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Questions:

1. Would King & Queen be liable to EFL? Provide Specific Case References to support your Answer.

2.Would your answer change if EFL had written to King & Queen advising you that they intended to make a loan to Impulse and were relying on the 2012 audited Financial Report to assist them in making their Decision?

3.Define Actual and Perceived Independence, and Explain the importance of each.

4.For each of the above Independent situations list any Professional Standards and Regulatory Requirements Breached and Discuss possible Alternative Courses of Action the Auditor should have taken in order to properly discharge their Professional Responsibilities.
 
 

Answers:

1.An auditor’s report is for those who are outsiders to the company such as financiers, creditors and such other suppliers. Therefore it is their duty to ensure that the audit report contains all the material facts stated in detail i.e. it should reveal the true and fair view of the said report. The present case study clearly states that the auditors of Impulse Pty. Ltd are liable to EFL for the losses they have suffered due to the loan they extended to the company basis the audit report. As on 30 June 2012, i.e. the audit period it was evident that the conduct of the company was not well and that it was suffering from liquidity crisis. Further the auditors also did not find it necessary to conduct an additional audit of the various assets or get it conducted by an expert as per ASA 240 (Auditing and Assurance Standard Board. 2013). They ended up giving a report which was unqualified free from all material misstatements. A financier will always trust the work of an auditor as he is expected to perform his duties with integrity and honesty. They gain confidence over the performance of an organization basis the audit report and thus they are expected to disclose all the important data relevant for the users and other decision makers.

The auditing standards i.e. ASA 200 also defines the fact that independence in the conduct of an audit assignment is the key to a fair work (Auditing and Assurance Standard Board. 2009). An auditor is expected to do periodic valuation of the assets of the firm so that the balance sheet portray a true picture of the asset liability position of the company. Transparency is another key factor which the auditors should pay attention to as it is their professional duty to perform their work keeping in mind all the assurance standards and the requirements of the profession.

As is rightly stated in Pacific Acceptance Corporation Ltd v Forsyth (1970), an auditor is a professional who is expected to perform his duties with care and due diligence without any kind of undue influence. Professional scepticism is what is expected out of all auditors i.e. if they have any hint with regards the performance of the company deteriorating, they should extend their scope of audit and give an opinion which is in the best interest of the investors and such other users of the financial statements. However the level of scrutiny will vary from company to company and in the said scenario the auditors performed their duties against professional standards.

 

Therefore since EFL had extended working capital loan to Impulse Pty. Ltd basis the audit report, thus their claim against the auditors is not incorrect and they are equally liable to EFL for the losses they have incurred.

2.An auditor has immense authorities’ basis which they can easily detect frauds that the management is doing. As a professional they are expected to perform their work with independence without any undue influence. The said case study clearly shows that the loss incurred by EFL was due to a failure on the part of the auditor to conduct their duties professionally (Patel, 2014). Even though they were aware of the current scenario of Impulse Pty Ltd. yet they did not propose to conduct further investigations into the asset valuations of the organization. Unethical practice and lack of independence is what is proved by the conduct of King and Queen in this case study.

Even if EFL had asked the auditors prior to extending loan to the company and even after the same they remained quite then also in such a situation the auditors would be liable for the losses suffered by EFL. Had they disclosed the actual position of the company even at that time , then they would have been saved from being liable to the losses, simply because then the financiers would have extended loan basis the actual scenario. However although the said scenario frees the auditors from the current litigation but it does not free him from the litigation brought in by other users of the accounting statements since they are still unaware of the facts.

3.Actual Independence: When the auditors do not have any material interest in the financials of the organization they are auditing, then it is described as a situation of actual independence. Thus real independence means that when an auditor is performing his tasks then he is maintaining the highest possible degree of honesty and professionalism. This kind of independence emphasises upon the state of mind of the auditor who is perfuming the task in the actual scenario.

Its importance cannot be ignored as it confirms that the audit is conducted with full vigour and truth (CPA Australia, 2013). There is no interference of the client and the opinion stated is in the best interest of the various users of the audit report.

 


Perceived Independence: A situation where the auditor tries to pretend to be independent is defined as perceived independence. Many a times an auditor is seen to be standing on the crossroads where one way leads to a negotiation with the audit client and the other leads to giving an independent view without any undue influences. When such a scenario arrives then the auditor is said to take a decision which is free from prejudices even though he is in a state of bargaining.

The importance of perceived importance is that it helps the auditor to perform his task tactfully wherein the main motive of the profession i.e integrity, objectivity and honesty is not defeated( Dwyer, 2015). Thus pretending to be an independent auditor is equally important as is being one in the actual sense.

4.As per Section 140.1 of the APES 110 Code of Ethics for Professional Accountants, the principle of confidentiality states that the confidential data obtained of an organization whose accounts are being audited cannot be used for fulfilling any personal work such as completion of an assignment of university. However Section 140.7 states that disclosure of such information is permissible only if consent from the client is taken and it is permissible under relevant laws as well (APESB 2010)

In the said situation Bob was auditing the accounts of Club Casino and came across data which would be relevant in his university assignment and therefore uses the same after carefully removing all the references about the company so as to maintain confidentiality. However the same is in contradiction to the relevant sections. He should have taken a written concurrence from the authorities of the company before using the data as per former Rule 301 and preferably the permission should have been in writing as per Rule 391. Thus if he takes permission then he can use the said data of Club Casino for his personal use.

 

A company secretary is an officer of a company and as per Section 324 of the Corporations Act 2001, an auditor cannot be appointed for performing dual role of an auditor as well as a company secretary (Corporations Act 2001). For becoming the company secretary, the auditor will have to resign from his post as an auditor first before accepting the said engagement as it is against the professional criteria of independence.

In the said scenario Wendy can be appointed as a company secretary for a period of six months only if he first resigns from his present post as an auditor.

 

The main crux of an audit is independence, but in the present case the same is not in line with the said concept of independence. As per Section 290.115 of the APES 110, members of an audit team are required to determine whether a self interest is existing in the present engagement with an audit client (APESB 2010). Such an interest may be when the member who is sent to audit the accounts of the client has an employee who is related to the auditor.

In the present case also Leo who was being sent to conduct the audit of he internal control of the cash system of Precision Machinery Limited is in contradiction to the theory of independence of an auditor as his father is a factory foreman there. Since such an appointment is not in line with the regulatory requirements thus such an engagement is not done appropriately. Further if the same is to be done by Leo only then a former permission of the same has to be taken from the client and the work of Leo has to be revisited and checked again by another auditor or his supervisor thoroughly so that the independence in conduct of the job does not get defeated.

In the said circumstances the auditors who have still not received audit fees should not have threatened to resign, instead should have delayed the audit as there could be a chance that the client accepts such a resignation and the audit fees becomes a bad debt. However in the said case the client offers the auditor new furniture which totals to only 50 percent of the total audit fees and the auditors agree to set off the same with the entire amount. The same is also incorrect. They should set off 50 percent against the furniture and take the balance in cash from them. Further to this 25 percent shareholding is offered to a member of an unrelated listed entity should be accepted only after informing the other members of the audit firm and obtaining their due consent(Luttrull, 2012). If the same is not informed then it would take the shape of bribery in settlement of 50 percent against the total audit fees.

 

References

Luttrull, E.G., (2012), Rules for a CPA on Accepting Gifts From a client, Available at https://www.ehow.com/info_12010461_rules-cpa-accepting-gifts-client.html (Accessed on 09th December 2016)

Auditing and Assurance Standard Board. (2009). Auditing standards ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards. Available at https://www.auasb.gov.au/admin/file/content102/c3/asa_200_27-10-09.pdf (Accessed 14th December 2016)

Auditing and Assurance Standard Board. (2013). Auditing Standard ASA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report, Available at https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_240.pdf (Accessed 14th December 2016)

Patel, Y., (2014), A Review on Role of Auditor in Corporate Governance – The Auditors’ Perspective, International Journal of Management and Business Studies, vol.4, no. 4

CPA Australia Ltd., (2013), Independence Guide, Available at https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/auditing-assurance/independence-guide.pdf?la=en (Accessed 09th December 2016)

Dwyer, R.J., (2015), Perception or Reality : Auditor Independence and Objectivity, Available at https://thegaap.net/perception-or-reality-auditor-independence-and-objectivity-in-the-accountability-process/ (Accessed 14th December 2016)

In the said scenario Wendy can be appointed as a company secretary for a period of six months only if he first resigns from his present post as an auditor.

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