Understanding The Auditor's Report: Importance Of Australian Accounting Standards And Essay.

Compliance with Australian Accounting Standards

Question:

Discuss about the Familiarity Threat and Auditor Independence.

James Bromley disclosing tax information and helpful information to a new account is not violation of ethical standards. James has permission from his client to reveal the audit and tax information to the Jayne Godfrey who will be the new auditor. James providing other information information regarding the client product, services and potential services is within the auditing standards of professionalism. This practice doesn’t interfere with the integrity, independence, and objectivity of the auditing standards. James orderly handover to Jayne will enhance professional competence which is within his due care. This professional behavior by James to disclose important information about the firm to be audited is in accordance with Auditing Standards section 304 and 204 on knowledge of the business and terms of enganagement respectively.

Fred Hingarra who is an auditor coming back to practice auditing after spending several years in another profession is a violation of ethical principles. Fred violets the principle of being professionally competent after being away from the industry for six years. Six years is a long time to lose competence in undertaking auditing of a public company. Secondly, Fred action to get a professional indemnity insurance for his work is against the due care princinple of auditing. The auditor should be ready to take duty of care of his actions and opinion (Carey, Subramaniam, and Ching, 2006).

Asquith Accountants advertising in a local paper is a violation of auditing ethics and principles. The firm giving special offer to clients is a form of persuading them to get the job of auditing. An advertisement in a local paper by an auditing firm to provide tax refund within 10days violates the principles of integrity through unprofessional behavior. The advertisement to appeal to a client also violets the principle of objectivity that cautions auditors from participating in activities that can impair or presume to impair unbiased assessment.

Amy Harris taking a role of treasurer in a local not for profit business is not a violation of ethical principles. The local athletic club is not audited by the company that Amy works for. This shows that Amy Harris taking this position will not interference with her ability to execute her job as an auditor. The independence of an auditor will not be threaten by a post of treasurer in a not for profit organization. Therefore, there will be no violation of the auditing ethical principle of Amy taking the position and continuing her job as an auditor.

Statutory Regulations Compliance

Simtec Ltd advice to Gordan Accountants firm about the appropriateness of the final report is a violation of the ethical principles. First, the advise violets the independence of the auditors. The auditors’ independence to present the true and fair opinion of the financial statements of the company is threatened. This means that the Gordon Accountants actions and opinion will be influenced to one side. The auditor will be required to give a certain opinion in order to get his pay. Secondly, there is violation of the objectivity principle where the auditor is being involved in activities that are likely to impair unbiased opinion (O'Leary, and Stewart, 2007). This means that the auditor will be forced to give a biased opinion. This will also impair the professional judgment of an auditor. Lastly, the management of Simtec violent the terms of engagement with the auditing firm as stipulated in the Auditing standards AUS 710.

David Dale entering into contact with Cheap Insurance Company is a violation of ethical principles. David’s action violates the ethical principle of confidentiality. The Cheap Insurance Company wants David to use the information he has from the auditing process to recommend clients. First, this will lead to David using the information from the audited firms without their authority. Secondly, the David uses the audited information for personal benefits. The Cheap Insurance Company is promising 5% for every client that David will get. This is against the confidentiality principle that requires respect the value of information they acquire in the process of auditing (Craswell, Stokes, and Laughton, 2002). The auditor should protect the information acquired. Lastly, it against the law and objectives for an auditor to use audit information for personal gain. Therefore, David will be violating confidentiality ethical principle.

Ellen Davis taking the role in the audit team that will audit Jenkins Ltd threats the independence of the auditing process. Ellen Davis worked as a senior accounts manager for Jenkins Ltd and therefore can be used to audit the financial statements that she prepared. Using Ellen in this case will lead to conflicts of interests. This situation will be as a result of a relationship that Ellen had for four months with the entity that is to be audited. Ellen being part of the team to audit the financial statement of Jenkins Ltd will be influenced by her to make biased opinion. This will not necessary represent the true and fair financial position of the company being audited.

Material Disclosure Requirements

John Dargin auditing Winmalee Ltd does not threaten the independence of auditors. The financial records of Winmalee Ltd have taken an optimistic approach on valuating their intangible assets which will require the auditor to understand the approach to give an opinion. Secondly, the Winmale Ltd provided all the details of it senior staff about their profits performance and all information about the accounting standards used. Though the approach is sympathetic the auditor independence is not threatened by it will be difficult to give an opinion based on the accounting standards set in Australia. John will therefore be require3d to give an opinion according to company approach or give a qualified opinion that the preparation of the financial statements were not in accordance with the generally accepted standards of accounting in Australia.

An invite to visit a subsidiary or branch of the company does not threaten an independence of the auditor. Visiting the shop where defective chocolates are sold at a discount price increases the auditor’s knowledge of the business that is being audited. This will allow the auditor to have knowledge of the firm’s disposal of defect chocolates. Therefore, an invitation to a second shop in the process of auditing will not interfere with the auditor’s independence (Ye, Carson, and Simnett, 2011).

The managing director request for a flexible approach in audit is a threat to the auditor’s independence. The manager influence on the audit report threatens the unbiased of the report. The auditor will not be able to give the true and fair state of the Company’s financial position. This will be as a result of interference on the process of auditing. The auditor should be the one to choose the approach of auditing the financial statements of the company. On the other account, it against the law for the Managing Director to meet an auditor prior to commencement of the auditing process.

Elaine Ong being a senior member of an audit team and having dating the senior Accountant threatens the independence of the auditing process. Elaine will not be able to give unbiased opinion about the accounts that are prepared or supervised by an individual who have an intimate relationship. There will be a conflict of interest in the process of auditing. First, the Elaine Ong will be biased to protect her relationship with the Accountant. This will jeopardize the whole process leading to an instance where opinion is biased. Secondly, the relationship between Elaine and James will lead to self interests to safe guard the boyfriend job. This will lead to Elaine giving unqualified opinion. Therefore, the relationship between Elaine and James will lead to conflict between the shareholders interests and their interests. Elaine will then work to serve her interest at the expense of the shareholders interests. Elaine should not be part of the audit team because her relationship with the accountant in the firm to be audited. Therefore, having a relationship conflicts interests that threatens the independence of the auditors (Hussey, 2007).

Changes in Accounting Principles

Diane Polo playing in the same team with Elise Lift who is a senior Account ant and several other members of the Rangers Ltd that is to be audited does not threaten the independence of the auditing report. The relationship between Diane, Elise and other members of staff of the Rangers is for playing softball. The relationship is of playmates. This relationship does not have shared interests in business. The auditing opinion that will be given in the auditing report will not affect Diane in any way. The independence of Diane to make judgment in this case will not be influenced by the playmates in the company. The independence can only be threatens when the relationship between the auditor and a member in the team has vested interests that can jeopardize shareholder’s interests (van der Wiele et al., 2011).

First, the auditor reports contains details on whether the financial statements are prepared in consistent with the accepted accounting principles. The financial statement in Australia should be prepared in accordance with Australian Accounting standards (AAS). These standards are the same as international Financial Reporting Standards (IFRSs). These standards are to be met in the financial statements for an opinion of unqualified in the audit report. The compliance with AAS standards makes it easy for an auditor to understand the financial statement when auditing them.

Second, the audit report contains a statement of financial statements on compliance with relevant statutory requirement. The audit report shows whether the financial statement complied with statutory regulations such as taxes. The report shows how if the compliance of met by the company that was being audited.

Third, audit report gives details about the disclosure of materials that were important to the process of auditing. This is disclosure require all relevant materials be disclosed for the purpose of auditing. Disclosure is important for the auditor to establish true and fair financial position of the company (Stewart, and Subramaniam, 2010). For instance, disclosure of the inventory helps the auditor understand the methods of valuation used.

Fourth, the audit reports contains changes that were made in the accounting principles or any other methods used in preparation of the financial statement. The report shows their effect on the financial statements that that they have been disclosed and properly determined in the financial statements.

The auditor’s report also contains details that include; a title indicating independent, a statement that financial statements were audited, a statement indicating that the financial statements are management’s responsibility and a signature of the auditor which can be manual or printed.

Lastly, the auditor’s report contains the opinion of the auditor. This is the most important part of the audit report. It expresses the opinion of the auditor from the auditing process of an entity. The auditor’s opinion can be qualified, unqualified, or adverse opinion. Qualified opinion shows that the financial statements of an entity did not follow the Accounting Standards as contained in AASB standards. Unqualified opinion shows that the financial statements audited complied with the accounting standards and that they show the true and fair state of the entity financial position. Adverse opinion shows that there is misstatement in the financial statement of an entity that affects financial statements.

References

Carey, P., Subramaniam, N. and Ching, K.C.W., 2006. Internal audit outsourcing in Australia. Accounting & Finance, 46(1), pp.11-30.

Craswell, A., Stokes, D.J. and Laughton, J., 2002. Auditor independence and fee dependence. Journal of Accounting and Economics, 33(2), pp.253-275..

Christopher, J., Sarens, G. and Leung, P., 2009. A critical analysis of the independence of the internal audit function: evidence from Australia. Accounting, Auditing & Accountability Journal, 22(2), pp.200-220.

Hussey, R., 2007. The familiarity threat and auditor independence. Corporate Governance: An International Review, 7(2), pp.190-197.

Jones, J., Massey, D.W. and Thorne, L., 2003. Auditors'ethical reasoning: insights from past research and implications for the future. Journal of Accounting Literature, 22, p.45.

O'Leary, C. and Stewart, J., 2007. Governance factors affecting internal auditors' ethical decision-making: An exploratory study. Managerial Auditing Journal, 22(8), pp.787-808.

Stewart, J. and Subramaniam, N., 2010. Internal audit independence and objectivity: emerging research opportunities. Managerial auditing journal, 25(4), pp.328-360.

Tsui, J. and Windsor, C., 2001. Some cross-cultural evidence on ethical reasoning. Journal of Business Ethics, 31(2), pp.143-150.

van der Wiele, T., Kok, P., McKenna, R. and Brown, A., 2001. A corporate social responsibility audit within a quality management framework. Journal of Business Ethics, 31(4), pp.285-297

Ye, P., Carson, E. and Simnett, R., 2011. Threats to auditor independence: The impact of relationship and economic bonds. Auditing: A Journal of Practice & Theory, 30(1), pp.121-148.