Challenges of Liability Limitation Agreementâ€MyAssignmenthelp.com

Question: Discuss about the Challenges of Liability Limitation Agreements. Answer: Introduction: In the first situation, Chris the CEO of LTH being impressed with last years audit wishes to reappoint CJ, and wants them to give a speech in the companys favor at the travel agency seminar, and has no intention to re-engage them if they refuse to offer such assistance. This is an intimidation threat upon CJ, as their independence is at stake, and has become bound to offer a biased judgment, irrespective of being a non-audit function. The second situation sheds light on self-interest threat wherein Chris has provided gifts in kind to the auditor for want of another smooth audit. Here, the auditor is liable to offer an unbiased judgment, and accepting such gifts can tamper their ethical values. Besides, this threat can result in an incorrect audit report for want of such benefits offered by Chris. The third situation sheds lights on familiarity threat wherein Geoff (CJs audit partner) has recommended Michael to be the auditor, but Michael already has some interest in the company, as his father is the financial controller. Therefore, becoming an auditor may make him biased and spoil his moral values, as he will not report misconduct on his fathers doings, or of the company due to fear of loss of fathers job (Cappelleto, 2010). The fourth situation sheds light on self-review threat wherein Annette being an ex-employee is recommended as an auditor. Besides, not only Annette, no other individual can audit their own activities, and offer an unbiased judgment. Hence, another auditor must opt for the same. The safeguard for the first situation is avoidance of the engagement because offering a good speech may attract many investors, but may not be ethical. Moreover, direct personal touch with independent audit committees must be made in order to be safeguarded from performing non-audit functions (Kalpan Williams, 2013). The safeguard for the second situation is communication with the management regarding the kinds of services provided, and implementing strict guidelines against the offering of any gifts other than audit fees. In addition, proper mechanisms for rotation, retirement, or reassignment must be complied to avoid self-interest. Once the norms are stringent it will ultimately lead to an effective service. Moreover, chances of any error will be eliminated. The safeguard for the third situation is considering the guidelines mentioned in the SOX Act, and strictly debarring any auditor from being appointed, who has any type of interest with the company, as it is entirely against such guidelines. If an auditor has any vested interest then the auditor should not be appointed as the auditor will fail to provide an independent decision and hence, the decision will be affected (Cameran, 2016). The safeguard for the fourth situation is preventing any auditors appointment who had already worked for the company in the past. Any relation to the company in the past will affect the decision-making process. This is against the guidelines of an auditors appointment and thus, any other qualified professional must be assigned the job of performing the audit, as an ex-employee cannot self-review their own doings (whether right or wrong). Hence, these safeguards must be implemented in lieu of the above-mentioned threats. The auditors of MSL must assess the following business risks related to purchasing of equipment and spare parts. Firstly, the quality of goods supplied cannot be evaluated because the company orders the quantities based on the demand, and the orders directly arrive at its warehouses. Besides, these goods are even sold from the warehouses itself. It is difficult to ascertain the goods sold. Therefore, since there is no strategy to assess the quality of received goods, customers may reject the same if defects are prevalent in the goods (Holland Lane, 2012). As a result, MSL has to take back the goods and offer fresh ones, thereby increasing its traveling and handling costs. In addition, such goods can be destroyed on the path to the warehouse, and it may happen they do not arrive at all. Moreover, there is no insurance policy to protect transportation of goods against fraud or theft. Secondly, maintenance services provided by MSL may become prone to theft or fraud, as mobile mechanics might charge higher service charges and present fake bills to the company. As the mechanics travel far flung areas and hence, the bills might be subjected to tamper. It is a challenging scenario by the auditors to get the correct amount. Besides, there is no verification procedure to determine the area traveled by these mechanics, the quantum of spare parts used, and other expenses incurred on the path (Heeler, 2009). Hence, the above facts pose a strong problem for the auditors as a wrong figure can affect the reporting process. Further, the company cannot question its personnel as it can tamper its reputation in the market. Firstly, the auditor cannot assess whether the company financials depicting massive warranty expenses is true or not. This is because there is no approach to assessing the quality and labor costs incurred while providing warranty services (Roach, 2010). Apart from this, MSL is also liable to offer one free service to its customers that add up to its costs. All these can minimize the company profits as a whole. Further, both financial and maintenance divisions of the company are unknown to each others activities, thereby resulting in nil verification of reimbursement bills by warehouses. Besides, auditors are left with no option that to approve the bills expended by the company (Lapsley, 2012). Secondly, auditors cannot assess the written down value of orders attained by the company. The reason behind this can be subjected to the absence of mechanisms to scrutinize the quality and pricing of goods manufactured. Further, such measures are also absent in the company warehouses, thereby forcing an auditor to exaggerate or understate the closing stock. This can in turn increase or decrease the companys profits, thereby resulting in loss of stakeholders faith (Carcello, 2012). The closing stock is an important element and an overstatement or understatement will lead to differences in the profit or loss thereby the financial statements will fail to provide a true and fair view of the company. All these audit risks can prove detrimental to the company, as auditors must offer an unbiased and true judgment, and improper measures prevailing in the company can not only be problematic for the auditors, it will also be harmful to MSL. The account balances that can be influenced by the first audit risk are maintenance expenses, spare parts expenses, and warranty costs, while in the second audit risk are closing stocks, profit amounts, and balances of the supplier. References Cameran, M., Prencipe, A. Trombetta, M., 2016, Mandatory audit firm rotation and audit quality, European accounting review, vol. 25, no. 1, pp.35-58. Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne Carcello, J 2012, What do investors want from the standard audit report?, CPA Journal vol. 82, no. 2, pp. 7-12 Heeler, D 2009, Audit Principles, Risk Assessment Effective Reporting. Pearson Press Holland, K. Lane, J 2012, Perceived auditor independence and audit firm fees, Accounting and Business Research, vol. 42, no. 2, pp. pp.115-141. Kaplan, S. Williams, D 2013, Do going concern audit reports protect auditors from litigation? A simultaneous equations approach, The Accounting Review, vol. 88, no. 1, pp. 199-232. Lapsley, I 2012, Commentary: Financial Accountability Management, Qualitative Research in Accounting Management vol. 9, no. 3, pp. 291-292. Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.