Effects of Guanxi and Audit Independence

Question: Discuss about the Effects of Guanxi and Audit Independence. Answer: Introduction The following report constitutes the case of Health Care Holdings Group (HCHG) owning private hospital group like Shady Oaks Hospital, Gardens Nursing Home and Total Cancer Care. During the year ended 30 June, two material situations have been identified from the preliminary analysis done by Tania Fellowes. Accordingly, the report identifies and explains different type of potential threat to the Fellowes and Associates as per the given situation in consideration with the APES 110. Further, the report provides the probable actions that the audit firm can include in the audit procedures to eradicate the potential threats along with the necessary safeguards to eliminate the future risk threats. The first situation in the given case states the interest of one of the organizational accountant to join the audit team during the financial year 2014 that owns significant shares in HCHG. It has been stated that the interest of the accountant was not material to the organization. The second situation in the present case provides the previous engagement of the audit firm by HCHG in order to value intellectual property for the year 30 June 2014. According to the financial statement of the organization, value of intangible asset includes $30 million as per the valuation given by Fellowes and Associates as on 1 March 2014. Identification of Potential threats In view of the regulations under APES 110 on code of ethics for professional accountants, it is essential to comply the fundamental principles with respect to integrity, objectivity, confidentiality and professional competence. According to the section 290 under code of ethics for professional accountant, the auditor of the organization is required to follow the independence requirement for auditing the financial statements of the organization to determine the true and fair view (Chawla et al., 2015). Accordingly, in view of the first situation, intention of HCHGs accountant to be a part of audit team as well as ownership of organizations shares would lead to certain threats on the independence of Fellowes and Associates. The primary threat that Fellowes and Associates might experience would be limitation on the scope to verify the necessary documents and ledgers to examine the financial information. It is possible that the presence of companys accountant in the audit team would influence the audit procedures following substantive procedures and test of controls to check the accountability of the financial information (Garcia-Falires Herrbach, 2015). Further, involvement of organizational accountant in the audit team would affect the confidentiality on audit working papers in terms of audit procedures. In view of the second situation on valuation of intangible assets, it is significant to determine the fair value of the assets based on the standards of IFRS to determine the true and fair value of financial position (Al-Akra, Abdel-Qader Billah, 2016). Valuation of intangible assets amounted to $30 million has been done after the acquisition of subsidiary company Shady Oaks Hospital. Therefore, the potential threat for such valuation involves determination of fair value by considering the acquisition date and appropriate cost (Boyle, DeZoort Hermanson 2015). Correct valuation of intangible asset is important since it measures the business value and business growth hence; the availability of correct information on intangible assets to the audit team is a primary threat. In case the intangible assets like goodwill is purchased, then ascertainment of details on contract and third party confirmation is difficult for Fellowes and Associates (Taylor, Fan Tan, 2015). Necessary action and safeguard to eliminate the potential threats and future risk on independence In order to eliminate the potential threats for the two given situations, Fellowes and Associates audit team is required to consider certain actions as per the regulation of APES 110 on code of ethics. The audit team may state the objection on involvement of organizational accountant to avoid the risk of independence and disclosure of confidential information (Garcia-Blandon Argiles, 2015). Another action that the audit team can take to reduce threats in the first situation is communication with the organizational management and governance for providing all the necessary accounting records and documents. In view of the threats for second situation, audit team may take action for ascertaining necessary details on intangible assets along with the communication with the subsidiary parties (Chiang Chiang 2016). Further, audit team can prepare audit procedures for physical verification on the contracts of intangible assets to verify the significant details on true and fair valuation. However, in order to reduce the risk of independence audit team, it is recommended to institute the safeguard in terms of external review with third parties and former employees. Additionally, the audit team can incorporate physical verification by applying test of controls to determine the accountability and transparency of the organizational financial information and other documents (Roy, 2015). It can be said that the audit team of Fellowes and Associates can apply the professional judgment to measure the appropriateness of safeguard. Further, the audit team may include the safeguard by communicating with the former auditor of HCHG before accepting the audit engagement with the organization. Similarly, audit team is required to maintain the audit working papers in a confidential manner with respect to the audit procedures for nature, timing and extent of audit to avoid the future risk on independence of audit. Conclusion In view of the regulations of APES 110 for professional accounting and professional auditing, it can be concluded that the involvement of organizational employee in the audit team is material. As per the principles of section 290 under APES 110, it is important to follow integrity, confidentiality, professional competence and objectivity. According to the given situation, involvement of accountant in the audit team is against the requirement of code of professional ethics since it affects the confidentiality of financial information. Further, valuation of intangible assets is required to be considered to determine the true and fair value in accordance with IFRS and APES. 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