1. The following are a number of different situations where there may be violations of the ethical principles .You are asked to state whether there has been a violation of the Accountants Code of Ethics and state which ethical principle has been violated briefly providing a reason for your opinion:
(a) Peter Harmon , professional accountant, does the bookkeeping, prepares the tax returns and provides various management services for Bunker L td .When providing these services it frequently advises its clients to buy its computer equipment from Computer Services Ltd. Computer Services has agreed to pay Harmon a 10% commission if the referral leads to sales for Computer Services .
(b)David Smith ,an auditor ,was asked by Allied Insurance,for its help in finding clients. David Smith subsequently referred ten clients to the insurance company without letting them know.
(c) Wrench and company,Chartered Accountants,keeps details of its clients in its computer records at its office .Since it also has time available it will allow its clients to use its computers if they require them.If necessary Wrench will arrange for members of its staff,mainly administration but sometimes from the audit branch to assist with the input of data for these clients.The staff from the Audit section can be involved in the audit of clients, depending upon the Audit Partners requirements.
(d)Stephanie Barry has an audit client,Williams Pty Ltd ,which uses another public accountant for its management services work. Barry sends her firm’s literature regarding its management services capabilities to Williams on a monthly basis,unsolicited .
(e ) Katrina Ng is a manager on the audit of a not for profit entity.She is also a member of the Board of Directors for the not for profit entity,but the position is honorary and does not involve her acting in a management capacity for the not for profit firm.
(f) Peter Beattie , a public accountant , provides tax services, management advisory services,bookkeeping services and conducts audits for the same client .As the firm is small the same person frequently provides all the services .
(g) The Hornsby Auditors, have taken advertisements in the local newspaper with a bright colourful full page pictures of the staff and giving details of their being the top auditors in the district compared to other auditors and their ability to help clients get higher tax deductions.than all others
in the district.
(h) David Cheadle conducted an audit of Nestree Ltd for the year ended 30 June 2015 .David has just started his audit of Nestree for the year ended 30 June 2016 .The audit fees for the year ended 30 June 2015 have not yet been paid .
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 three of the client’s major customers that were included in the sample .The auditor was able to satisfy himself about the balances of these accounts using other audit procedures.
(b)The client restricted the auditor from observing the property ,plant and equipment .The property, plant and equipment is a material part of the assets making up 20% 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.
(d) A significant proportion of a retailer’s sales are on a cash basis and inadequate records have been maintained. There are no audit tests that can be done to assure yourself that cash sales are accurate.
(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 five 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.
1 a) Principles of code of ethics for professional accountants under section 240- 241 states that the professional consideration for the accountants involved in public practice include the amount of referral fee and commission. However, the amount of referral fee and commission should not be received in connection with the self- interest threat in terms of professional objectivity, competence and due care as well as professional integrity. Accordingly, it can be said that Peter Harmon had not violated the professional ethical codes since the referral commission 10% had been received for the purpose of computer services sales (Craft 2013). As per the ethical codes on competence, professional accountants are required to possess knowledge and skills in order to act diligently for the organizational clients. Therefore, Peter Harmon cannot be said to have violated the ethical principles.
(b) Principle on Accountants code of ethics requires auditors and professional accountants to maintain the confidentiality of clients’ business details and other relevant information. In the present case, David Smith referred ten clients to the services of Allied Insurance Company without providing them information. As per the ethical codes, professional auditor may disclose information or refer the business clients only after receiving due permission from the business clients (Goh, Joos and Soonawalla 2016). It is the responsibility of the auditor to maintain the clients’ key information private. In the present case, David Smith referred clients without taking approval from the Allied Insurance Company therefore, David can be held guilty for professional misconduct as per APES 110. An auditor is allowed to disclose necessary information or can refer clients only if it is required as per the regulations relevant legislation as well as after providing information to the respective clients.
(c) Code of Ethics for Professional Accountants 110 requires the professional auditors to sustain integrity and professional competence for providing services to the clients. in the present case, Wrench & Company, Chartered Accountants keeps clients’ details in the computer records to make it available for use as and when required by the clients. For the purpose of assisting the business clients with respect to input data, Wrench and Company provides arrangement for the administrative members together with the audit branch. In addition, the company also mentioned that other staffs from audit section could get involved for auditing process as per the requirements of audit partners. Therefore, Wrench and Company can be held liable under professional misconduct because the number of audit partner is included only by including professional auditors rather than audit staffs (Han Fan, Woodbine and Cheng 2013).
(d) Making solicit approaches to the professional clients is against the ethical codes and conceptual framework whether it is done by electronic mode or through any other mode. In the given case, audit client of Stephanie Barry, Williams Pty Ltd utilizes the management services from other public accountant. Further, Barry provides literature of the firm to the client company based on the monthly records that was not solicited. APES 110 regulations provide that the solicited services provided by the professionals are against the code of ethics while unsolicited professional services are accountable and fair (Soltani and Maupetit 2015). Hence, Stephanie Barry cannot be held liable for violating the ethical principles and professional competency on the basis of Accountants Code of Ethics.
(e) Regulations and principles on Code of Ethics states that the organizational employee as well as organizational member cannot be appointed as auditor or assistant of the auditor at any point of time. Further, the principles require that the organizational auditor is required to be independent and should not be involved in any business functions that provide impact on opinion. In the given situation, Katrina Ng, the auditor manager of non- profit company serves the company also as an honorary Board member. As per the principles of Accountants code of ethics, services as an honorary member do not include the activities as management capacity since it affects the independence, professional competence and confidentiality (Zimmerman 2016). Therefore, inclusion of honorary services together with the management services can be held under violence of professional misconduct accordingly, Katrina Ng has violated the ethical principles.
(f) Professional accounting services involve auditing and assurance, services on tax advisory, general business advisory and professional consultancy as per the regulations of relevant legislations. In the present case, Peter Beattie, public accountant offers auditing services along with the services on tax advisory, book- keeping and management to the same business clients. As per the regulations on permissible types of services, all the services provided by Peter Beattie is allowed as per the APES 110 (Bampton and Cowton 2013). Therefore, Peter Beattie cannot be said to have violated the principles of code of ethics and cannot be held liable for professional misconduct under the requirements of APES 110.
(g) Principles on Accountants Code of Ethics provides that the accountants involved in public service are not required to advertise the professional service together with the involvement of inaccurate publicity. In addition, principle on ethical codes states that the accountants are held liable for professional misconduct if they are involved in making comparisons for professional capabilities along with other professional in the same sector. Therefore, publicity of professional work in the local newspaper together with the colorful prints of staff and comparisons with other professional work is against the principle ethics of professional behavior (Strickett and Hay 2015). Hence, Hornsby Auditors can be said to have violated the professional ethics under APES 110 since, the auditor adopted several unethical publicity of professional work in terms of benefit for higher tax deductions to the clients.
(h) As per the principles of professional ethics, accountants are eligible to retain accounting books and statutory documents if the clients make delay for the payment of audit consideration (Blay and Geiger 2013). Accordingly, the auditor owns the right to put claim for realizing the delayed fees against the work of audit. In the present case, David Cheadle performed audit work for Nestree Ltd with respect to the financial statements during the financial year 2015, fees of which had not been paid. Therefore, David is eligible to retain the accounting books and statutory documents to claim the dues and can continue the audit procedure for 2016 under the regulations of A0PES 110.
2. a) In the present case, the auditor has been unable to obtain third party confirmation from the major customers of the client involved in the sample accordingly, auditor satisfied himself with the present account balances that were used in other process of audit. Since the auditor failed to attain the confirmation from major customers, it can be said that the audit procedure contained misrepresentation on identification of details. Hence, the auditor is recommended to state “unmodified- emphasis of matter paragraph” in the audit report for examination of financial statements. The unmodified opinion is suggested since the auditor did not find any material misrepresentation in the financial statements together with the non- compliance of GAAP (Cohen et al. 2013). Accordingly, the auditor is required to highlight the non- confirmation fact in the matter paragraph to draw the attention of users.
(b) “Disclaimer of opinion” is provided by the auditor if the auditor come across limitation on the scope of audit process from the management, consequently, auditor cannot obtain the complete and accurate audit report. In the given case, client of the auditor restricted to verify the records and books of accounts of property, plant and equipment, which forms material part i.e. 20% of the total assets. According to the accounting standards, property, plant and equipment consists essential part of organizational total assets hence, appropriate verification is required to be conducted to check true and fair view (Bills, Jeter and Stein 2014). Since, the organization in this situation restricted the auditor to examine the integral part of fixed assets, auditor is recommended to state “disclaimer of opinion”.
(c) If the management of the organization provides restriction to the auditor on the scope of obtaining audit evidence, then the independent auditor is supposed to provide “disclaimer of opinion” in the audit report due to lack in obtaining accurate verification. Moreover, “unmodified opinion- emphasis of matter paragraph” is stated if in the opinion of auditor the financial statements of the company are in GAAP compliance, there is no misrepresentation while there exists limitation in the confirmation from material sources (Gallizo and Saladrigues 2016). Therefore, in the present situation, omission on disclosure of contingent liability should be reported and stated under “unmodified- emphasis of matter paragraph” in the audit report for draw the attention of users. Further, if the liability appears as actual liability, it would affect the financial position of the organization and auditor is required to state “disclaimer of opinion” because of the limitation in obtaining audit evidence.
(d) Adverse opinion is provided if the financial statements do not comply the regulations under GAAP. Besides, if there appears gross misrepresentation in the financial statements due to fraud or error while accounting the transactions, then the auditor would provide adverse opinion. In the present case, essential proportion of cash sales including the proper records of the retailer had not been recognized correctly. Further, there is no specific audit test that can be performed for determining the accuracy and correct record of cash sales except on verifying the sales invoices (Tahinakis and Samarinas 2016). Hence, the audit is recommended to state adverse opinion as there was material misrepresentation due to fault in accounting cash sales, an essential part in measuring the company’s profit.
(e) According to the regulations of auditing standards opening balance verification is an integral part of audit procedures. Auditing for the current financial year takes place based on the appropriate recognition of accounting balances for previous financial years. In the given case, the client of the auditor denied to provide information for the opening balances of the financial accounts and contended that the current year’s financial information are free from any material misstatements (Chouhan, Soral and Chandra 2017). It is the auditor’s responsibility to verify the correctness of the account balances rather than accepting the management’s contention. Hence, the auditor is recommended to provide “disclaimer of opinion” as there was restriction on the obtaining the evidence for opening balance.
(f) For preparing and presenting the financial statements of the company, it is essential to consider the principles of Australian Accounting Standards as well as GAAP to determine the true and fair outcomes. Besides, the management of the company is responsible to present the financial information to follow the accounting principles for the benefit of stakeholders and potential investors. On the contrary, auditor has the reasonable responsibility to measure the transparency of the financial statements. Accordingly, misrepresentation or error in preparing and presenting the financial statements together with the non- compliance of GAAP would require the auditor in presenting adverse opinion (Mishra 2016). Therefore, in the present case, auditor is required to provide adverse opinion since the client had not followed Australian Accounting Standards since last five years.
(g) Non- compliance of Australian Auditing Standards presents material effect on the true and fair view of the financial statements. Accordingly, the auditor would provide adverse opinion by highlighting the non-compliance of accounting principles affecting the accountability of financial information. Hence, considering the present situation client used the method of LIFO for accounting inventory that is not allowed as per Australian Auditing Standards (DeZoort and Harrison 2016). In addition, the method affected the organizational financial performance for valuation of inventory as it is considered an essential part of total assets hence the auditor should provide adverse opinion.
(h) Organizational management is responsible to prepare financial statements based on conceptual framework and going concern while auditor’s responsibility is reasonable to determine the appropriateness as per ISA 570. Hence, if the auditor finds the organization’s inability to sustain going concern, then the auditor would provide “explanatory paragraph followed by the opinion paragraph” (Kassem and Higson 2016). Therefore, in the present case, identification of substantial doubt on the company’s going concern had been made however no material misstatement had been found by the auditor. Therefore, the auditor is required to provide modified opinion that includes explanatory paragraph by stating the major customer’s liquidation reason for the audit client.
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