Audit Independence and Threats Regulations

Question: Discuss about the Audit Independence and Threats Regulations. Answer: Introduction Independence of the auditors is a crucial aspect as audit operations cannot be done without the independence of the auditors. The independence principles of auditing states that the auditors must should not have any kind of material financial interest in the properties of the audited clients. The independence of auditors demands honesty and integrity from the sides of the auditors (Roy Saha, 2016). Breaching of the principles of auditors independence poses some major threats for the auditors as well as for the audit profession. The independence of the auditors can be divided into two categories; they are Actual independence of the auditors and Perceived independence of the auditors (Kouakou, Boiral Gendron, 2013). It is desired that the auditors should follow the principles of independence for the smooth conduct of the audit operation. The main purpose of the report is to evaluate the auditors independence factors along with the threats and safeguards. Potential Type of Threat It is desired that the auditors of an organization will be free from all kinds of material interests in the property of the auditors so that the auditors independence is maintained. Violation of the principles of auditors principles can pose some major threats for the auditors as well as for the organization. The threats of Fellowes and Associates are highlighted below: First Situation: It is the first and foremost requirement of auditors independence that the auditors will be free from all kinds of financial interest from the clients property. As per the information provided in the case study, one of the accountants of Fellowes and Associates owns shares of Health Care Holdings Group (HCHG). This situation implies that one of the auditors of Fellowes and Associates has financial material interest in the properties of the audited client. According to the rules and regulations of AccountingProfessional Ethical Standards (APES) 110, this act of the accounts associate of Fellowes and Associates has breached the Auditors Independence Principle. This is a potential major threat for Fellowes and Associates. This act may influence the decision making process of the auditors for HCHG as there can be biasness (Ettredge, Fuerherm Li, 2015). Second Situation: As per the given situation, Fellowes and Associates valued the intellectual property of HCHG worth $30 million on 1 March 2014. However, this particular amount of intellectual property was shown in the books of HCHG and these assets were considered as material to HCHG. This total process poses a major potential threat for Fellowes and Associates as the process of valuation of intellectual assets was wrong. As per the accounting rules and regulations, intellectual properties of an organization are immaterial to that company. By showing the intellectual properties as material, the accountant has breached the accounting as well as auditing principles. On the other hand, on 30 June 2014, the unchanged amount of 1 March 2014 was taken into consideration. In this situation, the auditor did not do the revaluation of that intellectual property by neglecting the fact that the value can be changed over the gap of 3 months. This is a potential threat for Fellowes and Associate s (Basioudis, Gul Ng, 2013). Corrective Actions and Safeguards The above discussion shows that some major threats are posing for Fellowes and Associates due to the breaching in the principles of auditors independence. The first situation shows that there is one of the auditors of Fellowes and Associates has financial material interest in the properties of HCHG as he owns shares of the company. The second situation states that the valuation of intellectual property of HCHG was not correctly done and they were shown as material to HCHG. Fellowes and Associates should take some actions to avoid the potential threats. First, Fellowes and Associates should terminate the accountant who purchased the shares of HCHG as it is against the professional and ethical principles of the audit profession. In case of the second situation, Fellowes and Associates should do a revaluation of the intellectual properties of HCHG and should show the correct value in the books of the company (Openscholarship.wustl.edu 2016). On the other hand, Fellowes and Associates sh ould show in the audit report that the intellectual property of HCHG is not material to the company. These are the corrective measures that Fellowes and Associates need to take to revive the situation. Apart from these corrective measures, some safeguards can be taken to avoid the future independence related risks. Effective leadership is one of the safeguards that can be taken to avoid this kind of situation as good leaders helps to maintain the auditors independence in an organization (Ball, Tyler Wells, 2015). Second, Fellowes and Associates should analyze and evaluate the condition of the linear accelerators before making any kind of judgments. Fellowes and Associates should take the fact in mind that they are the representative of the public; so there should not be any kind of influence and biasness in the decisions of Fellowes and Associates. Another safeguard can be the rotation of auditing staffs. The audit staffs need to be rotated often to bring transparency in the audit process (J. Clout, Chapple Gandhi, 2013). The auditors should not be involved in any kind of agreement to the audit client that can influence the audit decision. These are some of the safeguards that can be taken to avoid future independence threats (Chapple et al., 2014). Conclusion From the above study, it can be understood that the audit report in the absence of auditors independence is not a true and fair audit report. The above study shows that different kinds of threats can be arrived by wrong professional practices of the auditors of Fellowes and Associates. This type of threat is called the independence threat of the auditors that can harm the audit and audited firm both. However, this potential threat can be eliminated by taking corrective measures like revaluing the assets, eliminating the dishonest employee and others. On the other hand, some safeguards are available to avoid independence related risks of the auditors. Hence, from the above discussion, it can be concluded that the auditors independence risks are a major kind of risks and these risks can be avoided by taking corrective measures and safeguards. References Ball, F., Tyler, J., Wells, P. (2015). 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