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Questions: 1.Evaluate any threats in relation to Auditor Independence. 2.Identify any safeguards to threats. 3.In relation to the purchasing of equipment and spare parts, describe two business risks to MSL that Crampton and Hasaad will consider in planning the 2015 audit. 3.Identiy of Account Balances that are impacted directly by the Audit Risk. Answers: An auditors independence is defined as the statue of the auditors being able to give his or her opinion regarding the quality of financial statements without his judgement being altered by any economic, financial and any other significant relationship with the company being audited (THE INSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESH CPE Seminar, 2008). 1.In the past 10 years, the auditing firm Clarke and Johnson (CJ) has been the auditor of Luxury Travel Holidays (LTH). This causes rise to the familiarity threat since because of longer working relationship the audit firm managers can develop a close relationship with the LTH firm managers. This has the effect of making the auditors firm employees to be sympathetic to the interest of the LTH managers more than that of the shareholders. In addition, Michael, an auditing firms team has his dad as the as a member of the LTH accounting department tasked with preparing the financial reports which we are supposed to audit (THE INSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESH CPE Seminar, 2008). This close relationship is also a form of familiarity threat to our independence. Also, the managers of the LTH are offering me and Geoff family a holiday gift stating it to be a sign of sincerity. But due to the large cost of the trip it may generate a self-interest threat to our job as the auditors as our opinion may be interfered with by need to protect the LTH managers to avoid losing the travel gift. The situation has also indicated an intimidation threat. The LTH managers are offering to recommend the appointment of our firm on the condition that Geoff help give a talk in their annual seminar to help promote LTH. This condition will be a threat to our work since our opinion may be taken to be biased by third parties by the virtue that Geoff an auditing partner is participating in promoting the firm something which will directly benefit the LTH managers. This promotion if undertaken on the other end will generate an advocacy threat. Introduction of Annette to the auditing team will generate a self-review threat to our independence. Annette was in the past three months working with LTH to prepare the tax entries in the account something we are supposed to go and audit. This means her presence in the team will interfere with our judgement of the quality of the tax information in the financial statements. 2.It is the responsibility of the auditing firm management to ensure that the firm is independent form any factor that might interfere with their judgement. After identifying the independency threats this are the possible measures that should be taken to safeguard the firms independence (Siegel, 2002). Before we go ahead and accept being the auditor of LTH in the 2015 financial year we should reach the LTHs audit committee and air our view regarding the management demand of Geoff taking promotional tasks for us to be recommended as the preferred auditor. Their offer of a travel gift should only be notified to the audit committee to erase any independence issue that may arise because of accepting the gift should our firm be approved (Blann, 2012). Should we accept the task to audit the firm it will be appropriate to select a different team from that of the past auditing team this will eliminate the familiarity threat generated by continuing association with the client for the past 10 years. As an audit manager for the firm in charge of the LTH auditing for the past 10 years am recommending my role be changed and another person take charge to take care of any doubts into my independence brought about by the continuing working amidst the LTH staff. Annette and Michael should be moved from the audit team to clear the self-review threat and the familiarity threat respectively brought about by Annette working with the LTH to prepare the financial statements we are auditing. Also, Michaels dad being a senior worker in the LTH firm might be viewed by third party as a threat to our independence since he is in apposition to influence Michaels work during the auditing process. Considering that Annette helped in the tax entries in the LTH books she may generate a self-interest regarding protecting the quality of her job as a consultant of the LTH taxation department, her elimination from the team is highly recommended. Furthermore, the management of the CJ should put in place policies that enables the workers present issues interfering with their independence as auditors team members to the senior staff without fear. Lastly should CJ be approved to audit the 2015 financial statements we should appoint another independent body to review our auditing work and advice accordingly. 3.Business risk is the situations that might hinder the firm from attaining its objectives. They may be from external sources or from within the firms management decisions (Fazal, 2012). In relation to the purchasing of equipment and spare parts the risks involve might be: exchange rate fluctuations, Mining and Suppliers Limited (MSL) operations are based in Australia yet it relies on equipment and spare parts supplied from Europe, US and China. This dependency in imports exposes the operations of the MSL to exchange rate volatility something which might generate cash flow issues in the firm. This fluctuations in the exchange rate might cause increase in profits or sometimes losses hence failure to meet the business target (International Standard on Auditing (UK and IRELAND), 2010). Also, the full reliance on inventory from abroad may be associated with transportation issues. Unless the MSL have policies which enable keep excess stoke their operations might easily be affected by problems affecting transportation such as grounding of aeroplanes or increase in charges due to increasing cost of energy. Hence in planning the audit the Crampton and Hasaad should consider these issues being that the firm entirely relies on imports (Luskova, 2011). 4.Audit risk is the presence of fraud and errors in the financial statements that the auditor fails to detect leading to him giving a misleading opinion (Anderson, 2012). Audit risks that will be associated with the foreign exchange rate issues will include indication of non-realized loss due to foreign currency reassessment. Resulting into foreign exchange denominated loans something which will weaken forint compared to hard monies. Also, there will be possible currency losses which the accounting department fails to transfer to selling prices. The effect will be rising prices caused by unhedged purchases hence leading to decline in demand. This will have an impact on the expenses account due to losses unaccounted for. The auditor might miss identification of such details as they are entirely not featured in the financial statements and as a result come up with misleading opinion. In addition, non-realized loss on forward, option and swap deals. This can only be taken care in the preceding accounting period provided hedge accounting is not applied. The losses resulting from foreign exchange may minimise the companys participation in public procurements. This is because it, may not be able to comply with the requirements necessary for obtaining tenders (INTERNATIONAL ACCOUNTING, AUDITING AND ETHICS, 2015)s. this information requires specialists to identify. Without proper attention, the auditor may fail to detect it. The transportation problems may also create some form of audit risks which may include. A possibility of the transport cost consumed by repairs of equipment because of warranty condition being reflected the books to increase cost of sales this causes miss interpretations on the business sales figure. Also, some remotely located clients might liaise with the firm employees and obtain maintenance and repairs under the pretence of warranty agreement yet the warranty condition if not met. This will result in misstatements of the repair expenses. Should the auditor not express due diligence in identifying these errors an audit risk may end up occurring due to this. The equipment and spare parts are supplied directly to the operational centres by the manufactures but the finance services are offered by the finance services. This delegation of duties may cause billing of excess or less invoice. Being that the head office only relies on the operational centres and pays for the goods without physically seeing them there is the risk of the firm purchasing the wrong quantity from the budgeted one. The effect is that the inventory as indicated by the financial statements may fail to show the exact cost. References Anderson, A. W., 2012. Undestanding audit risks and discussing them with your client. s.l.:Anderson's audit express. Blann, S. W., 2012. AUDITOR INDEPENDENCE in the public sector, Revisited. s.l.:Government Finance review. Fazal, H., 2012. Difference between business risk, inherent risk, control risk, detection risk and audit risk, s.l.: Paka accountants. INTERNATIONAL ACCOUNTING, AUDITING AND ETHICS, 2015. Risk assessment and internal controls: continuing challenges for auditors, s.l.: ICAEW. International Standard on Auditing (UK and IRELAND), 2010. IDENTIFYING AND ASSSESSING THE RISK OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT, s.l.: s.n. Luskova, K. B. a. M., 2011. Components of Risk Management in Transport Company. VI(5). Siegel, W. T. A. a. A., 2002. Threats and Safeguards in the Determination of Auditor Independence, s.l.: Washington University Law Review. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESH CPE Seminar, 2008. Auditor Independence-Threats and Safeguards. Dhaka, Sabbir Ahmed.