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Facts of the given case

Discuss about the Public Integrity Auditing and Dynamic.

The case study is about accounting firm in Australia that is Miller Yates Howarth having office throughout regional centres of NSW and Queensland. Various audit clients of organisation includes mining, agriculture, property and manufacturing industries. One of the most long-standing and significant client of accounting firm is Morgan Fertilizers Pty limited having their operations in Toowoomba, Tamworth and Bathurst in Queensland and NSW. Manager in the audit division that is Jaqui of Miller Yates Howarth is concerned about waste management contractor with Dumparound limited that is investigated by local council regarding their toxic waste. However, the manager is mainly concerned about the contract between waste management company and Morgan Fertilizers Pty. Some of the other issues that Jacqui is concerned about is valuation of inventories. Miller Yates verified stock of Morgan and valuation done by management was accepted by auditing company that did not take into account of substantial obsolescence (Acito et al., 2013).

The major issue identified with valuation of inventories is that cost should be recognized as assets and forwarded until revenue recognition. As per the Australian accounting standard board, inventories are required to be measured at cost or net realizable value, whichever is lower. Inventories cost involves conversion cost, asset cost and any other costs that is incurred on making the asset ready for use. If the part of inventories are damaged then it is not possible to recover the cost of inventories. On other hand, if there is expansion of estimated expenses to make sales, it is not possible to recover cost of inventories.

A logical seven step process is suggested by American Association model that takes into account all the ethical issues

Model is initiated with step 1 that helps inn establishing the facts of case. Under this step, there is initiation of decision-making process that does not leads to any ambiguity under the case scenario. The fact of case scenario is that engagement of its audit client that is Morgan Fertilizers with waste management contractor, Dumparound limited does not takes into account the specification of damagers that is not signed by later henceforth. Dumparound has been inspected for its toxic disposal of waste that would be damaging environment. This particular aspect regarding contract with waste management organization is inspected and they are concern whether they should interfere and give suggestions relating to their client’s business management.

In second step, identification of the ethical issues of the given case is done. . Ethical issue in the given case is that whether the audit firm should interfere with the business management of Morgan fertilizers and raise concern for environmental issues hampering communities resulting from waste disposal. If the audit firm does not raises the concern regarding waste disposal and their client contract with Dumparound Limited, then they would be negligent of their professional duties. This is of fact that other entities dealing with Morgan fertilizer would be completely dependant upon the opinion formed by the auditing firm. In the given case, takeover of Morgan fertilizers by oasis Ltd

Alternative course of actions

In third step, principles, norms and values related to case is identified. It incorporates decision placement in context of ethical, professional and social behaviour. Values, principles and norms regards that auditors are assumed to have impeccable integrity and assurance that MHY is providing true and fair view of financial situation of Morgan fertilizers while conducting audit. Auditor fails to oblige with their duties concerning stakeholders when they are involved in act of something that interferes with their objectivity.

Alternative course of action is identified in fourth step. First option is that auditing firm should not interfere with business management and continues to carry out audit whether they are being professional on their part and maintains integrity. Second option is to interfere with the business management that their contract with Dumparound limited is not feasible and taking steps accordingly.

In next step, it is possible for analyst to depict options that are in accordance with norms or not. Course of action that would be consistent with principles, norms and values is to raise concern about Morgan fertilizer contract with Dumparound limited, as going against environment community work would be unethical on their part (Louwers et al., 2016).

Sixth step deals with consequences of outcomes and finally decision is taken in last step. Under option one, auditor would not raise concern about environmental issues and thereby exposing MHY to risk of being in legal and professional trouble (William et al., 2016). This would happen when take over firm that is Oasis ltd would discover the matter.

When auditing firm would go for selecting other option, they would present true and fair view of Morgan fertilizes activities along with their financial declaration. However, this would result in creating number of unfortunate consequences on part of their clients and might hamper the operations of business. It would also affect the relationship between auditing firm and clients (DeFond & Zhang, 2014). Nonetheless, choosing second option would help in maintaining the confidence of public in audit, enhancing the reputation and social standing of auditors and serving the stakeholders’ interest.

The ethical decision concerning the case is choosing second option. Therefore, auditing firm should raise concern about business management.

Oasis Limited successfully overtook Morgan Fertilizers and at that very time they were reported of carrying high inventory value in their audited balance sheet. It was discovered after two months of takeover of Morgan business that there was overvaluation of inventories and there was no claim made by auditor regarding inventory quality. It was mentioned that 50% of inventories was held at Bathurst facility of Morgan fertilizers and there were no existence of inventories. Furthermore, there has been over valuation of inventories by 35% at Tamworth facility (Beasley, 2015). Quantity of stocks held at Tamworth facility was not reported by auditor.

It is the duty of management of organization to take into account inventories physical confirmation. Basis of preparation of financial statements needs to be established by developing strategies for checking inventories. In order to tally the stock of physical inventories reported to auditor’s knowledge, it is required by them to review complete techniques for getting suitable and adequate confirmation. Auditors are required to carry out investigation of inventories and inspecting them by being physically present. They are required to evaluate tool that is set by management for controlling and recording inventories and identifying the dependability and reliability of procedures adopted. Furthermore, for evaluating the adjustments concerning inventories between date of physical count and year, auditors are required to adopt an additional measure and they need to be physically available on optional date. It is essential on part of inspection by auditors that they evaluate inward and outward movement of stocks of Morgan fertilizers from cut-off date until inventories are counted physically (Yuan & Yu, 2015).

Auditors should evaluate instruction of management and reviewing on internal control with regard to counting and recounting of stocks, stock sheets, tagging, damage items in inventories and their impact on recoding items in financial statements. Valuation of work in progress, procedures of inventories cut-off and inventories movement. Auditors are obliged to refer to audit reports if they faces difficulties in obtaining sufficient and proper evidence regarding to existence and physical count of inventories. While auditing, auditors are evaluated against the standard that obliges them to have professional judgement and maintain integrity while carrying out audit (Hayes et al., 2014). Oasis ltd can bring out negligence charge for not conducting audit as per auditing standards. Auditors are liable to third parties if following points are proved:

  • Any act of negligence of part of employees of audit firm
  • Action taken by third party based on audited financial statement
  • Recklessly ignorance of the facts
  • Intentional preparation of financial statements for enabling action by third party.

Conclusion:

As per the given case, despite correct verification of stock of Morgan fertilizers by MYH, they would be claimed of conducting audit without considering integrity. The reason is attributable to the fact that obsolescence of stock was not considered and auditing firm accepted valuation done by management. It is also evident from the given case study that Morgan fertilizers on MHY to complete audit within one-month period exercised considerable pressure. Furthermore, Oasis Ltd decisions to overtake Morgan fertilizers was based on audited financial statements and opinion of auditors. Hence, after reviewing all the facts, it is certainly possible on part of Oasis to bring negligence charge against audit firm, MYH. Holding MYH for negligence charge is the sole discretion of court.

References:

Acito, A. A., Hogan, C. E., & Imdieke, A. J. (2014). Auditing Standard No. 2 versus Auditing Standard No. 5: Implications for integrated audits and financial reporting quality. Working paper, Michigan State University.

Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2016). Auditing and assurance services. Pearson.

Beasley, M. S. (2015). Auditing cases: An interactive learning approach. Prentice Hall.

DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2), 275-326.

Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.

Stojanovic, T., & Andric, M. (2016). Internal Auditing and Risk Management in Corporations. STRATEGIC MANAGEMENT, 21(3), 31-42.

William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.

Yuan, J., & Yu, S. (2015). Public integrity auditing for dynamic data sharing with multiuser modification. IEEE Transactions on Information Forensics and Security, 10(8), 1717-1726.

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