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Breaches of Ethical Requirements under APES 110

The following situations may or may not breach the ethical requirements of APES 110.

You need to state whether they are or are not a breach of the ethical requirements of APES110 and if they are a breach of the ethical requirements state which ethical principle has been breached :

(a)The Mortdale Accounting firm had carried out several audits of public companies in the last year.It now provided the working papers to the Penshurst Accountants who were carrying out a peer review of the audits by Mortdale Accounting.The Mortdale Accounting firm does not advise its clients of these reviews.

(b) Jan Dungog,a CPA ,  applies to a local public accounting firm of Chartered Accountants, for a position ,but asks the local public accounting firm not to contact her current employer.The local public accounting firm do not contact her contact her current employer but hire her without contacting them or her other referees .

(c)Wendal Sailor ,a chartered accountant,acquires an insurance and superannuation business as well as conducting audits.During audits Wendal Sailor frequently contacts the firms during the audit advising them of their other services prior to providing their final Audit Opinion.

(d) Judith Durham is the partner on an audit of a not for profit charitable organisation.She is also a member of the Board of Directors  but this position is honorary and does not involve her performing any management function.

(e) Ernie Dengate sells his accounting practice which includes bookkeeping, tax and auditing.He obtains permission for the release of tax working papers but does not request permission for the others.He releases all the working papers from these functions to the new accountant,Jago ,who has bought the practice .

(f) Fred Nerk ,a public accountant in a small country town,provides tax services,management advisory services and does audits for the same clients.Sometimes the same person provides all these services.

(g)The Allgood Chartered  Accounting firm maintains its records on various computers in its office.It does audits on the Branch company and the Branch company has found its computer facilities are inadequate for its needs and so the Allgood Chartered Accounting firm has maintained certain of the accounting records of Branch company on its computers.

(h)James Jameson ,a public accountant,stays too long at the annual Christmas party  of his firm,the Balgowlah Accountants and consumes too much alcohol and drugs. He subsequently goes into town and is involved in a fight and is charged with assault on a person at a hotel as well as drunken and disorderly behaviour when he attempts to drive off.He is subsequently convicted and sentenced to 3 month in gaol as well as having his license suspended for 1 year.

Indicate the type of opinion that should be expressed in each of the following situations,providing reasons for your choice .

(a) The auditor was unable to obtain confirmations from eight  of the client’s major customers that were included in the sample however the auditor was able to satisfy himself about the balances of these accounts using other audit procedures.

(b)The client restricted the auditor from carrying out procedures  to verify   the  property ,plant and equipment .The property, plant and equipment comprises 35% of total assets..

(c) Management have excluded from the financial report the necessary disclosures in relation to a contingent liability .If this becomes an actual liability it will have a material effect on the financial report when it becomes an actual liability.

(d) A significant proportion of a retailer’s sales are made on a cash basis but the internal controls are inadequate and the value of these cannot be verified . There are no audit tests that can be done to assure yourself that cash sales are being recorded or are correct

(e)You have been asked to do the audit for a new client this financial year .While you are satisfied that there appears to be no material misstatements for the information during the current financial year the client will not provide any information about the opening balances of accounts at the start of the financial year.

(f) You have just started auditing the financial statements of a client which has  the innot been following the Australian Accounting Standards since it began operating four years ago.   

(g) A client has been using the LIFO method of accounting for inventory  which is disallowed under the Australian Accounting Standards.This has had a material effect on the financial  statements however its effect is currently limited to the effect on the Inventory value.

(h) The auditor of Numark has just completed the audit and is satisfied that there are no material misstatements however the client’s continuation as a going concern is in extreme doubt as its major customer has gone into liquidation and it appears very unlikely that other customers will take its place due to the highly specialised nature of its products.  

  • As the firm Mortdale Accounting is under peer review process, it shall not disclose the details or any information to any person outside the organization. Confidentiality is to be maintained by every person who is involved in peer review process including the peer review team, the members of the Board, the audit team of the firm, assistants or any other person who was involved in the audit process (Cappelleto, 2010). Hence, the Mortdale Accounting firm has not conducted a breach of any ethical requirements by not informing its clients about the peer review being conducted.
  • When a professional seeks employment as an employee or as auditor of any firm, he shall not put up any conditions for his appointment. In this situation, Jan Dungog (CPA) has asked the public accounting firm not to contact her current employer; the reason might be that she may be hiding some important facts and incidents that have happened with her previous employer. For example, she might have committed a fraud in her previous firm. Hence, putting up conditions for appointment is a breach of ethical requirements. It is not under the ethical code of conduct because the previous role might influence the current role and hence might come up as a threat (Fazal, 2013).
  • Provision of other services by an auditor to the firm may pose a threat to auditor independence and his integrity. The auditor in order to earn more fees from his other services may give a biased opinion on the position of financial statements of the firm. This might hamper the smooth running of the operations and lead to a strange code of conduct. An auditor should not provide any other service to the firm which can change the final audit opinion (Fazal, 2013). Hence, advising the client of other services by Wendell Sailor is a professional misconduct. This will be a case of self-interest threat to auditor’s independence also. This will debar the auditor from providing an independent decision and hence, will impact the decision.
  • The auditor or any partner of audit firm should not be a part of the management team. In the given situation, Judith Durham is a member of the Board of Directors and thus has a substantial interest in the organization and will be guilty of breach of ethics if she will express her opinion on the financial statements of the organization.  Although she does not perform any management function, but she holds a prominent position in the organization to be audited (Hoi et. al, 2009). Therefore it is crystal clear that any person who has a substantial interest or holds any place of profit should not be allowed to audit as it will impact the decision-making ability and hence, an independent decision will be absent.
  • The auditor must retain his working papers of an audit of the auditee firm for a substantial period of time. Further, he should maintain confidentiality with regard to the working and other papers of his clients and should not provide the documents and books of clients to the third person without the permission of the client. Providing such papers or any information will leak the confidentiality and hence, will appear as a threat to the system (Cappelleto, 2010). Although Ernie has sold his practice to Jago, but he is guilty of breach of ethics as the client has not permitted him to hand over the bookkeeping and auditing records to Jago. It is a breach of confidentiality. Auditors are expected to keep the client's data and information in a confidential manner and any breach might lead to a grave situation and treated and unethical.
  • A professional should judge at the time of providing his professional services if there are any threats to compliance of his duties. In this case, Fred Nerk and his firm are providing all services along with audit service. He is also involved in management advisory services and thus has an interest in client firm. It poses familiarity threat to his independence of opinions as he has made good relations with officials of the client. Such an act is not permissible under the law (Guan et. al, 2008). A person who holds a different position in a firm should not be allowed to act as an auditor. Hence, he shall be guilty of breach of ethics if he continues to perform all the services together.
  • The All Good CA firm has maintained the records and books of the client company in the computers of its own office. Such a situation creates a threat to auditor independence by creating a conflict of interests as the audit firm is getting associated with the data of the client firm indirectly which will have an impact on the representation of facts (Lapsley, 2012). It is a breach of ethical conduct of objectivity and conflict of interests. Further, the staff of the auditor will have also have access to all the records and figures of the client, who can modify the records for monetary interest (Bhasin, 2008). This is a threat to the confidential data because an access to the confidential data will put the client’s data at risk and hence will spoil the prospect of confidentiality.
  • If a professional does any such acts whether related to his profession or not, due to which he is found by any court guilty of any offense and thus he brings disrepute to his profession or institute, then such a professional will be guilty of other misconduct. In the given situation, Mr. James Jameson, a public accountant is a professional and has been convicted by a court for an offense that he has done and he has also brought disrepute to his profession (Zhang et. al, 2007). Hence, he is guilty of other misconduct.
  1. The auditor has verified the balances of client’s customers using his audit procedures. However, in absence of confirmation from major eight client’s customers, he shall not be able to cross check the balances from confirmation letters. It is a problem that has come up in the role of the auditor and he must ensure that this problem is highlighted in the decision. This is a limitation on expressing an opinion but he was able to draw sufficient procedures to draw the closing balances (Roach, 2010). So, in this scenario, he should give a disclaimer of the opinion that customer balances are not subject to confirmations.

  2. Where an auditor has been restricted to carry out audit procedures to verify property, plant, and equipment (35% of the total assets), this is a serious limitation on carrying out of the audit. The amount of PPE was more than 1/3rdof total fixed assets which constitute a substantial part. The fixed assets should be physically verified and it forms a major part of the audit. There might be a possibility that the PPE might not be in working condition and has been manipulated in the books only. So in this scenario, he should give a disclaimer of the opinion that is the auditor was not allowed to carry out his audit procedures. This will keep the risk at bay and in the case of any contingent event, the auditor will not be held responsible for any breach.

  3. An auditor should disclose all the material matters in the Financial Statements and notes to accounts where the management has not disclosed a contingent liability in their disclosures which may also become an actual liability in future. An auditor should give an adverse report because it is a case of misstatement of facts and information that is of utmost importance to the client firm. The adverse report is the worst form of a report as it represents a material misstatement in the financial statements. In the present case, hiding of contingent liability disclosures can have a material effect on financial position if it becomes an actual liability (Bhasin, 2008). If this is not highlighted in the correct manner it might become a material risk and the onus will fall on the auditor.  Hence, the adverse report should be given and the financial reports should be revised by the management.

  4. In the case where Internal Control placed by the company are inadequate to verify cash sales and value of which are uncertain. The Accounting standards also state that there should be proper internal control in every organization. Here, the accounting standards have been neglected in the case of verification of cash sales which is a material part of financial statements. Also, there are no audit procedures which may verify the cash sales. The auditor should qualify the report and also advise the management to place internal controls in such a way that cash sales are correctly recorded and entered in the books (Elder et. al, 2010). This may affect the profitability of the company if the internal controls are weak. The incorrect sales records will also mislead the stakeholders of the client firm. Hence, the qualified report should be given.

  5. While the auditor has satisfied himself that there appear no material misstatements during current financial year, but it is equally important for him to know the opening balances in the financial year starting. Here, the client will not provide the opening balances and hence is restricting the auditor to present true position of financial statements (Pilbeam, 2009). In such a situation, the auditor should give a disclaimer of opinion as the opening balances are a vital part of financial statements.

  6. The client firm does not follow the Australian Accounting Standards since its inception. In such as the case where the financial records are maintained without following the applicable accounting standards, the auditor should issue a qualified opinion as there are no material misstatements (Gilbert et. al, 2005). The auditor should present an additional paragraph to mention the reasons for his qualified report.

  7. The client uses LIFO method of accounting for inventory which is disallowed under the relevant standards. As the wrong use of method has led to a material effect on the financial statements, hence the auditor should issue an adverse report. The client should get his records re –audited and provide correct financial statements (Livne, 2015). Although the effect of the wrong method is limited to the effect on inventory value, but it depicts over or under valuation of inventory that will mislead the financial statements (Fazal, 2013). Hence, adverse report should be issued.

  8. Where the auditor is satisfied as to non-existence of material misstatements but there are defaults in the maintenance of records according to Generally Acceptable Accounting Principles, in such a case the auditor should give a qualified opinion. In this situation, the company after knowing the unlikeliest of sustaining as a going concern should have prepared its financial statements on such basis only (Manoharan, 2011). But due to default in doing so, the auditor should give a qualified opinion and mention all these facts in his audit report in separate paragraph (Hoffelder, 2012). Where the fundamental accounting principles are not complied with, the auditor should issue qualified report.

References

Bhasin, M. L 2008, ‘Corporate Governance and Role of the Forensic Accountant’, The Chartered Secretary Journal, vol. 38, no. 10, pp. 1361-1368.

Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ,

Elder, J. R, Beasley S. M.& Arens A. A 2010,  Auditing and Assurance Services, Person Education, New Jersey: USA

Fazal, H 2013, What is Intimidation threat in auditing?, viewed 9 May 2017, https://pakaccountants.com/what-is-intimidation-threat-in-auditing/.

Gilbert, W. Joseph J & Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92

Guan, L,  Kaminski, K. A & Wetzel, T. S 2008, ‘Can Investors Detect Fraud Using Financial Statements: An Exploratory Study’,  Advances in Public Interest Accounting vol. 13, pp. 17-34.

Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.

Hoi, C. K, Robin, A & Tessoni, D 2009, ‘Sarbanes-Oxley: are audit committees up to the task?, Managerial Auditing Journal vol. 22, no. 3, pp. 255-67.

Lapsley, I. 2012, Commentary: Financial Accountability & Management, Qualitative Research in Accounting & Management, vol. 9, no. 3, pp. 291-292.

Livne, G 2015, Threats to Auditor Independence and Possible Remedies, viewed 9 May 2017, https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full.

Manoharan, T.N. 2011, Financial Statement Fraud and Corporate Governance,  The George Washington University.

Pilbeam, K 2009, Finance and Financial Markets, Palgrave Macmillan

Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.

Zhang, Y,  Zhou,J & Zhou, N 2007, ‘Audit committee quality, auditor independence, and internal control weakness’, Journal of Accounting and Public Policy vol. 26, pp. 300-327.

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