Auditing Standards, Governance, And Legal Responsibilities Essay.

ASA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Environment

You a member of the audit team at Miller Yates Howarth (MYH), an accounting firm with offices throughout the major regional centres of NSW and Queensland. Although a medium sized firm by national standards, MYH is the second largest regional accounting firm in Australia. Most of MYH’s audit clients are in the agriculture, mining, manufacturing and property industries. All those industries are currently under pressure, either from a downturn in commodity prices or fierce competition from overseas competitors. MYH have now been appointed auditors of a community bank. Two audit directors have previous experience auditing in the banking sector and need to raise the awareness of staff with respect to the governance issues that have recently impacted the banking sector.

1.Audit standard ASA315 focusing on audit responsibility with respect to client governance,
read the web page on the ASIC report on the Commonwealth bank which details the governance issues raised by ASIC summarises and justifies the auditor’s responsibility to review the governance of an audit client, and Includes a table for use in the audit which explains the impact of each of the ASIC identified Commonwealth Bank governance issues on audit risk. The table should further explain why each of the ASIC recommendations would reduce audit risk. 

2.David Little is a senor working at MYH and is part of a 3-person team working on a client’s material loan application that needs to be finished and delivered to the partner on Monday morning. The team are working all weekend to get it finished. There is a strong incentive for the team members, as a well prepared and successful application will ensure that this major client is retained within the firm and raise the standing of the team members in the firm. On Sunday morning, one of the team, John, calls in sick. The rest of the team work harder and get the job done. When David get home exhausted on Sunday night, his flatmate says, “I saw John and his girlfriend at that new restaurant in town today, I thought he was working in your team.”

What should David do? David doesn't think that it is fair if John gets the same kudos as the rest of the team when he did not put in the same amount of effort but he is David's friend. David and John play on the same touch football team and often spend time with each other after Outline the ethical issues and your decision using the American Accounting Association decision model. Use the following template to guide your answer:

American Accounting Association Model

Decision making process

Impact of each of the ASIC identified Commonwealth Bank governance issues on audit risk

3.Explain the role that incorporation of auditors and a statutory cap on auditors’ liability have on the limitation of auditors’ liability.

ASA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Environment

With the changes in time and applicability of the accounting standards, each and every auditor should undertake the possible auditing and accounting works. With the increasing complexity in the accounting and reporting frameworks, auditors have played pivotal role in the financial reporting compliance of company. The governance at the client place is reviewed by the auditor to get an observation regarding the environment of entity. In this report, audits acts and their legal responsibilities have been discussed. In addition to this, case study analysis has also been evaluated to identify the liabilities of John and David.

1.ASA 315, identifying and assessing the risks of material misstatement through understanding the entity and environment,

With The changes in time and ramified economic growth, auditing standard and rules have been changed throughout the time. ASA 315 reflects the laws and standards of identifying and assessing the risk of material misstatement which focuses on the responsibility of auditor to understand the environment of entity to identify and assess the risk of material misstatements in the financial statements. The entity’s internal control is also included in this assessment. The governance at the client place is reviewed by the auditor to get an observation regarding the environment of entity. When entity has put in place a governance system, it becomes important to assess whether the same is working properly without any conflict of interest and is in line with the goals of organisation (Contessotto, & Moroney, 2014).

Although the auditor do not have any direct responsibility to review the governance practices, but to develop an overall view for the organisation and the internal control placed within the organisation, the auditor has to review the same. The foremost responsibility of auditor is to check whether the investors of the organisation are getting reliable information or not. Auditor need to obtain ank understanding of the nature of entity’s operations, the relevant industry, its environment, its selection and application of accounting policies, the communication procedures prevailing in the entity etc. to express an opinion. Due to the auditor’s opinion a value is added to the financial statements and the same are considered more reliable (Contessotto, & Moroney, 2014). After analysing the financial statements of company, auditors analysis whether company has complied with the applicable international accounting standards or not. If in case, they find issue in company’ accounting and financial reporting frameworks then auditors will have to pass non-qualified audit report. Company should establish the harmonization in its domestic and international reporting frameworks to strengthen the transparency of the business (Dumay, Bernardi, Guthrie, & Demartini, 2016).

issue	impact on raising audit risk	recommendation	reduction in audit risk because of recommendation
Ignorance by the board in over sighting and challenging the emerging non-financial risks	This ignorance can lead to creation of misstatements due to fraud, misconduct, failure of internal control; disasters etc. and the auditor may not find the same because of the intentional hiding (Cohen, Krishnamoorthy, & Wright,  (2017).	Increase in the governance stringency for non-financial risks and lower down the complexity of the work process system.	Stronger governance shall lead to sound internal control which shall detect fraud and prevent misconduct. In addition to this, misconduct of the process system will be controlled by setting up new governance legal department (Christensen, et al. 2016).
No drawn line of accountability for key risks at the executive committee level	Again the lack of accountability shall lead to poor internal controls and might lead to the chances of auditor relying on internal control when he should not	Involvement of remuneration practices to define accountability	When every person is accountable for a certain risk level, the internal control shall automatically become sound
Complexity and bureaucracy in decision making process	These results in time taking process that detect risk at a time when it’s useless to do so. However, proper set of functions are required to set up this process system.	Setting of clear authority for the function of compliance and risk management. Each and every department should be responsible for the undertaken work in organization.	Timely detection of risk shall enable early correction and help in planning for future prevention. It also requires setting up new department for detecting the frauds and errors in the process.
The operational risk management function seems great on the planning plot, but the same is inefficient and under-resourced	The inefficiency of the operational risk management function shall lead to non-detection of frauds and that shall ultimately create misstatements (Edgley, Jones, & Atkins, 2015).	Up gradation in the capabilities of the operational risk management function	This shall help in timely detection and proper correction of frauds. It focuses on keeping the books of accounts more transparent to its stakeholders.

american accounting association model	decision making process
1.      Determine the facts	There is a group task of material loan application which is assigned to a team of three members involving David and John. John put forwards his inability to reach office and help in the same on Sunday due to sickness. The rest two members complete the task. But later on David finds that John, on the day he took sick leave was seen with his girlfriend in a restaurant on the same day.
2.      Determine the ethical issues	The main ethical issue involved here is lack of commitment by John in the group task. He has not responded well as a cohesive member of team and lied on purpose.  John has failed to meet his commitment which will increase the overall risk and ethical issues.  The ethical issues faced by John needs to be managed while taking the decisions otherwise it will lead to destruction or negative impact on the organization at large.
3.      Identify the major principles, rules and values	The major principle of any team task expects every member of the team to be cohesive towards a common goal to achieve the predetermined purpose. Every team member needs to show a certain degree of commitment towards every task allocated to them. However, company needs to establish the linkage between the organizational gaols and objectives with the employee’s growth. As per the rules, David needs to report to the senior management about the ignorance done on part of John. Management needs to make sure that the same benefits are not enjoyed by John as are by the other team members. He must compensate for the lack of commitment.
4.      Specify the alternatives	Alternative option is that David, because of having personal relation after office with John, should talk to him and try to listen to his side of story before making any complaints to management (Philipsen,  2014).
5.      Compare values and alternatives	The values and alternatives are both striking initially. Values talk about what should be done as per the rules, while the alternative solution lays down the way this issue can be handled otherwise. Values are more professional whereas the alternative solution puts forward an idea to better understand the human resource before any action is initiated.
6.      Assess the consequences	If the values are to be followed stringently, the rules shall result in John being deprived of benefits that the whole team will be getting. This might demotivate him as a team person. Further the disclosure of David making the complaint can ruin the companionship between John and David. John and David both need to understand the values, rules and benefit of undertaken work which could strengthen the companionship between both.
7.      Make your decision	As an observer, it seems right to first follow the alternative option by David to talk to John and analyse the exact situation. If David feels that John has no genuine reason to do the same that he did, then David should certainly follow the values that the team work must follow. In order to make the effective decision, David needs to collect the required data and after that the possible actions should be taken by him to resolve the particular issues in effective manner (Simnett,  & Huggins, 2015).

The Auditor's Responsibility Regarding Governance

Auditor plays an important role in setting reliability that the stakeholders have on the company and its financials. But, in recent years due to significant rise in the capitalisation of the companies and their growth in international markets, it has become difficult for the auditors to give a completely relying opinion on the financials of the company. Moreover, there is a serious rise in the auditor's own exposure to liability risk. So to curtail the auditor’s liability approximately, 33 countries are limiting the auditor’s liability (Philipsen, 2014). Therefore, auditors are the person who check the genuinely of the financial statements and determine whether the company has complied with the IFRS rules and regulations or not to prepare the financial statements (Stubbs, & Higgins, 2018).

Out of those 33 countries, some eleven countries are using the method of statutory cap to limit the auditor’s liability. There are many methods to set a statutory cap on auditor’s liability, but the important aspect to be kept in mind in every method is the presence of a contract which mentions the same. The liability cap also follows the joint and several liability rules. Simply, it means that whatever method of cap setting is followed, the liability of the auditor shall be his own liability as well as his liability jointly with others.  However, the cap of the auditors needs to be fixed for strengthening the reporting frameworks. It is required to make them more responsible for the audit work and other audit works. If auditors are held responsible for their audit reporting work then it will not only increase the quality of the audit reporting framework but also strengthen the transparency of true and fair view of financial reporting framework (Turley, 2015).   

The cap can be fixed on the basis of several methods which may involve, the cap amount being uniform irrespective of the client and task, the cap amount dependent upon the size and type of the client and the task involved, or on the remuneration that the auditor receive from the client as audit fees. All these different criteria form a base to make a decision on how to decide the amount of cap on auditor’s liability.  Therefore, it could be inferred that in order to set up cap on auditor’s nature of clients, task, undertaken reporting frameworks and other related factors should be considered. However, auditor’s cap should be undertaken in effective manner before undertaking proper steps and audit work.

Conclusion

It is analyzed that auditors are the main person who checks and audit the financial statement of company to strengthen the true and fair views of the booked assets and liabilities. In addition to this, auditors have right to pass their opinion on the fact that whether company has complied with the IFRS rules and standards or not while preparing the financial statements. It is considered that with the increasing reporting complexity, each and every auditor should be kept responsible for their audit work. It is found that the lack of accountability shall lead to poor internal controls and might lead to the chances of misleading information to the stakeholders.

References

Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit quality: Insights from audit professionals and investors. Contemporary Accounting Research, 33(4), 1648-1684.

Cohen, J., Krishnamoorthy, G., & Wright, A. (2017). Enterprise Risk Management and the Financial Reporting Process: The Experiences of Audit Committee Members, CFO s, and External Auditors. Contemporary Accounting Research, 34(2), 1178-1209.

Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), 393-418.

Dumay, J., Bernardi, C., Guthrie, J., & Demartini, P. (2016, September). Integrated reporting: a structured literature review. In Accounting Forum (Vol. 40, No. 3, pp. 166-185). Elsevier.

Edgley, C., Jones, M. J., & Atkins, J. (2015). The adoption of the materiality concept in social and environmental reporting assurance: A field study approach. The British Accounting Review, 47(1), 1-18.

Philipsen, N. J. (2014). Limiting auditors’ liability: the case for (and against) EU intervention. The Geneva Papers on Risk and Insurance-Issues and Practice, 39(3), 585-597.

Simnett, R., & Huggins, A. L. (2015). Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), 29-53.

Stubbs, W., & Higgins, C. (2018). Stakeholders’ perspectives on the role of regulatory reform in integrated reporting. Journal of Business Ethics, 147(3), 489-508.

Turley, S. (2015). Developments in the framework of auditing regulation in the United Kingdom. In Auditing, Trust and Governance (pp. 223-240). Routledge.