditor independence
Self interest

Answer 2

Inappropriate influence from financial or other personal interest
Financial interest - have big deposit in bank they will audit …. if they find financial misstatements & know highlighting it will cause bank to go down & they will loose deposit.
If audit firm depends heavily on one client for income. Highlighting material error could ruin relationship and cause them to stop being a client. Dont want to lose money firm is making from them - job security
Personal interest
Incentive schemes or bonuses tied to success of the client. Owning shares in company you will audit … if your own investment will be affected.
All these can affect you from highlighting material misstatements

Question 3

Threats to auditor independence
Self review

Answer 3

When assurance team evaluate and form opinion of their own or colleagues in the same firm/under same employer’s work.
Eg
Reviewing financial statements that audit firm prepared for its client
Assessing the effective internal controls that the audit firm implemented for the client.

Question 4

Threats to auditor independence
Advocacy

Answer 4

Danger of compromising objectivity by excessively advocating for a clients or employers position … can lead to questioning auditors objectivity
Eg
Acting as advocate for client in legal / financial disputes
Promoting clients shares or bonds to potential investors
Publicly commenting on the clients future prospects when info is incomplete

Question 5

Threats to auditor independence
Intimidation

Answer 5

Actual or perceived pressures may deter you from acting objectively
Eg
Distorting findings to be favourable to the client in fear of being fired
Dominant figure within client firm attempting to influence audit decisions
Pressure from client to reduce audit hours to lower fees

Question 6

Threats to auditor independence
Familiarity

Answer 6

Developing excessive sympathy and or predisposition to accept the work due to an excessively long or close relationship with client or employer. Assurance staff can become too sensitive to clients needs and lose objectivity due to familiarity
Eg
Having close personal relationship with management / staff
Long term association with client influencing audit judgements
Acceptance if gifts or preferential treatment from client, even minor

Question 7

Safeguards to auditor independence

Answer 7

Professional level - created by professional legislation or regulation
Client level - created by clients
Firm level - created by accounting firms

Question 8

Safeguards to auditor independence threats
Profession, legislation, regulation
eg by CAANZ

Answer 8

Entry requirements - education, training, experience criteria + continuous professional development - relevant degree and practice
Corporate governance regulation (external audit) which demand discussion or approval of audit & non-audit services by the governing bodies. - Board of director audit committee and auditor need to check conflict of interest and transparency
Professional standards and pronouncements + monitoring and disciplinary procedures governed by professional + regulatory bodies - can be publicly named and license revoked
Duty to report breaches of ethical requirements eg ‘whistleblowing’ to expose unethical behaviour - law made to protect whistleblowers
External legal reviews of reports by professional accountants - eg unethical behavior hotline

Question 9

Safeguards to auditor independence threats
Firm level eg what kpmg can do

Answer 9

Leadership highlights importance of complying with professional ethics & public interest - leader sets tone for the rest of the firm… cant have ethical firm without ethical leader
Quality control & review measures are in place for all client engagements … audit work needs to meet firms standards, high level employee reviews work of senior auditor on the job
Policies to ensure disclosure of all relationships or interests with different partners and teams having different reporting lines eg telling someone your friend is a member of x firm or you have investment with x bank
Senior management oversees the safeguard system
Timely comms of policies and procedures, extends to all partners and professional staff
Using different partners and staff for non assurance services provided to assurance client, as well as rotating senior team members - use different teams from same firm for different job to avoid self review
Disclosing fees and making a threshold.
Involving another firm to perform or re-perform part of the engagement

Question 10

Safeguards to auditor independence threats
Client level - created by client

Answer 10

Appointment of an independent firm to ratify the engagement. If ey did audit, get kpmg to check and ratify their work
Competence of employees
Internal procedures to ensure objective decisions on engagements - context of internal controls
Proper corporate governance structure with appropriate oversight and communications - clear lines of reporting within the auditing firm

Question 11

Integrity

Answer 11

Being straightforward and honest in all professional and business relationships
Not knowingly being associated with materially false or misleading statements or making statements recklessly
eg. correctly reporting material misstatements to ensure correct representation of the firm’s accounts.

Question 12

Objectivity

Answer 12

Avoiding bias, conflict of interest, external pressures overpowering professional or business decisions is crucial. Objectivity is a mental state, can exist without complete independence
Independence is vital for assurance tasks eg audits and reviews, demands both independence if mind & appearance
Eg reporting material error on a long time client’s financial statement

Question 13

Competence and due care

Answer 13

Maintaining expertise, professional knowledge & skill to deliver services to clients or employers diligently, complying with technical and professional standards
Sound judgement in applying professional knowledge
Ongoing education & continuous professional development to stay current with business, professional and technical developments… keeping up to date with changes in regulations
Training, supervision & awareness if service limitations for clients and employers

Question 14

Confidenciality

Answer 14

Not to reveal information obtained through professional or business relationships unless authorised by client or legal obligation
Mandates refraining form exploiting confidential data for personal gain or others gain eg insider trading
Apply to potential, current and past clients & employers
Practicing confidentiality also involves vigilance against accidental disclosures to close associates, family members, or in social settings.
Eg not telling your friend information about a firm you are auditing

Question 15

Auditors independence in mind

Answer 15

allows an auditor to perform their work without being influenced by factors that could compromise their professional judgment. This state of mind allows the auditor to act with integrity, objectivity, and professional skepticism

Freedom from conditions (physical and mental) that could threaten their ability to be unbiased
In mind, professional skepticism
In appearance, dont put yourself in situations where independence can be questioned eg having lunch with client firm

Question 16

Confidentiality exceptions

Answer 16

Professionals may have a legal obligation to reveal information in situations such as:
* Court subpoenas or reporting suspicions of illegal activities like terrorism or money laundering.
* They might also need to disclose information to:
* meet professional body regulations,
* respond to inquiries, or
* safeguard their interests in legal matters such as fee recovery or defending against negligence claims.
Disclosure might be necessary to adhere to ethical or technical standards
Eg authorities are investigating clients activities and request relevant documentation

Question 17

Professional behaviour

Answer 17

Complying with relevant laws and regulations and avoiding any action that discredits the profession.
Be honest in representations to current and prospective clients.
Do not claim to provide services they cannot provide, or qualifications they do not possess, or experience they do not have.
Do not undermine reputation of, or quality of work produced by, others.

Question 18

Ethics

Answer 18

Integrity
Objectivity
Confidentiality
Competence and due care
Professional behaviour

Question 19

Audit failure

Answer 19

Failure in audit opinion. Inaccurate incorrect audit opinion
Audit failure occurs where an auditor gives an opinion that the financial report is free from material error when this is not the case.
Failure in audit process to detect and/or report material errors, which can lead to the release of incorrect information
The risk is that users will make financial decisions based on the information contained in the financial report unaware that they contain material errors.
Users place reliance on an audit opinion that is wrong and can suffer losses as a consequence.

Question 20

Corporate failure

Answer 20

Failure as a result of financial management
Corporate failure is the failure of the org to continue trading. Where a company is unable to meet its debts when they fall due it is insolvent and the company is no longer a going concern. There is likely to be an attempt to save some or all of the business from liquidation to maximise the ability to pay off creditors and possibly the shareholders.
Where the business cannot be saved, the assets will be sold to pay off the debts and surplus funds remaining, if any, will be given back to the shareholders. On completion of the liquidation the company no longer exists. When corporate failures occur, it is likely that some, if not all, the creditors will not receive all that is owed to them and the shareholders generally do not get any return.
The auditor only considers going concern to the extent that it is met so that the accounts can be prepared on a going concern basis. The auditor (unlike the directors) makes no positive assertion about the going concern of the company.
Insolvency = company bankrupt

Question 21

Governance problem

Answer 21

Governance = econ & admin authority given to certain individuals to manage the affairs (resources) of an org BUT those charged with governance are not conducting affairs of entity in line with certain rules/regulations
… act against the interest of principal owners of business (taxpayer, citizen, public)
Management (leadership) / board directors are not acting in ways to uphold interest of shareholders (resource providers)

Ownership and management separated… owners cant trust managers to have good intentions

Eg government not following laws

Question 22

Auditor and governance
What do auditor do for owners

Answer 22

• Auditor is a check mechanism of what leaders (governance) do
• Auditor obtains reasonable assurance whether financial statements as a whole have been prepared in line with certain rules/regulations/standards
  And
  Financial statements are not materially misstated
• Owners / shareholders dont 100% trust governance to uphold their interest, they get independent third party (auditor) to check what managers have done for a particular period

Question 23

Agency problem

Answer 23

Pursuit of own personal interest. Natural inherent human nature to pursuit own personal interest first. This may not be inline with the orgs objectives. Auditor helps check governance isnt acting in line with org objectives

Question 24

Agency Theory - explanation

Answer 24

Agency theory explains the relationship between owners & managers.
Due to the remoteness of the owners from the entity, the owners have an incentive to hire an auditor to assess info provided by management

Question 25

How agency theory results in demand for auditing

Answer 25

In an agency relationship, investors (as principals) entrust their resources to managers (as agents). The agent’s self-interest is expected to diverge from the principals’ interest, giving rise to agency costs. A consequence of this agency problem is that investors will ‘price protect’ themselves on the assumption that managers are acting for themselves. It is therefore a rational response that there is a demand for a financial statement audit to verify the assertions made by management

Question 26

Users of audited financial statements & their demand for audited statements

Answer 26

The users of the financial statements are not limited to the shareholders or owners of the business…. other users can include:
* Investors: can include current or potential investors. Decisions include to buy, hold or sell stake in the org
* Suppliers: may want to assess whether the entity can pay them back for goods supplied.
* Customers: may look into going concern if it is to rely on the entity for goods - can they continue to meet my demands
* Lenders: to assess whether loan repayments can be made as and when they fall due. credit worthiness of client firm
* Employees: to assess whether they can pay entitlements, and stability may be assessed for job security.
* Governments: whether the entity is complying with regulations and paying appropriate taxes.
* General public: whether they should associate with the entity (future employee, customer or
supplier,) what it does and plans to do in future.

Question 27

Sources of demand for audit and assurance services form users

Answer 27

• Remoteness: users do not have access to information themselves. Information asymmetry, manager have more access to info than owner
  and prepares with proper rules/regulations
• Complexity: users do not have knowledge to read and understand financial statements to be able to use them
• Competing incentives: managements incentives may have been over-represented. Users may not be able to identify, audit opinion can help identify them. Manager overrepresentation detrimental to shareholders
• Reliability: as decisions are being made based on information presented, it is important that it be reliable

Question 28

C in CRIME

Answer 28

Control Activities
Control policies processes and procedures put in place to assist actions identified by governance to achieve the org’s objectives are effectively carried out & minimise risk to an acceptable level.
- Activities they want to be doing eg.
Segregation of duties
Approval and authorisation control - eg 2 person approval over certain threshold
Reconciliation and review - compare records or records to physical inventory
Access control eg password
Backup/recovery procedure
Physical control - locks or cameras
Performance reviews - kpi
Documentation and record keeping

Question 29

R in CRIME

Answer 29

Risk Management
Org must identify, analyse & mitigate / manage risk to an acceptable level. Cannot eliminate risk
-not all risk have the same impact, high risk, low risk
Consider changes to the external and internal environment for potential obstacles to objectives Eg
Fraud risk assessment workshop
Risk Mapping- see all risk and what is most likely/impactful
Financial target - what risks relevant if cant reach target
Operational goals - labour shortages equipment failure
Scenario analysis - understand impact if different risk in different condition
Segregation of duties review - review seg of duties to make sure one single employee doesnt have control of all aspects
Regulatory changes - impact of new laws on internal control, update if needed
Organisational changes - disrupt processes or intro new risks

Question 30

I in CRIME

Answer 30

Information & Communication
Fundamental component of internal control.
Ensures relevant accurate and timely info is identified captured and communicated effectively to enable employees and management to carry out their responsibilities.
Effective comms flows vertically (top management, bottom management, employees.
Horizontally, accross departments
Eg. People anonymously reporting misbehaviour eg whistle blowing
Exception Reports - reports that highlight deviations from expected performance or procedures (e.g., budget overruns, inventory discrepancies) to prompt corrective action.
Management dashboards - monitor kpi monitor progress towards goals
Employee handbook
Training programs
Financial statements
Regulatory findings

Question 31

M in CRIME

Answer 31

Monitoring
Process of constant assessment of the org’s internal controls effectiveness over time. This involves both ongoing activities and separate evaluations to ensure controls are operating as intended and are adapted to address any new risks or changes in the org’s environment.
Eg
Periodic internal audits eg compliance Audits - assessing compliance with laws, regulations, & internal policies to identify areas of non-compliance and recommend corrective actions.
Management reviews of kpi & control activities to find areas to improve eg variance Analysis - analysing budget-to-actual variances to identify unexpected discrepancies that may indicate control failures or inefficiencies.
Feedback mechanism eg - monitoring customer feedback and complaints to identify trends that may indicate underlying control or operational issues.
Eg audit procedure.
Process audits
Compliance audits
Variance analysis
Review meetings
Whistleblowing hotlines
Customer complaints

Question 32

E in CRIME

Answer 32

Control Environment - foundational to all other elements
Foundational to every other internal control component. The core of any business is its people - their individual attributes including integrity, discipline, ethical values and competence - and the environment in which they operate. They are the engine that drives the organisation and the foundation on which everything rests
..Tone/culture set at the top (ethical culture, values of leadership). Strong values = strong risk assessment, control activities etc
People, culture at strategic top management
eg
Commitment to attract, develop and retain competent individuals in alignment with objectives
Governance people are committed to integrity and ethics
Broad oversight of internal control systems

Question 33

Internal control objectives

Answer 33

Should help company achieve:
- Reliability and relevance of financial reporting want it to be accurate and useful
- Effectiveness and efficiency of operations - eg lecture doors limiting entrance outside lecture hours, job done, effective and efficient
- Compliance with applicable laws and regulations

Question 34

Auditors independence in appearance

Answer 34

avoiding facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an audit or review team member’s integrity, objectivity, or professional scepticism has been compromised.