Providing Non-Audited Services to Audited Clients - Coursework Example

Providing Non-Audited Services to Audited Thesis Paper The The paper will give a definition of both audit and interim audit process in the introduction section. The interim audit is done between two regular audits, and lies between the final audit and continuous audit, therefore, the process aim at prohibition of the independent threat that can cause the threat of the process. in addition, the paper will discuss different points that support and oppose the thesis statement that state; It is unethical to provide interim audit to clients that you will audit because of the dangers of manipulation, conflict of interest and auditors independence. Finally, the paper will draw a conclusion on which side is the best for both auditor and client to avoid conflict of interest in the interim audit process. Outline Thesis Statement 2 Introduction 3 Supporting Arguments 4 1. The fundamental principles 4 2. Integrity, objectivity, and independence 5 3. Confidentiality 6 4. Audit Fees 7 Opposing Arguments 8 1. The conflict between two clients 8 2. Provision of other non-audit services to the audit clients 9 Conclusion 10 Bibliography 12 Thesis Statement: It is unethical to provide interim audit to clients that you will audit because of the dangers of manipulation, conflict of interest and auditors independence. Introduction An audit is an examination of books of account of a business that will enable the auditor to guarantee that the balance sheet is suitably drawn up to give a true and fair view of the state of affairs of the business. It also shows whether the profit and loss gives the true view for the financial period according to the information and clarification given to the auditor, as shown by the book of accounts (Mainardi 27). According to Kumar and Sharma (34), the interim audit is intricately linked to an interim period and not the full accounting year. It is done between two regular audits, located between the final audit and continuous audit. The interim audit is obligatory in the business to know the reliability and the accuracy of the financial statements of the clients for part of that year. Therefore, to get an declaration about the reliability of the financial statements and maintaining the importance of the interim, the clients may decide to get the accounts audited by an independent auditor in the form of interim audit. The interim audit helps in the detection of errors and fraud that can be rectified at initial stages and re-occurrence prevented. Due to the use of the independence auditor in the interim audit, the professional ethics are not likely to be manipulated by a client, as it is in the internal audit process where clients are likely to interfere with the process due to close contact with account literature. Providing the interim audit to the clients always affect the professional ethics of the auditors because the codes governing the auditor profession is broken and misused. Nevertheless, in cases where the conflict of the interest is involved between the clients the ethics can be violated to meet the interest of each client to avoid leakage of the confidential information. In conclusion, the issue of the ethics depends on the circumstances facing the auditor and the clients involved in the interim audit process. Supporting Arguments The Fundamental Principles The importance of the professional code of ethics helps in promoting the culture of ethical in the interim audit process. The code of ethics is necessary and appropriate for the interim auditing, founded as it is on the trust based on its purposeful guarantee about risk managing and control. Therefore, it is unethical for the auditor to provide interim audit to clients to prevent dangers of manipulation, conflict of interest, and auditors’ independence. Providing the interim audit to client is against the fundamental principles governing the process, hence affecting the independence of the auditors in their work. The fundamental principles of the audit require the auditor not to accept work that will compromise their ethics in the work; therefore, the auditor should adhere to this principle to avoid conflict of interest from the client. To maintain the auditor independence, auditor should carry their work with due skills, diligence expedition, and proper regard for technical studies as expected by the code of ethics. If he opts to disclose the interim audit to client, the auditor should use technical skills that will help the process not to interfere with the fair and true process of auditing. The code provides structure to assist the auditor to recognize, calculate, and address the hazards to compliance with the deep-seated principles. The auditor should apply safeguards to eliminate the threat or reduce them to an acceptable level of disclosing the interim audit to the client (Puttick, Esch, and Kana 119). The auditor should address threats that can bring conflict of interest, and avoid complying with set of specific rules that threaten conformity. In conclusion, the auditor should comply with fundamental principles of the code of ethics to avoid manipulation by the client at expense of the public interest. Integrity, Objectivity, and Independence The ethic principle requires the client to be objectivity beyond the question if he or she is to report to auditor. The objectivity can be assured if the client is to be independent to avoid the inconsistence with actual independence of the auditor and appearance of the independence in the interim audit process between them (Oates, and Goelzer 404-415). Independence is the freedom from condition that threatens the ability of the interim audit process to carry out audit responsibilities in an unbiased manner (Pickett and Pickett 430). To provide the interim audit to client may impair the objectivity because the auditor might find difficult to make a stand for a particular issue, as it will have a disastrous effect on the stability of the business. The auditor must always bear in mind the need to maintain not merely independence, but also to manifest appearance of independence in the interim audit process to avoid conflict of interest. The threat to independence may be less where the client is not personally engaged on the interim audit process; therefore, the auditor should put ethics safeguard of rotation of the engagement client to avoid the manipulation of fair practice. To avoid the conflict of interest the client should not personally take part in the conduct of the interim audit if he or she is closely connected with the partner who has benefit interest in the shares of the company. Objectivity may be threatened where there is actual litigation between the auditor and client; the adversarial position would call into question the auditor’s ability to report fairly and impartially on the company’s accounts. The writ for negligence would generally impair the independence of the auditor in the process of the interim audit, so the professional ethics should specify where disclose of the interim audit is essential to the clients. Confidentiality Information confidential to a client or employer acquired in the course of professional work should not be disclosed except where conceit has been obtained from the client or other proper sources. The confidentiality is an unethical where the client or the auditor acquiring the information in the process of interim audit uses that information for his personal advantage. To provide the interim audit to the client may result into obtaining information of other clients that would be a breach of confidence to reveal the information of another client without his or her approval (Snyder 9). The auditor should endeavor to make ascertain that the information in the literature that the second client possesses supports evidence obtained directly to dictate direct substantiation. The confidentiality of the business information should meet the independence requirements to advance the superior audits by minimizing the possibility of external factors that will influence the auditor final judgment. The auditor should approach each issue with the aptitude to make declarations with a dispassionate and objective approach (Anonymous), even when the decision is affecting the interest of the client offering the information. Confidentiality is an implied term of the auditors’ contract and the client should not disclose information about business during the interim audit process to avoid the threat of the independence of the auditors. Conversely, the auditors has neither a general right nor to make unauthorized disclosures to the client about the tax authorizes or any other vital body of the client. The interim audit ensures an effective, efficient, and independent audit; therefore, the confidentiality should be maintained to evade the divergences in the business. In conclusion, the confidentiality of the business information is ethical, and the two parties should adhere to the professional codes to avoid unethical act in the practice that would threat the independence of the interim audit process. Audit Fees The recommended fee that a client is supposed to pay to the auditor is estimated not to exceed 15 % of the gross practice income of the business. However, this can change in case the interim audit is provided to the client because the auditor can change the fee to meet his or her personal interest that is a threat to the principle of integrity. The existence of significant overdue fees can be a threat to the objectivity; hence, before the interim audit process commence the financial situation should be evaluated to ascertain where the overdue fees taken together with the fees for the current assignment could be regarded as a significant loan that could threaten the independence of the auditor. Providing the interim audit to the client will result to higher non-audit services that are more likely to restate the earnings of the business. Hence, non-audit services will impair the independence and legislative agreement of section 201 of the Sarbanes- Oxley Act preventing the interim audit from providing the non-audit services to the clients as to safeguard the auditor independence (Bloomfield and Shackman 125-141). According to Denies, Janvrin, and Kurtenbach (73-99), for the interim audit to be effective the process should prohibits the auditors from providing interim audit services to prevent the conflict of the interest in the business and public at large. The professional ethics requires the auditor to charge the fees based on the amount of time worked, the seniority of the person involved, and the business cost structure. Hence, the process will not be manipulated to meet the interest of the both parties in the interim audit process that can threaten the independence of the auditors. In conclusion, the fee charged to cover the non-audit services of the interim audit process should be reasonable to prevent conflict of interest of the clients and auditors involved in the process. Opposing Arguments The Conflict between Two Clients In the interim audit process, conflicts occur when the two clients are tendering for the same contract or where the clients are in direct competition with each other. Such clients must be managed to avoid the interest of one client being adversely affected by the other, for instance in the case of outflow of confidential information among the parties. In this case providing the interim audit to the client is ethical though it breaches the professional codes of ethics it will help in averting the divergences among the parties. In some circumstances, it may be preferable to advice only one client but there are mechanisms used to avoid the manipulation of the information between the parties. The interim auditor should use the separate teams from different office who will not discuss the vital information of the two clients the situation is called Chinese walls, in this case, the full disclosure of the conflict should be made to both clients to avoid the threat of independence. The ethicality of providing interim audit is relevant where the auditor earns a commission because of the advice given to the clients; thus, this should be disclosed to the client to avoid threat of the independence of the auditors. The commission is against the professional ethics of the interim audit but to avoid the conflict of interest between the parties it is recommendable too contravene the ethical standards. Some academicians argue that providing the interim audit to the client makes the auditor to understand the client well (Anonymous 81). Therefore, superior audit services can cause potential divergences between the two parties. In conclusion, the conflict of interest compromises the independence of the auditors in the interim audit process, and therefore, contravenes the professional codes of ethics that are required in the effectiveness of the audit process. Provision of Other Non-Audit Services to the Audit Clients There is no objection in the fundamental principles governing the codes of ethics of the interim audit in the provision of the non-audit services to the audit clients. In this case, the process does not affect the functions and the decisions of the business management. The interim audit services however, should not be performed for the public companies except in the relation to assistance of a routine the clerical nature or in the emergency. In all cases, that the practice is concerned in the preparation of accounting records for the audit clients the necessary safeguard measures to observe to prevent the manipulation of the accounts to show the true and fair view of the financial situation in the company. To provide the interim audit to the client will cause the threat of the independence due to lack of enough safeguards to protect both the auditor and audit client in the case of problems during the process of interim audit process (Ebimobowei 100-107). The code of ethics in this circumstance consists of examples such as the provision of the shares of the audit clients that are proscribed by the professional code of ethics but are necessary due to request by the client. The audit committee of the business must satisfy that the independence and objectivity of the interim auditor are not compromised to that will affect the image of the interim audit process if there is conflict of interest. The provision of the non-audit services to the client will be unethical because it does not adhere to the professional codes of ethics on the confidentiality of the information because the two separate entities work at personal benefit at the expense of the other. Therefore, they contravene the code of confidentiality that threatens the independence of the auditors in the interim audit process. Conclusion To provide the interim audit to the audit client is the issue of analyzing the professional codes of ethics and decide what to do when the client request the disclosure of the information. The code of ethics is necessary and appropriate for the interim auditing, based on the conviction that is proffered to the objective assurance about risk aversion, control, and governance. Therefore, it is unethical for the auditor to provide interim audit to clients to prevent dangers of manipulation, conflict of interest, and circumstance that will cause threat of the auditors’ independence. The objectivity and integrity of both client and interim audit is necessary in the interim audit to client though it may prejudice the objectivity of the process because the auditor might find difficult to make a stand for a particular issue, as it will have terrible effect on the stability of the business. Conversely, opposing the thesis statement will compromise the fundamental codes of the ethics that will lead to threat of the independence in the interim audit process. The divergences in the opposing examples that show how the breach of the code of ethics brings the threat of independence of the auditor though the move benefit the client and the auditors. The unethical situation of the interim audit to the audit client is supported because by adhering to the codes of the ethics, the auditor and client are not capable of manipulating the process at their expense. Bibliography Anonymous. A conflict of interest? A question of holding the accountants to account. The Economist, 2010. pp 81. Available at: Bloomfield, Deborah and Shackman Joshua. Non-audit service fees, auditor characteristics and earnings restatements. Journal of Managerial Auditing, 2009. Pp 125-141. Dennis, Caplan, Janvrin Diane and Kurtenbach James. "The Congressional Ban on Non audit Services: "Reasoned and Reasonable" or "Quack Corporate Governance:” Accounting and the Public Interest. 2009. 73-99. Ebimobowei Appah. Non-Audit Services and the Impairment of Auditors’ Independence: A Further Examination. Pakistan Journal of Social Sciences, 2011.vol 8 (2). Pp 100-107. DOI: 10.3923/pjssci.2011.100.107. Kumar Ravinder, Sharma Virender. Auditing principles and practice. New Delhi: PHI Learning Pvt. Ltd, 2005. Print. Mark Oates and Goelzer Daniel. Auditor Independence: Sarbanes-Oxley, and tax services. Money Library. 2002. Pp 404-415. Available at: Mainardi, Robert. Harnessing the Power of Continuous Auditing: Developing and Implementing Practical Methodology. London: John Wiley and the Sons Inc.2011. Print. Pickett Spencer, Pickett Jennifer. The Internal Auditing Handbook. London: John Wiley and the Sons Inc.2010. Print. Puttick, G., Esch Sandy. The Principles and Practice of Auditing. Cape Town: Jutaonline Inc. 2008. Print. Snyder, Herber. Client Confidentiality and Fraud: Should auditors be able to exercise more judgment that is ethical. Fraud Magazine, 2011. Available at: Read More