Construal Instructions and Professional Skepticism †Free Samples

Question: Discuss about the Construal Instructions and Professional Skepticism. Answer: Introduction Auditing is considered as one of the major aspects for the business organizations in todays world. Auditing refers to the process of inspecting the financial statements of the companies in order to be ensured that they are free from material misstatements (William Jr, Glover and Prawitt 2016). At the time of performing the audit operations, it is required for the auditors to comply with all the required ethical principles. In this process, International Ethics Standards Board for Accountants, commonly known as IESBA, plays an integral part. IESBA is an independent body to set standards of ethics for the accountants and auditors. IESBA sets different robust accounting and auditing standards related with ethical standards, auditor independence and others. It is the prime responsibility of the auditors to comply with all the principles and standards of IESBA. According to IESBA, it is not the only responsibility of the auditors to satisfy the needs of the audit clients, but it is also t heir responsibility act in the public iterates (ethicsboard.org 2018). The main aim of this report is to analyze and evaluate the roles and functions of IESBA. The above discussion provides a short description of IESBA. Now, it needs to be mentioned that IESBA has some specific roles and functions. The main role of IESBA involves in the development and issuance of high quality of ethical standards for the public interest and the other pronouncements for the use of the accountants all over the world (ethicsboard.org 2018). The code of Ethics for Professional Accountants and Interpretation of IESBA can be applied to all the accounting professionals all over the world irrespective of any industry as the codes of IESBA serve as a foundation of ethics for the accountants. It is the regulatory obligation on all the business entities under IFAC not to apply less stringent standards than the ethical standards of IESBA (ethicsboard.org 2018). At the time of the development of ethical standards for the accountants, IESBA needs to follow a rigorous due process. The first standard is research and consolation. The task force of IESBA is required to unde rtake appropriate research and consultation process for proposing the draft standards. The next process is transparent debate, as it is required to present the proposed agenda as a form of discussion and debate. The next process is the exposure for public comment (ethicsboard.org 2018). IESBA is to required to present the proposed draft for public comment. After that, it is the role of the project task force of IESBA to consider the comments and suggestions in order to develop the final ethical standards. In the last process, the final exposure draft needs to be approved (ethicsboard.org 2018). Apart from the above, one of the major functions of IESBA is the periodical issue of revised stases for ethics in accounting. For example, in the year of 2010, IESBA did issue a revised Code of Ethics for Professional Accountants to be effective from the date of 1 January 2011 (ethicsboard.org 2018). Apart from this, the issuance of a revised principle-based definition about the constitution of work can be seen from the committee of IESBA. Thus, it can be said that development of principle-based definition is another major function of IESBA. Most importantly, the convergence of international and national ethical standards is a high priority to IESBA. It is also the role of IESBA to make the accountants all over the world to comply with five major ethical principles; they are integrity, objectivity, professional competence and due care, confidentiality and professional behavior (ethicsboard.org 2018). From the provided situation, it can be seen that the auditor has undue financial dependence on an audit client. This particular situation leads to the financial dependency or interest of the auditor on the property of the audit client. Thus, this particular situation creates the self-interest threat of audit independence due to the presence of financial dependence (Tepalagul and Lin 2015). The main consequence of this threat to the audit profession is the generation of biased audit opinion or the generation of audit opinion in the favor of the audit clients. Moreover, this action will breach the IESBA ethical principles of auditing (Sarkar and Sarkar 2012). There are some specific safeguards available for this particular situation. As the most important part of the safeguard, the audit company needs to ensure that the audit member having undue financial dependence on the audit client does not perform the auditing services further. Apart from this, it is required for the audit firm to place proper policies and procedures in order to make it sure that the members of the audit team do not assume any responsibility of the audit team (Tepalagul and Lin 2015). The auditors all over the world have the regulatory obligation not to have any kind of financial or other interests on the property of the audit clients that can influence the audit judgment as it can create the self-interest threat of audits independence (Chi, Douthett Jr, and Lisic 2012). However, in the provided situation, it can be observed that the audit partner or staffs have financial interest in the audit client. Thus, this particular situation has created the self-interest threat of audit independence. In this particular situation, it will not be possible for the auditor to conduct the audit operation of the company in a bias-free manner. The main reason is the influence of financial interest on the audit judgment. Moreover, in the presence of financial interest, the audit judgment will have negative influence and will not convey the correct financial position of the company (Onwuchekwa, Erah and Izedonmi 2012). In order to reduce the level of this particular threat, it is recommended to the audit firm to discontinue the audit operation of the involved audit staff from the audit client. Apart from this, the audit firm is also recommended to implement effective governing system so that this type of situation does not occur in the future (Tepalagul and Lin 2015). The provided situation indicates towards the presence family ties or close relationships between the firms, its partners and the staff of the audit team. According to the audit regulations, the staffs and members of the audit team should not have any long or close relationships with the audit client as it can affect the audit judgment. Non-compliance with this regulation creates familiarity threat of auditing (Ojo 2013). Thus, it can be observed that the provided situation creates the familiarity threat of audit independence. The major consequence of this situation is the breach of the ethical principles of IESBA for the accounting profession as the staffs of the audit team have not complied with the ethical standards and principles. After that, the breach of the ethical principles of IESBA leads to the development of influenced or biased audit opinion in the favor of the audit client (Onwuchekwa, Erah and Izedonmi 2012). As a major way of safeguard, the audit firm is required to assign new experienced audit members for the audit operations. At the same time, the company is recommended to assign a separate chartered accountant for reviewing the work of the audit team. He/she will report to the audit firm in case any negative aspect is found (Onwuchekwa, Erah and Izedonmi 2012). According to the auditing regulation, the auditors are prohibited from providing any kind of non-audit services to the audit clients like bookkeeping services, design and implementation of financial information system and many other services. In the provided situation, it can be seen that the audit firm uses to provide different kinds of non-audit services to the audit client. Thus, this situation states that the audit firm has not complied with the relevant laws and regulation of audit professional (Bowlin, Hobson and Piercey 2015). For this reason, this particular situation creates the treat of the violation of professional behavior of the auditors. In this case, the main consequence of this particular threat is the breach of the ethical principle of IESBA for the accountants and the auditors. This particular aspect leads to the violation of audit reporting principles. In the presence of influence or conflict of interest, the audit opinion will not be biasfree or influence free (Hurtt et al. 2013). As a process to implement safeguard, it is recommended to the audit firm to stop providing non-audit services to the audit client as it is against the audit regulation. At the same time, it is suggested to the audit firm to implement effective corporate governance regulations so that this type can be avoided in the near future. Most importantly, the auditors are advised to comply with the auditing professional standards (Bowlin, Hobson and Piercey 2015). From the provided situation, it can be seen that the audit firm has been providing the audit client with the services of external audit for many years. There has been raising concern related with the independence of the auditors due to the longstanding relation with the audit client. There is a possibility that the auditors can lose professional skepticism and objectivity due to the long relationship with the audit client. For this reason, this particular situation can create the risk of audit failure (Peytcheva 2013). The presence of longstanding relationship between the audit client and the audit firm can lead to the development of biased audit judgment. At the same time, this particular threat degrades the audit profession, as the auditors will have difficulties in conducting different audit opinion (Popova 2012). After consideration of the threat, it is recommended to the audit firm to rotate the audit staffs on a regular interval. Due to this process, there will be less chances of the influence of audit opinion by the audit staffs. At the same time, the auditors are required to comply with the required audit rules and regulations so that there is less chance of audit failure (Rasso 2015). Conclusion From the above discussion, it can be observed that ethical principles have an integral role to play in the success of the audit operations as they help in the gyration of correct and biasfree audit opinion. The above discussion states that IESBA is an independent body responsible for the setting of ethical standards in the auditing process. The study states that the main role of IESBA is the development of high quality ethical standard of auditing. Apart from this, from the analysis of the provided situations indicates that there are different kinds of threat in the audit process along with some major consequences. At the same time, some major safeguards are there of these threats. According to the above discussion, some major threats in auditing are self-interest threat, familiarity threat, professional skepticism threat, threat related to the breach of professional behavior and others. One common consequence of these threats on the audit process is the non-delivery of true audit op inion. Some major safeguards are audit staff rotation, compliance with the ethical standards and others. References Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation, professional skepticism, and interactions with managers on audit quality.The Accounting Review,90(4), pp.1363-1393. Chi, W., Douthett Jr, E.B. and Lisic, L.L., 2012. Client importance and audit partner independence.Journal of Accounting and Public Policy,31(3), pp.320-336. Ethicsboard.org. (2018).About IESBA | IFAC. [online] Available at: https://www.ethicsboard.org/about-iesba [Accessed 21 Mar. 2018]. Hurtt, R.K., Brown-Liburd, H., Earley, C.E. and Krishnamoorthy, G., 2013. Research on auditor professional skepticism: Literature synthesis and opportunities for future research.Auditing: A Journal of Practice Theory,32(sp1), pp.45-97. IESBA | Ethics | Accounting | IFAC. 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Sarkar, J. and Sarkar, S., 2012. Auditor and audit committee independence in India. Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review.Journal of Accounting, Auditing Finance,30(1), pp.101-121. William Jr, M., Glover, S. and Prawitt, D., 2016.Auditing and assurance services: A systematic approach. McGraw-Hill Education.