Discuss about the Effect Of Auditor Rotation Professional Scepticism.
Auditing refers to the process of inspecting the financial statements of the companies in order to make sure that they are free from any kind of material missstements. Thus, in this process, it is required for the auditors to plan and perform the necessary audit procedures in order to obtain reasonable and logical assurance about the fact that whether the financial statements are free from material misstatements or not caused by any kind of error or fraud (William Jr, Glover and Prawitt 2016). It needs to be mentioned that the auditors have many responsibilities in the auditing process and one of these major responsibilities of the auditors is the detection and reporting of fraud. All the responsibilities of the auditors related to the detection of fraud and error can be seen in auditing standard ASA 315 and ASA 330. Auditors are required to determine whether there is any deliberate action of the audit clients in the occurrence of fraud and errors. Apart from the responsibilities, the auditors are also required to maintain professional skepticism while performing the audit operations. There are many instances all over the world where the non-compliance of auditors responsibilities and professional skepticism has led to the collapse of large business corporations (Leung et al. 2014). The collapse of ABC Learning in Australia is considered as one of the major collapse due to the fault of the auditors. This essay takes an honest attempt to analyze and evaluate different aspects of auditors’ responsibilities along with professional skepticism in reference to the case of ABC Learning.
Earlier discussion shows that the auditors are responsible to obtain reasonable assurance that the financial statements of the companies are free from material misstatements caused by error and fraud. For this reason, the external auditors are responsible to consider the risk of material misstatements caused by fraud. In this process, the auditors must consider the fact that there is possibility for the occurrence of material misstatements due to fraud in spite of having the experience about the integrity and honesty of the clients (smh.com.au 2018). In this particular process, it is the responsibility of the auditors to identify and assess the risks of material misstatements by understanding the business entity and its business environment further than the general concepts; moreover, the audit engagement team is required to discuss about the susceptibility of the audit clients to fraud (Salem 2012). In this process, the audit team is needed to obtain sufficient information for the identification of fraud risk at the time to perform the risk assessment procedures. In the process of doing so, the auditors are responsible for identifying the management’s process to assess and respond to the fraud risk.
At the same time, it is also the responsibility of the auditors to enquire the management team and the internal auditors of the audit clients in order to know that whether they are aware of any kind of fraudulent activity (Robu et al. 2012). In the presence of all of these audit activities, some inherent limitations of the audit process leads to the risk of the non-detection of some risks related to material misstatements even in the presence of planned audit procedures. It needs to be mentioned that there is a high probability of fraud risk than the error risk in the companies due to the presence of sophisticated and carefully organized schemes. As a part of the reporting of fraud, it is the responsibility of the auditors to communicate the matters to the management of the companies in a timely manner in case they encounter any kind of fraud (Gold, Gronewold and Pott 2012). The auditors are required to communicate the matters with the governance team in case the suspected fraud activities are related to the management. The auditors are required to take legal advice from the legal authorities in case they encounter the involvement of the governance team with the fraud activities.
In case of ABC Learning, Pitcher Partners were the auditors during the period of 2007 and Simon Green was responsible for conducting the audit operations of ABC Learning. However, it can be seen that the Australian Securities and Investment Commission (ASIC) suspended Mr. Green from the audit activities for a period of five years due to the fact they he filed to detect and report fraud in the financial activities of the company (smh.com.au 2018). In one of the reports, ASIC mentioned that Mr. Green failed to perform the adequate and proper audit duties in the company and Mr. Green can knowledge this fact of ASIC. Furthermore, ASIC added that the auditor of ABC Learning failed to obtain sufficient audit evidence related with the peeper accounting treatment of different fees of the company and it led to major material missstements in the reporting of revenue. Apart from this, Mr. Green, the auditor of ABC Learning also failed to obtain sufficient information related to the going concern assumption of the company (smh.com.au 2018). The above discussion mentions about the responsibilities of the auditors. After referring the above discussion, it can be seen that the auditor of ABC Learning failed to fulfill the basic responsibility of the profession that is to obtain sufficient information for fraud detection and going concern assumption. Thus, all these factors are major reasons for the collapse of ABC Learning.
In the process of auditing, Professional Skepticism is considered as one of the major factors. Professional skepticism refers to the attitude of the auditors that include the questioning mind, to be alert to the conditions for indicating possible misstatements caused by errors and frauds and the critical assessment of the obtained evidences (asic.gov.au 2018). It needs to be mentioned that the auditors have some basic requirements in the concept of professional skepticism as it is the responsibility of the auditors to apply professional skepticism in various stages of audit operations.
It is required for the auditors to apply professional skepticism at the time of the assessment of audit engagement acceptance (Bowlin, Hobson and Piercey 2015). In this part, it is the requirement of the auditors to consider whether the management of the company works with integrity. Moreover, the auditors are also required to consider whether the acceptance of audit engagement will make them to maintain professional skepticism like ethical threat and others.
After that, the auditors are required to apply professional skepticism at the time to perform the risk assessment procedures. It demands the auditors to be skeptical at the time of performing the risk assessment procedures at the audit planning stage (Hurtt et al. 2013). For example, the auditors are not required to accept the explanation of the management while discussing the results of analytical procedures.
After that, it is the requirement of the auditors to apply professional skepticism at the time of obtaining the audit evidences. It implies that the auditors must be ready to challenge the management of the company in the process to acquire audit evidences (Glover and Prawitt 2014). Most importantly, the auditors are required to consider the reliability and sufficiency of evidence at the time of assessing the fraud risk.
Lastly, it is required for the auditors to apply professional skepticism at the time of the evaluation of audit evidences. At the time of the critical evaluation of audit evidences, the auditors are required to be alert for contradictory evidence that can undermine the sufficiency and appropriateness of obtained audit evidences.
In the case of ABC Learning, it can be observed that there was a clear lack of application of professional skepticism in the various stages of audit operation by the auditor, Mr. Green. It was required for the auditor of ABC Learning to assess the integrity and honesty of the company while accepting the audit engagement proposal that was not done by the auditor (theaustralian.com.au 2018). Apart from this, there were numerous areas where the auditor failed to apply professional skepticism. It can be seen that the auditor of ABC Learning failed to consider the reliability and sufficiency of audit information and this aspect contributed towards the wrong accounting treatment of various fees that ended up in significant material misstatements.
At the same time, the lack of application of professional skepticism contributed towards the wrong classification of income items (theaustralian.com.au 2018). As a result of this, the auditor wrongly classified the provision of childcare services. Moreover, in the lack of professional skepticism, the auditor of ABC Learning failed to support the opinion that the financial statements of the companies are free from material misstatements. It was another major failure of the auditors of ABC Learning not to apply professional skepticism in the evaluation of audit evidence. Due to this, the auditor of ABC Learning failed to perform sufficient and appropriate audit procedures for the evaluation of the obtained audit information. In this context, it needs to be mentioned that the audit of ABC Learning, Mr. Green acknowledged their failure related with the non-application of professional skepticism (asic.gov.au 2018).
At the time of conducting the audit operations, it is necessary for the auditors to comply with all the required ethical and legislative principle and standards as it is necessary to maintain the quality of audit operation along with the delivery of fair audit operations. However, the exception of this situation can be seen in case of ABC Learning, as there were many breaches of ethical principles by the auditor and the accountants of the company (smh.com.au 2018). From the provided case study of ABC Learning, it can be observed that the chief financial officer of the company was asked to prepare a statement of cash flow for the whole year in spite of the fact that the company was battling with mount of debts. The main aim of this act was the extension of financing for the company.
According to Australian Professional Ethical Standards (APES), Section 110.1, the accounting professionals are required to be honest and straightforward while providing the professional services (ifac.org 2018). However, in case of ABC Learning, it can be seen that the accountants of the company breached this ethical standard by developing the cash flow. The next major issue can be seen in case of the treatment of revenues. It can be observed that the accountants of ABC Learning hid the large amount of loss from subsidized loss-making childcare centers and showed them as normal revenue.
According to APES 110, Section 150, it is required for the accountants of the companies to comply with the relevant laws and regulations of accounting (ifac.org 2018). However, in this case, it can be observed that the accountants did manipulation with the accounting regulations by showing the losses as revenue. Thus, the breach of Professional Behavior principle is also responsible for the collapse of ABC Learning.
Apart from this, according to the regulations and standards of ASIC, it is the responsibility of the auditors of the companies to identify and deal with major accounting frauds (asic.gov.au 2018). In case of ABC Learning, it can be see that the auditors of ABC Learning failed to identify and deal with accounting frauds related to revenue and others. On the overall basis, it can be seen that the auditors and accountants of ABC Learning did not maintain the objectivity of the accounting process. As per APES 110, Section 120, it breached the ethical principle of Objectivity (ifac.org 2018).
Conclusion
From the above discussion, it can be observed that the auditors are required to obtain sufficient amount of evidences in order to find that the financial statements are free from material missstements. After the collection of audit evidences, the auditors are required to evaluate them to get to the results. In case of ABC Learning, the auditor failed to perform the main auditing responsibilities. The above discussion also states that the auditors are required to apply professional skepticism in various aspects of auditing. They need to apply professional skepticism while assessing the audit engagement contract, assessing the audit risk, obtaining the audit evidences and evaluating the audit evidences. In case of ABC Learning, it can be observed that the auditors lacked the application of professional skepticism in different stages of audit operations. The above discussion also states that the breach of ethical principles was one of the major reasons for the collapse of ABC Learning. Some major breached ethical principles were the principle of integrity, objectivity and professional behavior. In addition, the company also breached the principle of ASIC.
References
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