The auditors are qualified accountants that must conduct the audit of an organization in accordance with the Auditing and Assurance Standards issued by the Auditing and Assurance Standards Board (AUASB). The professional accountants who have been given the responsibility of conducting audit of an entity is under the obligation to follow the code of ethics for professional accountants issued by Ethics Standards Board for Accountants in the country. A detailed discussion in this document shall explain the issues associated with the facts provided in the case study about the Eric and Alan.
Legal and ethical issues:
In this case Alan is the auditor of Cement Manufacturing Pty Ltd and it is his responsibility to conduct the audit in accordance with the auditing and assurance standards issued by AUASB. An auditor must abide by the professional code of ethics applicable to him. Under no circumstance he should contravene the code of ethics of professional accountants during the course of an audit. As per APES 110 the following are the main code of ethics applicable to a professional accountant, Alan in this case (Knechel & Salterio 2016).
An auditor is subjected to the code of ethics for professional accountants of APES 110. Issued in December 2010 APES 110 supersedes the professional ethics for accountants issued in June, 2006. As per the ethical code an auditor must follow the following ethical standards during the course of audit of an organization:
Professionally qualified accountant: Only a professional accountant is allowed to be an auditor of an organization established under the Corporations Act, 2001. Hence, the auditor must hold the professional accountant degree in order to be appointed as an auditor of an entity (DeZoort & Taylor 2015).
Independent: Auditor must be independent from the entity, i.e. he / she in case the auditor is an individual and firm or any partner of the firm in case the auditor is a firm, should not have any interest in the entity that is to be audited. Independence can be defined as the state of mind that allows an individual to express an opinion without any influence. Generally the financial interests as well as blood relations in an entity will be considered as clear contravention of independence of an auditor (Carey, Monroe & Shailer 2014).
Integrity: A professional accountant must show integrity while discharging his duties and responsibilities as an auditor of an organization. Independently verifying the financial statements with an objective of expression of proper opinion on these statements is commensurate with the integrity (Kraakman & Hansmann 2017).
Objectivity: An auditor must be objective in his views and decision making process. There should be only a single agenda for an auditor and it is to conduct the audit in accordance with the auditing and assurance standards applicable to the entity to express valid opinion on these statements.
Professional competence and due care: Professional competence and due care are the two most important qualitative characteristics that a professional accountant must have while discharging the duties and responsibilities of an auditor (Dhaliwal, Li, Tsang & Yang 2014). Verification of the books of accounts and financial statements of an entity to assess whether accounting standards issued by the Australian Accounting Standards Board have been followed properly by the entity in drawing the books of accounts is essential for an auditor. An auditor must have knowledge AASBs and other relevant provisions to assess the financial statements prepared by an organization (Turley 2015).
In addition an auditor is also expected to take due car while conducting an audit. Though nothing has been defined as what constitute due care but generally it is necessary care that an ordinary man takes for matters in which he has interests.
Confidentiality: An auditor during the course of an audit comes across number of documents and is accessed to confidential information of an entity. The professional code of conduct for the accountants barred a professionally qualified accountant from disclosing any information of the client without the knowledge of the client to the outsider. Maintaining confidentiality is an important attribute of a professional accountant (Gitman, Juchau & Flanagan 2015).
Professional behaviour: APES 110 has mentioned that an auditor must behave professionally. Under no circumstances he is allowed to be personal during the course of audit. Thus, even if there is any personal matter that comes up an auditor should deal with such matter in a professional way by giving precedence to the profession and his duties over the personal matter.
Taking into consideration the above and the combined reading of Corporations Act, 2001 the responsibility of an auditor can be summarized as:
Eric Being the Financial Controller of Cement Manufacturing must abide by the provisions of the Corporations Act, 2001. He should discharge his duties as financial controller with utmost integrity and honesty. No matter how small may be the amount but a financial controller or any employer of an entity is not allowed to use the funds of the entity for his or her personal purpose without the permission of the company. In this case Eric has committed a fraud by using $12,345 amount to pay the hospital bill of his wife without the approval of the company. In fact not only Eric has used the amount to $12,345 to pay the hospital bills for his wife but he has also used fictitious entries to manipulate the books of accounts. This is a clear case of fraud and Eric should be punished for such act as per s180 of Corporations Act, 2001.
Impact on the friendship of three friend:
An auditor is responsible to verify the books and accounts of an entity and provides his independent point of view on such books of accounts as to their relevance based on the documents and vouchers examined by him. An auditor must be an independent person and shall not have any interest associated with the business of an entity to provide an independent audit report. An employee on the other hand must do discharge his responsibilities as an employee by doing his job with utmost integrity and honesty. As per the facts of the case study it is clear that Alan and Eric have certainly not been professional in discharging their duties and responsibilities as auditor of Cement Manufacturing Pty Ltd and as Financial Controller of the company respectively. However, the third friend who also works in a chartered firm can provide the correct advice to Alan to ensure that he discharges his duties properly as an auditor. However, the friendship between the three friends would affect (Enriques & Troeger 2018).
The relationship at personal level between the three friends, i.e. Eric, Alan and the third person that has been referred as the employee of another chartered accountant firm would affect depending on the decisions taken by Alan and the employee of another chartered accountant firm. It is important to understand that friends expect each other to stay by their side and support them at all times, irrespective of the situation. However, at professional level it is equally important for Alan to disclose his findings during the course of audit of Cement Manufacturing to the company and the senior auditor of the chartered firm. In case Alan would have disclosed his findings to the company and the senior manager of the chartered firm then obviously the relationship between his and Eric would have gone sour. Since Alan has not disclosed the information to the company accepting the justification of Eric that the fraud of $12,345 is not material there would be no impact on the friendship between his and Eric.
Alan has failed to discharge his duties as an auditor of the company as he has not bring this to the notice of higher management and his senior partner in the audit firm. The justification that the materiality level for the audit of the company has been set at $125,000 is absolutely incorrect in this situation as it is a clear case of fraud committed at the highest level of management. Alan should disclose the matter to higher authority of Cement Manufacturing Pty Ltd and to the senior manager of the firm.
The employee of the charted firm to whom Alan has come for advice will be doing injustice to his profession if he does not advise him to do the right thing professionally. The right thing to do is to disclose the fraud to the higher authority of the Cement Manufacturing Pty Ltd. If the employee gives that advice to Alan then the relationship between three friends would affect badly however, professionally they would be correct.
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DeZoort, F. T., & Taylor, M. H. (2015). COMMENTARY––A Public Interest View of Auditor Independence: Moving Toward Auditor Reliability When Considering and Promoting Audit Quality. Accounting and the Public Interest, 15(1), 53-63.
Dhaliwal, D., Li, O. Z., Tsang, A., & Yang, Y. G. (2014). Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33(4), 328-355.
Enriques, L., & Troeger, T. H. (2018). The Law and (Some) Finance of Related Party Transactions: An Introduction.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
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Kraakman, R., & Hansmann, H. (2017). The end of history for corporate law. In Corporate Governance (pp. 49-78). Gower.
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