The following situations may or may not breach the ethical requirements of APES 110.You need to state whether they are or are not a breach of the ethical requirements of APES110 and if they are a breach of the ethical requirements state which ethical principle has been breached :
(a)The Mortdale Accounting firm had carried out several audits of public companies in the last year.It now provided the working papers to the Penshurst Accountants who were carrying out a peer review of the audits by Mortdale Accounting.The Mortdale Accounting firm does not advise its clients of these reviews.
(b) Jan Dungog,a CPA , applies to a local public accounting firm of Chartered Accountants, for a position ,but asks the local public accounting firm not to contact her current employer.The local public accounting firm do not contact her contact her current employer but hire her without contacting them or her other referees .
(c)Wendal Sailor ,a chartered accountant,acquires an insurance and superannuation business as well as conducting audits.During audits Wendal Sailor frequently contacts the firms during the audit advising them of their other services prior to providing their final Audit Opinion.
(d) Judith Durham is the partner on an audit of a not for profit charitable organisation.She is also a member of the Board of Directors but this position is honorary and does not involve her performing any management function.
(e) Ernie Dengate sells his accounting practice which includes bookkeeping, tax and auditing.He obtains permission for the release of tax working papers but does not request permission for the others.He releases all the working papers from these functions to the new accountant,Jago ,who has bought the practice .
(f) Fred Nerk ,a public accountant in a small country town,provides tax services,management advisory services and does audits for the same clients.Sometimes the same person provides all these services.
(g)The Allgood Chartered Accounting firm maintains its records on various computers in its office.It does audits on the Branch company and the Branch company has found its computer facilities are inadequate for its needs and so the Allgood Chartered Accounting firm has maintained certain of the accounting records of Branch company on its computers.
(h)James Jameson ,a public accountant,stays too long at the annual Christmas party of his firm,the Balgowlah Accountants and consumes too much alcohol and drugs. He subsequently goes into town and is involved in a fight and is charged with assault on a person at a hotel as well as drunken and disorderly behaviour when he attempts to drive off.He is subsequently convicted and sentenced to 3 month in gaol as well as having his license suspended for 1 year.
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 eight of the client’s major customers that were included in the sample however the auditor was able to satisfy himself about the balances of these accounts using other audit procedures.
(b)The client restricted the auditor from carrying out procedures to verify the property ,plant and equipment .The property, plant and equipment comprises 35% 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 when it becomes an actual liability.
(d) A significant proportion of a retailer’s sales are made on a cash basis but the internal controls are inadequate and the value of these cannot be verified . There are no audit tests that can be done to assure yourself that cash sales are being recorded or are correct
(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 the innot been following the Australian Accounting Standards since it began operating four 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.
As per the case, the firm Mortdale Accounting is undergoing aa process of peer review and therefore, it should not reveal any information to the outside parties. Those involved in the process of peer review must hold confidentiality that includes the team of the peer review, the Board members, the audit team and other person associated with the audit process. Therefore, there is no breach of conduct by the firm as it has not informed the clients regarding the conduct of peer review.
As per the conduct of conduct, it is essential that at the time of seeking an employment, the professional should not put up any condition for the appointment. In this scenario, Jan Dungog (CPA) has pleaded the firm not to get in touch with the current employer and the reason can be concealment of some vital facts and happenings that have occurred with the previous employer. There might be a case of fraud in the firm and therefore putting up questions her integrity and ethical conduct. Moreover, it is considered as a breach of ethical standards. The role in the previous organization holds a place of special importance because it determines the future course of action (Church et. al, 2008).
When the auditor is engaged in other services then it poses a threat to the integrity of the auditor and affects the independent decision. When the auditor is engaged in other services and occupies a place of profit then the auditor might provide an opinion that is biased in nature and this might not adhere to the ethical standards. It hampers the normal decision-making ability and hence, the auditor should not be engaged in any other service that might change the audit opinion (Elder et. al, 2010). Therefore, advising the client is a professional misconduct by Wendell Sailor. It is a threat of self-interest and will spoil the independent decision.
The auditor should not occupy a place of profit in the firm or the management. In the present scenario, Judith Durham is a part of the board and have a substantial interest in the organization. It will be a breach of the ethical standards if she provides her opinion on the financial statements. Even though she is not engaged in any function of the management yet she occupies a position (Hoffelder, 2012). It is clearly mentioned the person who acts as an auditor should not hold a place of profit in the company.
It is vital for the auditor to keep the working papers of the audit conducted by him for a very long period of time. Moreover, he must maintain confidentiality in respect to the documents of the clients and should not pass it on to the third parties without the consent of the client. Passing on such information or paper is a breach of function and confidentiality. Ernie sold the practice to Jago but is guilty of breaching ethics as the client did not provide consent to the auditor to sell the documents.
It is the duty of a professional to ascertain whether any danger or threat arises in the course of discharging the duties. In the current scenario, Fred Nerk and the firm is engaged in providing various services together with the auditing duties. There is a management advisory part that leads to an interest in the firm of the client. Hence, this attracts familiarity threat to the independent opinion that will be provided by the client because a familiarity is established with the client’s officials (Hoffelder, 2012). Such an act is not permitted by the law. An auditor should hold a different position in the firm as it leads to a breach of the regulations.
As per the scenario, the All Good Chartered Accounting Firm has maintained all the records and various other books of the client in its own office. This attracts threat to auditor independence by leading to issues in the interest because the audit firm has a direct access to the data that might lead to facts representation. Moreover, the auditor’s staff will gain a direct access to the records and hence the records can be tampered thereby putting the data at huge risk (Elder et. al, 2010). Hence, it is a breach of the APES 110 and will disturb the level of confidentiality.
When a professional is engaged in any act or practice whether directly associated with the profession or not and such has a direct impact on the profession then such professional will be guilty of misconduct. In the present scenario, Mr. James Jameson is a public accountant and convicted by the court of law which brings disrespect to the institute hence, he is guilty of other misconduct.
The verification of the balance by the customers was done through other audit procedures as there was an absence of confirmation from eight client’s customers and in such a situation he is unable to have a check from the letter of confirmation. This problem must be adequately highlighted in the decision. It is definitely a limitation when it comes to expressing of opinion but with the aid of other measures the closing balance was fetched (Fazal, 2013). Therefore, a disclaimer must be provided in the situation that the balances of the customers are subject to confirmation.
It is a serious limitation when the client is not allowed to verify the assets that comprise a major chunk of the assets (35%). The PPE amount exceeds 33% of the overall fixed assets and hence appears as a major part. It is to be noted that the fixed assets must be verified physically. It can be a situation that the PPE might not be in a working situation and such has been prone to manipulation. Therefore, in this situation, a disclaimer must be provided by the auditor that the normal audit function was disturbed. In the case of risk, the auditor will not be held liable.
It is the duty of the auditor to reveal all the matter that is material and appears in the financial statements and notes to the financial statement. Further, the contingent liability should be disclosed as it might become an actual liability. An adverse report should be given in this scenario as it is a scenario of misstatement of facts and information (Manoharan, 2011). An adverse report is a bad form of a report as it projects the misstatements present in the report. In this case, the concealment of contingent liability might prove to be a material risk and the auditor might be held responsible (Fazal, 2013). Therefore, an adverse report is the best safeguard.
If the internal control mechanism is not proper to ascertain the position of cash it means the firm does not adhere to the accounting standard where proper internal control needs to be present in every organization. It affects the entries in the financial statements too (Heeler, 2009). Moreover, no audit procedures are present to ascertain the cash sales. The auditor should qualify the report and recommend the management to have a strong internal control otherwise it will hamper the financial statements (Fazal, 2013). A qualified report must be provided as the incorrect sales record will lead to issues.
The auditor has ascertained that there is no material misstatement during the current year but it is vital to know the opening balance. In this situation, the client is not producing the opening balance that means he is restricting the auditor to provide an accurate decision. Therefore, the auditor should provide a disclaimer of opinion as the opening balance holds a place of special importance (Manoharan, 2011).
The standards of Australian Accounting are not followed by the client firm since the beginning and hence a qualified report must be provided by the auditor. Further, an additional paragraph must be drafted to provide the accurate reasoning (Heeler, 2009). A business is needed to follow the standards and in the absence of it, many frailties might be present.
The concept of LIFO is disallowed under the rules and the client firm uses the concept of LIFO that means a wrong policy has been undertaken and will have a material influence on the financial statements. Therefore, an adverse report must be given by the auditor (Church et. al, 2008). As the wrong method has been undertaken it will lead to under or over valuation of the inventory and therefore, it needs to be re-audited and adverse report must be given in this regard.
When the auditor is confident of the non-existence of material misstatements but certain defaults appear in the records maintenance then the auditor must proceed for a qualified opinion. A company prepares the report after considering various factors that influence the going concern, however; a default in the process will lead to a qualified opinion by the auditor (Church et. al, 2008). It is to be noted that when the fundamental procedures are not adhered to, then the auditor provides a qualified report. This reflects that there is some deficiency and the auditor has addressed the same in the report.
Church, B, Davis, S & McCracken, S 2008, ‘The auditor’s reporting model: A literature overview and research synthesis’, Accounting Horizons vol. 22, no. 1, pp. 69-90.
Elder, J. R, Beasley S. M.& Arens A. A 2010, Auditing and Assurance Services, Person Education, New Jersey: USA
Fazal, H 2013, What is Intimidation threat in auditing?, viewed 11 May 2017, http://pakaccountants.com/what-is-intimidation-threat-in-auditing/.