Audit of client Linstead Parva plc - Essay Example

? ACCEPTANCE OF POSITION AT AUDIT CLIENT Since one of the audit assistants has agreed to accept a trainee manager position at the audit client, Linstead Parva plc, and a noticeable fact is also that the trainee was also a part of the audit team last year. Potential threats There are certain threats that arise when a person, previously part of the Tick and Bask LLP, accepts a position at Linstead Parva plc. When a pervious auditor accepts a position, after resignation, at one of the clients where he has previously worked at, questions may arise that whether the auditor had exercised the proper diligence and the proper professional skepticism during the course of the last year’s audit when he was a part of it which may impact this year’s audit as well. Another noticeable fact is that when a person previously associated with the audit of the client has the relevant knowledge and familiarity of the processes and approach that Tick and Bach LLP uses for the audit of the company and can use that knowledge in order to evade the procedures of the audit. (Raghunandan) Another relevant threat is that the person accepting the position at the client can have association with current team members of the engagement, which would make it difficult for the team members to challenge the decisions of their former colleague therefore decreasing the objectivity of the audit. Solutions Where its has come to our attentions that one of the audit assistants has joined the client as a employee, the risk associated with the client has increased due to the above discussed matters. In this regard, we can lower the materiality level for the misstatement and errors that occur during the course of the audit, taking the particular matter into account. ACCEPTANCE OF TOKEN OR GIFT FROM AUDIT CLIENT As Linstead Parva plc, who is engaged in the business of property investment and developments, is offering its staff members mortgage deals at discounted rates and have also offered Tick and Bash LLP same offer of discounted property investments. Such an offer has created risk prospective to the independence and objectivity of the audit of the client. Potential threats due to acceptance of staff scheme The auditing standards strictly prohibit the acceptance of any unusual tokens from the client which the client does not offer regularly and which have the essence of impairing the objectivity and independence of the client. (Independence Provisions Applicable to Audits of Public Interest) The potential threats that may flow are: The acceptance of the staff scheme will cause significant influence on the decision and the professional judgment of the audit team members. The team will not be independent during the course of the audit due to possibility of significant benefits that will aid the team which will impair their objectivity. The audit objective will not be attainted as the members of the team will not be able to exercise proper skepticism during the course of the audit which may impair the objectivity of the audit. (Audit Ethics) Solution It is strictly advised to the members of the Tick and Bash LLP, which are involved in the course of the audit, not to accept significant gifts from Linstead Parva which may impair their objectivity and professional skepticism during the course of the audit. The engagement partner should also make sure, in light of the code of ethics, that any other token or gift which may impair the objectivity is not accepted from the Linstead Parva plc. RELATIONSHIP WITH EMPLOYEE OF AUDIT CLIENT One of the junior accountant working at the CPD (Development) Ltd has become engaged to be married to the son of the engagement partner and since CPD (Development) Ltd is a 100% owned subsidiary of a jointly controlled entity of Linstead Parva plc, i.e. CPC Ltd, there also arises a risk that the audit engagement partner may exercise influence on the team members of the audit team where a matter arises during the course of the audit. However, there can be an argument that the risk will not be very substantial as the person to whom the audit engagement partner's son is engaged to, is only a junior accountant at CPD (Development) Ltd. But the code of ethics has clearly said forth that "Such relationships must be avoided with the audit clients which tend to prejudice, bias or even influence the objectivity of the auditor" (Fernando) Solution The risk can be mitigated by lowering the level of reliance placed on the work performed at the audit of CPD (Development) Ltd and exercising extra amount of skepticism when dealing with the particular accountant. This also creates questions of client acceptance procedures as a client which is involved with the audit firm should not be accepted as an audit client. (Hkiaat) BUSINESS RISKS IN AUDIT OF LINSTEAD PARVA PLC The group is engaged in the business of property investment and development. It has several wholly and partially owned subsidiaries which are in the related business. As per the current circumstances, the property portfolio of the group has undergone certain decline in value which has caused loss in the value of the value of property held by the company. They also purchase material from some parts of China and Indonesia which are laid at the port until there is enough space to accommodate the material. An annual stock take is carried out at the year end to ascertain the amount of inventory. The report was qualified due to treatment of material of different grade as one by the firm of consultant which carries out the stock count. The business risk of Linstead Parva plc is that the revaluation of the assets of the company have lead to a decrease in the overall value of the property portfolio, this may have adverse affects in the long-term with respect to their losses in the coming years. Audit Risks with regards to inventory quantities There are several potential audit risks that are created as a result of the mixing of the inventory with that of other grades: The most important audit risk which is created by such an act of mixing the material with another of a different grade may lead to overvaluation of the inventory at the year end. As a result of the overvaluation of the inventory, the profit for the year may increase due to the greater closing stock where the lower grade and low cost inventory is mixed with high graded and expensive inventory and the profit may even be understated where the vice versa takes place. The assets of the company may also be over or under valued, depending on the circumstances, where the inventory at year end is mixed with that of different grade and quantity. Steps to mitigate risk inventory blending The mixing of inventory with a different grade creates audit risk that the inventory may be over or under stated which should be mitigated by the following steps: It should be ensured that the inventory count is carried out at the date of the end of the financial year end. Inventory count should be conducted personally in support of an expert who can distinguish between the grades of the inventories so that sufficient appropriate audit evidence may be achieved about the particular quality of inventory treated accordingly. Where it is not possible to conduct the inventory count at all the sites, the count should be carried out at on test basis as well as on surprise basis where the team can obtain evidence that all the sites are treating the inventory according to the relevant standards. (IASB) It should be made sure that the inventory take is carried out in place of a proper and independent expert who has knowledge and expertise of the grades of inventory which forms part of the material. Apart from the annual stock count, a surprise count may also be conducted to make sure that the inventory is graded properly for all purposes of the financial statements. References Audit Ethics. Available at: . [Accessed: March 12, 2011] Fernando, A. C. Business Ethics. n.d. Hkiaat. Available at: . [Accessed: March 12, 2011] IASB. International Standards on Auditing 501. 2010. Independence Provisions Applicable to Audits of Public Interest. 2009. Raghunandan, Venkataraman M. Iyer & K. "Auditors' employment with clients." Journal of Managerial IssuesWinter (2002). Read More