Audit Function With Due Care: A Case Study On Plummet Travel Limited And Kingsley Read

American Accounting Association Model

Decision making process

Facts identification                                            

The fact from the case is that Jimmy was of the opinion that Engines International Limited was using a questionable method for revenue recognition that cannot be considered as the appropriate method to use in the upcoming financial years.

Jimmy discussed the matter with the Senior audit partner but the answer given to him was that the method had been used for 10 years and is appropriate

Jimmy wants to include a disserting statement in the audit working papers but the audit partner refuses to permit such kind of statement. Rather, she showed willingness in writing a letter to Jimmy acknowledging full responsibility for the audit.

Finally, the audit partner refuses to make Jimmy her audit partner for the company.

Therefore, the fact that is identified from the case is that there is issue with the revenue treatment that is adopted by EI in their business operations

Defining the ethical issues

Ethical issue that is identified in the case is that there was disagreement between the statement made by Jimmy and the Senior Auditor.

Ethical issue identified in this case whether Jimmy has listened to the Senior Auditor or not. Addition to that, whether actually Jimmy should listen to the Senior Auditor in the particular situation where both the auditors disagreed regarding the unquestionable revenue treatment that has been investigated by ASIC.  

Identification of major principles, rules and values

Code of Ethics is statement of principles as well as expectations that governs individual behavior organizational behavior in the conduct of internal auditing (Bobek, Hageman & Radtke, 2015).

The purpose of the Code of Ethics is to promote the ethical culture in the profession of internal auditing.

Code of ethics is essential as well as appropriate for the profession of internal auditing as it is on the trust placed in its objective assurance in relation with risk management, governance and control. Code of Ethics provides four principles as well as rules of conduct under the category named as: Integrity, Objectivity, Confidentiality and competency (Cameron & O'Leary, 2015).

The rules of conduct mainly describe the behavior norms as expected from the internal auditors. Some rules help in interpreting the principles into practical implications as well as intended to guide the ethical conduct of internal auditors. The Code of Ethics mainly provides guidance to the internal auditors who serve others. Internal auditors refer to Institute members for providing internal auditing services within the definition of internal auditing.

Applicability and Enforcement- Code of Ethics is applied to both individuals as well as entities those provide internal auditing services (Cockrell, Stone and Wier, 2017). In case of Institute members, breaches of the code of ethics will be evaluated as well as administered in accordance to the Institute Disciplinary Procedures. If a particular conduct is not mentioned in the Rules of Conduct, it does not prevent it from being unacceptable or discreditable where member is liable to disciplinary action.  

American Accounting Association Model

This model comes from a report for the AAA that is written by Langenderfer and Rockness in the year 1990.

Scenario for the AAA Model

An auditor uncovers an irregular cash payment as well as receives an unsatisfactory explanation for it that comes from client finance director. This model suggests a logical seven step process for conducting the decisions as it takes ethical issues into account (Gay & Simnett, 2015).

Steps:

The first step is to establish the facts of the case by ensuring that there is no ambiguity about what is under consideration.

The second step is to identify the ethical issue in the case by asking what are the issues at stake

The third step requires identifying the norms by placing the decisions in its social, ethical as well as professional behavior context. In this, professional code of ethics are taken into consideration by discussing on the norms, principles and values

The forth step is to identify the alternative course of action by stating each consideration of the norms

The fifth step is to select the best course of action

The sixth step is to consider the consequences of the outcomes

The final step is take the decisions

According to American Accounting Association (AAA) Model, it is noted that acting in the public interest takes into consideration where accountants need to have legitimate interest of clients, financial institutions, employers, business, employees as well as financial community that relies upon the integrity and objectivity of the accounting profession (Gay& Simnett, 2015). This is to support the proprietary as well as orderly function of business.  The dependence actually imposes public interest accountability on the accounting occupation. It is responsibility of the professional accountants for acting according to the public interest, reasonable and informed public perception at the time of deciding whether to believe with the appointment or meeting that bears in mind to the stage of public interest of business entities.

Professional Accountants has to comply with the basic principles that includes:

Integrity- This principle means professional accountants needs to be straightforward as well as honest in all the professional and business relations.

Objectivity- This principle means that professional accountants cannot be bias in any particular situation, give rise to conflicts of interest as well as undue authority of others that will override specialized or commerce judgment in any case.

Professional competence and due care- This particular principle means that professional accountants has to maintain essential professional skills as well as knowledge to that level where they can guarantee that a client or employer receives the experienced professional services. The services depend upon the current developmental practices, techniques and legislation as well as act that are diligently followed in accordance with the applied technical as well as professional standards.

Confidentiality- This particular principle means that the professional accountants need to admiration the privacy of information that is acquired as a consequence of maintaining qualified as well as trade relationships. They cannot reveal any information to the third parties without proper and special power unless there is a legal or proficient right or duty for disclosing the information or using the information for personal benefit of the professional accountants or third parties.

Professional behavior- This particular principle means that the professional accountants should obey with the pertinent laws as well as policy so that they can avoid any accomplishment that discredits the accounting occupation in the near future.

From the above fundamental principles, the ethical case on Jimmy would comply with the:

Objectivity- In this case, conflict of interest is taking place between Senior Audit Partner and Jimmy that is actually hampering the professional or business judgment for the company EI.

Professional competence and due care- In this case, there is disagreement between the Senior Audit Partner and Jimmy. This means the Senior Audit partner do not have the essential professional attitude and skills in handling the matters as it is negatively affecting the company for which they are auditing and they cannot get required professional services in this type of conflict. They should understand the technical and professional standards of handling matters of audit where company relies upon their professional advices and services.

Professional behavior- Senior Audit partner lacks the professional behavior and failed to comply with the laws and system at the same time.

Specifying the alternatives

After reading the Code of Ethics for Professional Accountants, it can be understood that the given case on ethics has two alternative options that needs to taken into consideration by Jimmy before getting into final course of action.

The first option that Jimmy will have is agreeing with what Senior Auditor argued, that is,  there is no issue with the method adopted by EI in terms of revenue treatment.

The second option that Jimmy will have is not agreeing with the Senior Auditor and stick to the point as found out at the time of audit that is there is questionable method of recognizing revenues as investigated by ASIC.

Comparing values and alternatives

After evaluating the alternatives, Jimmy should compare the values of both the alternatives and decide over the best option that needs to be adopted for future activities. Jimmy should select the second alternative that state not agreeing with the matter pointed out by the Senior Auditor.

Assessing the consequences

If Jimmy selected the first option, then he would have charged legal actions by the Senior Auditor of the firm.

As Jimmy has selected the second option, he can now convey his issue to the Senior Management of Fitzgerald & Milhouse Chartered Accountants. If guidance is not provided by the Senior management, then further Jimmy can convey his matter to Corporate Governance. Jimmy can even go to shareholders and then to the regulatory bodies to get his matter solved and takes legal action on the Senior Audit partner.

Making the final decision

Jimmy made the final decision that he will not agree to the statement of Senior Audit Partner and take the corrective course of action.