e)Bill Holland , a chartered accountant ,sets up a casualty and fire insurance agency to complement
his auditing and tax services .He doesn’t use his own name on anything relating to insurance agency
and has a highly competent manager,Simone Taylor, who runs it .Holland often requests that Taylor review the adequacy of the client’s insurance with management if the client seems underinsured .
2. The following situations refers to threats to the Auditor’s independence.You are asked to state what
the different threats to the Auditor’s independence are and explain how these threats impact on the Auditor’s independence and any other implications for yourself and your firm.
Enid Blyton has been working as an auditor for the Anthony Don Chartered Accounting firm for the past four years and has just started an audit on the Green Thumbs environmental company, a small newly listed public company which has just listed as a public company one month ago.The
Green Thumbs environmental company has just started using a new contractor to dispose of its toxic waste .You know that this new contractor has won tenders in the past and there have been several unfavourable articles about this contractor in the local press.
Your Audit Manager ,Peter Don , has stated that it is your responsibility just to provide an opinion
on the financial statements with the emphasis being on providing an opinion on whether the financial statements are true and fair and whether there are any material misstatements.
Jean Douglas has just started to do the audit on the latest financial statements and has just made the following notes from your opening interview with John Dooley,CEO of Dooleys.
John has apologised for not making the final payment of 30% of the prior years audit fee but has explained that he will ensure the cheque is written once he is happy with the progress on the current audit. At this stage John Dooley has advised that the firm will be able to start deliberations
about the selection of Auditor for the following year.The Dooleys audit comprises forty percent of the annual audit fees for the firm .
John has advised that they will be providing a free trip to Europe for an Auditor from the Audit firm and his partner once the audit is successfully completed.
Jean is concerned with several aspects of the current audit as Dooleys do not appear to be following the accounting standards in their valuation of inventory as they are not taking into account the reductions in fair value of inventory and the impact on the financial statements is material.
1. APES 110 can be said to be the code of ethics that has been prescribed by the Accounting professional and ethical standard board. It is an independent body that is initiated by the CPA Australia and the Institute of Chartered Accountants of Australia. The principles are applicable to the ones present in Australia.
a) Jenny Wang case
Jenny Wang has been the auditor for panania Cars Pty Limited for the past 6 years and now she is given the opportunity to buy the new cars at a discount of 20% on the discounted sale price.
Section 260 of APS 110 States certain rules and regulations about the acceptance of gifts and Hospitality. This section includes that if a member of any family participant of this member accepts gifts from the company when it is likely to have a self-interest threat. The value and the nature of the offer made by the company to the member are considered to be important. In the given case, the 20% discounts have created the self-interest threat. Later if the auditor is approached by the company for any kind of unreasonable request in reference to the auditor financials then the auditor might not be able to refuse (Fazal, 2013). In any case, if we find that the threat cannot be a lesson or cannot be removed completely or to an acceptable level then the auditor should decline to accept the offer because it will have a negative influence and it will hurt the independence of the judgment of the auditor. The growing familiarity of the auditor with the company hinders Independence of the auditor.
b) Katrina Wearne me case:
Katrina Wearne is appointed for the auditing of Lancôme cosmetics. The auditor is offered a gift of $350 worth cosmetics from the company. Section 260 of the code States certain rules and regulations about acceptance of gifts and Hospitality. It is stated in the code that if the auditor accepts any kind of gifts from his client then there creates a self-interest threat. The extent and the importance of the threat are decided based on the value of the offer or hospitality served (Hoffelder, 2012).
According to the code, an auditor is prohibited from receiving any kind of gifts whether in cash or in kind from the target company as it may create self-interest rate and hurt the independence of the auditor (Gay & Simnet, 2015). Of course, the familiarity of the client with the company affect the Independence and decision-making process carried out by the auditor. There are no limits all values that are being set up by the code about the offers or the gifts that can be accepted or not. In any case, the auditor is not allowed to take any type of gifts whether small or big from the target companies (Kaplan, 2011). So it is advisable that Katrina should refuse to accept the gift because such acceptance of gift would have any material impact in the future.
c) D.Marron case
D.marron is a chartered accountant and he has indicated the computer consultant in order to install a computer system so that he can maintain proper records of production and inventory. He does not specialize in this and therefore cannot review the work going on. However and the auditor is defined as a person who has specialized kids in the required fields apart from accounting and auditing.
The fundamental principle of the code states that a person should be highly competent and should perform his obligations with you care which means that an auditor should have an adequate knowledge and should upgrade skills in order to provide his clients proper services in accordance with the standards. In the provided case D marron as been given the duty to review the work that is being done by the consultant. D. Marron should have reviewed the work by an external expert which he has not performed and hence has violated the code.
d) small Chartered Accountant firms case
The conceptual Framework requirement states that confidentiality is required according to the fundamental principles. This principle also states that the information that has been collected by the auditing of the firm’s account should not be provided or discuss with any outsider or third party. This can be carried out if there is a legal and professional duty which has been made in accordance with the situation. In this particular case, the papers of the organization are being reviewed by another organizations member which is the complete violation of the principle. It is not compulsory to take this into fact. It should also be noted that the working papers are not public documents and hence the auditing firms should try to keep them private.
e) Bill Holland case
The accountant with have been helping to run the business of insurance uses the method to review if the customers are underinsured and not. There are been also many guiding stated for the members of the business to work in accordance with them. In this particular case, it has been observing that the clients are being used in order to seek the business office Insurance Company. There were the fundamental principles and objectivity of the auditing rules and regulations are violated. The auditor should also seek any type of vulnerability that has been present in the accounts of the form by the use of which the business has obtained uncertain profits. It has also been stated in section 340 of the auditing act that the members cannot use the private information of the business in order to pursue personal gains for themselves.
f) Emma Lawrence case
As per the laws and the code of conduct which have been made as per the principles, it has been clearly stated that the auditor and the Accountant of the firm can never be the same irrespective of the size of the entity nature of the business or any other characteristic of the organization or management. The main reason behind this is to not allow the accountant to reviewers on work as there may be some kind of conflicts that may have been present in the work which he will not want to identify at the time of auditing. If the auditor and the accountant are different, then an unbiased decision and audit report will be processed. It has been clearly mentioned in the sections 29o and 291 that any lack of independence of mind of an auditor may be the cause of an influenced financial statement which will not provide the shareholders with accurate information. Therefore, the job of auditors needs to completed in an integrated and independent manner.
2. Situation 1
Auditing of the green thumbs environmental has been done by auditor Enid Bytom which is a newly listed small public company. There have been many unfavourable articles about the contractor in the media after the company has tried to work with new contacts of disposal of waste. The duty of the auditor that has been assigned to him is to provide the organization with an opinion that has been based on the analysis of financial statements so that it can improve its management.
It has been stated that there will be no Threads or problem during the assessment of the audit report as there is no personal relationship of the auditor with the company whose financial statement he is analyzing. It has also been a check that no influence has been made by the company towards the auditor by the use of any monetary or bribery cases (Lapsley, 2012) . The only job that the auditor should be concerned wastage to analyze financial statements and provide a fair picture of the management and the business.
After the assessment of financial reports of the organization, the auditor should be able to work in the rules and regulations of the entire standard so that he may now make valuable decisions on the accounts. The only concern that is to be known by the company is to provide environmental friendly management so that the waste disposal is done in an appropriate manner (Elder et. al, 2010). This process can be affected by the decisions that are being made by the auditor after the analysis of financial statements.
Therefore while analysis of the accounting reports of the organization the auditor should make fair and two decisions in regard to the disposal of waste measures that are to be taken by the organization and also the impact that it may cause in the company's management or the profit statement of the organization (Cappelleto, 2010). Therefore in order to get a true and fair solution, the financial statement should be properly assessed by the auditor.
It is the duty of the organization and the management to make sure that an audit process has been conducted in the company and opinion on the same have been made with a true and fair analysis of the accounts (Cappelleto, 2010). The auditor should provide necessary solutions that can be used by the organization in order to manage the operating system. If the solution that has been suggested by the auditor has not been taken into account then it should also be adjusted in the audit report. In this particular case, it has been observed that the Dooley’s have not been following the accounting standard of the valuation of inventory (Baldwin, 2010).
Because of the fair value of the inventory have not been evaluated in a proper manner, therefore use impact have been made on the financial data of the firm. It has been stated by the auditor that the 30% of the prior fees are due to him who should be paid so that he can continue with his work. The company has also stated to provide 40% of the revenue but it is not a possibility for the company in the significance to the audit report. Also, that have been considered as there has been a substantial amount of is involved in this matter.
The company has also offered a trip to Europe for the successful completion of the audit process to the auditor. This may be have been offered to the auditor because of the self-interest that is present in the company's mind so that even after that it is being and paid the auditor may provide a substantial report which is very profitable for the company (Geoffrey et. al, 2016). Hence it can be stated that material influence is trying to be made which is against the professional ethics and so the acceptance of gifts by the auditor should never be allowed.
All other decisions and consideration that are made by the auditor should be clearly based on the professional judgment and the financial statement analysis. Any types of gift that mash indulge the auditor in the self-interest that should be refused as the main cause problems with the Independence to the operations of the auditor (Lapsley, 2012). Therefore the report made by the auditor should stand on the integrity and objectivity which is based on the firm’s financial report.
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.
Cappelleto, G. (2010). Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne
Elder, J. R., Beasley S. M., & Arens A. A. (2010). Auditing and Assurance Services. Person Education, New Jersey: USA
Fazal, H. (2013, May 13). What is Intimidation threat in auditing?.Retrieved from: https://pakaccountants.com/what-is-intimidation-threat-in-auditing/
Gay, G., & Simnet, R. (2015). Auditing and Assurance Services. McGraw Hill
Geoffrey D. B., Joleen K., K. K.S., & David A. W. (2016). Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons, 30(1), 143-156. https://doi.org/10.2308/acch-51309
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011). Accounting scholarship that advances professional knowledge and practice. The Accounting Review, 86(2), 367–383. Doi: https://doi.org/10.2308/accr.00000031
Lapsley, I. (2012). Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management, 9(3), pp. 291-292. https://doi.org/10.1111/1468-0408.00081