Ethical Violations In Accounting And APES 110 Principles Essay.

Ethical Violations and APES 110 Principles

1. 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.  

2. 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 not 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 he 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.
 

1.a) Under the stated scenario the requirements of APES110 has been breached as the professional ethics as per the standard does not permit practicing firm for disclosing information that are collected while conducting audit procedure without availing prior permission from the client (Accounting Professional & Ethical Standards Board 2018). Mortdale accounting firm conducted the audit of various companies and while auditing, it collected various working papers from the client. However, later on it shared the papers with the peer reviewer Penshurst for the purpose of conducting assurance activity for Mortdale. Though the given information was conducting working procedures of the company and checking the required procedures for audit is satisfied, however, it shall not share the working papers without permission of client (Accounting Professional and Ethical Standards Board (APESB) 2013).

b) In the given scenario the ethical principle of APES 110 will be breached as the employer is free to contact anyone he thinks appropriate, before employing any person in his organization (Accounting Professional & Ethical Standards Board 2018). The employer is free to make enquiry regarding the applicant’s experience, behaviour, professional approach, objectivity and integrity. Hence, the applicant is not in a position to ask not to contact the current employer to make enquiry regarding him. Therefore, APES 110 will be violated as the public accounting firm hired him without contacting the applicant’s current employer as per his request (George, Jones and Harvey 2014).

c) While promoting or marketing their work and themselves, the members must not expose the profession towards disrepute. They shall not make disparaging references or call the client to take their services (Christensen, Glover and Wolfe 2014). Violating these will create a situation where the objectivity of the member will be compromised. As per the given case, CA Wendal Sailor before issuing his audit report used to call frequently advising them regarding their services of insurance and superannuation. Therefore, the principal of APES 110 will be violated in such circumstances.

d) Any member from the public practice while providing services to the client must assure that his action will not create any threat against the fundamental objectivity principle. To ensure this fact the person providing auditing services must not form any relationship or must not be interested in the office, employees and directors of the client. In the given case, though Judith Durham was in the position of director in client’s company (Krupenye et al. 2018). Though the position was honorary it is not valid for holding the position while providing the services. Therefore, she must resign from the post immediately or keep herself away from expressing any opinion on the audit procedure. Otherwise it will breach the APES 110 principle.

4 Types of Opinion Issued by Auditor in Financial Statement Audit

e) As per the given case the prior approval was obtained to share the working papers related to tax only and not for the papers associated with bookkeeping and auditing. Any member shall respect confidentiality of the information that is accumulated as the result of business and professional relationship. Hence, he shall not disclose any such information to any third parties without specific and proper authority until professional or legal duty or right is there to disclose the information. Further, the member shall maintain the same even after the relationship with the client is disclosed (Naslmosavi, Sofian and Saat 2013). Therefore, under given circumstances the principle of APES 110 will be violated as the standard does not permit sharing of information without prior permission (Accounting Professional & Ethical Standards Board 2018).

f) If the member along with the audit services provides any other it will be called as non-audit services and the members are not allowed to provide non-audit services along with audit services. Here in the given case, public accountant Fred Nerk provides various other services like management advisory services, tax services along with the services of audit. Hence, it will violate the ethical principle under APES 110 as the same person is not allowed to provide audit as well as non-audit services to the client at the same time (Sultana et al. 2015).

g) The auditor is not supposed to provide assistance in preparing the financial statement of the client and not implement his judgement that can alter the financial statement. However, maintaining records of the client in auditor’s own computer for smooth audit procedure will not breach the principle of APES 110 (Accounting Professional & Ethical Standards Board 2018). Further, the audit working papers generated during the procedures of audit can be kept by the auditor in his safe custody to maintain its confidentiality, safety and availability. Hence, maintaining accounting records in its own computer will not violate the ethical principle of APES 110.

h) Violation of the professional behaviour will breach the principal of APES 110. Section 150.1 of APES 110 states that the members are obliged to comply with the required laws and regulations and shall not involve in any action that may disrepute their profession; Involving with the third party in any kind of fight, charged with assaulting or behaving unprofessionally after consuming excessive drink will also fall under the category of unprofessional behaviour. Hence, the activities of Mr Jameson after consuming too much alcohol and getting involved in a fight and furthermore sentenced to jail will breach the principle of APES 110 (Accounting Professional & Ethical Standards Board 2018).

2. There are 4 types of opinion that are generally issued by the auditor after completing the audit of financial statement. These are –

• Unqualified opinion – this means the report is clean and is generally issued when the auditor is in the view that the financial statements of the company are presented in true and fair manner.
• Qualified opinion – it is issued when the auditor is in the view that they are not able to express unqualified opinion.
• Disclaimer opinion – when the auditors are not able to express the opinion they issue disclaimer of opinion.
• Adverse opinion – this report is issued when there exists a conflict among the management and the auditor.

Answer a

The auditor was not able to get confirmation from 8 of major clients. However, he was able to get confirmation through any other test. Further, as no material misstatements were found unqualified opinion will be issued.

Answer b

35% of the assets form material part and restriction on the verification of such material portion will put the auditor in such situation that they will issue disclaimer of opinion.

Answer c

Here qualified opinion will be issued for the following reasons –

• Unjustified and material departure from the GAAP which is not invasive
• Non-disclosure of material fact will have an impact on true and fairness of the report.

Answer d

If auditor is not able to verify the transactions that include considerable amount due to unavailability of proper internal control system qualified opinion may be issued. Further, no other tests were in existence to ensure the correctness of the recorded amount (de Andrés et al. 2013).

Answer e

In the given situation the auditor will issue unqualified opinion as he is satisfied regarding the fact that no material misstatement is there in the company’s financial statement. Moreover, the opening balances that were not provided by the client can be confirmed from the closing balances of the previous year (Cox 2013).

Answer f

Here in the given situation adverse opinion will be issued for the following reasons –

• Client did not follow the AAS while preparing the financial statements
• Reason given that it started operation 4 years ago is not justified as all the companies registered under ASX are required to follow the AAS (gov.au 2017)

Answer g

Here in the given situation qualified opinion will be issued for the following reasons –

• LIFO system was followed that is not allowed
• It has material effect on financial statement

Answer h

Disclaimer of opinion shall be issued as the going concern status of the company is under extreme doubt and non-disclosure of the fact has material impact on the financial report of company (Amin, Krishnan and Yang 2014)

Reference

Aasb.gov.au. 2017. Australian Accounting Standards Board (AASB) - Home. [online] Available at: https://www.aasb.gov.au/ [Accessed 30 Mar. 2018].

Accounting Professional & Ethical Standards Board, 2018. Code of Ethics for Professional Accountants. [ebook] Australia: Accounting Professional & Ethical Standards Board. Available at: https://www.apesb.org.au/uploads/standards/superseded_pronouncements/21092016145901_APES_110.pdf  [Accessed 30 Mar. 2018].

Accounting Professional and Ethical Standards Board (APESB), 2013. APES 110 Code of Ethics for Professional Accountants.

Amin, K., Krishnan, J. and Yang, J.S., 2014. Going concern opinion and cost of equity. Auditing: A Journal of Practice & Theory, 33(4), pp.1-39.

Christensen, B.E., Glover, S.M. and Wolfe, C.J., 2014. Do critical audit matter paragraphs in the audit report change nonprofessional investors' decision to invest?. Auditing: A Journal of Practice & Theory, 33(4), pp.71-93.

Cox, J.D., 2013. Strengthening financial reporting: An essay on expanding the auditor's opinion letter. Geo. Wash. L. Rev., 81, p.1036

de Andrés Suárez, J., García, E.C., Méndez, C.F. and Gutiérrez, C.R., 2013. The effectiveness of the audit committee in Spain: implications of its existence on the auditor’s opinion. SERIEs, 4(3), pp.333-352.

George, G., Jones, A. and Harvey, J., 2014. Analysis of the language used within codes of ethical conduct. Journal of Academic and Business Ethics, 8, p.1.

Krupenye, C., Kano, F., Hirata, S., Call, J. and Tomasello, M., 2018. A test of the submentalizing hypothesis: Apes' performance in a false belief task inanimate control. Communicative & integrative biology, (just-accepted), pp.00-00.

Naslmosavi, S., Sofian, S. and Saat, M.B.M., 2013. The effect of audit firm size on independent auditor’s opinion: Conceptual framework. Asian Social Science, 9(9), p.243.

Sultana, N., Singh, H., der Zahn, V. and Mitchell, J.L., 2015. Audit committee characteristics and audit report lag. International Journal of Auditing, 19(2), pp.72-87.