Understanding APES 110 Ethical Requirements And Audit Opinions

1. With reference to the facts of the case, it can be implied that Mortdale Accounting is currently under a process of peer review. Peer review team members which include the Board, audit committee, Board persons and other associated with the audit should hold a high level of confidentiality and not reveal any information to the outsiders (Messier, 2013). Hence, in this case, there is no breach of conduct by Mortdale Accounting as it has not informed the client about the sharing of working papers.
2. As per the Code of Conduct for CPA, any qualified CPA should not put forth any conditions to be satisfied for seeking any employment or such other projects. Also the reference from the previous employer holds a special significance as it is a direct certification of the conduct and professional expertise of Jan Dungog. The fact that Jan Dungog is requesting not to contact the previous employer is an indication that some such non-explanatory events or incidents might have taken place with the previous employer which are being concealed and which might pose a risk for the current organization also. There might be any cases or incidents in the past organizations and hence is a question of immense importance because the past details are related to the future course of action. The course of action in the near future depends on the same (Lapsley, 2012). Hence it is not ethically right on the part of Jan Dungog to place such conditions and is not supported by the professional ethics required by the Code of Conduct.
3. There are two types of services that can be rendered by the CPA namely audit services and non-audit services. Independence and integrity are the pillars of the code of conduct for the CPA. Hence when non-audit services are provided for the same client for whom audit services are also being provided, then it is likely to hamper the independent decision-making ability of the auditor and it a threat to the quality of the audit. Thus by advising the client, Wendell Sailor comes under professional misconduct and this poses a severe threat to self-interest (Hoi et. al, 2009). An auditor can provide audit and non-audit services or management advisory services, but not for the same client.
4. One of the basic requirements or qualifications is that an auditor should not occupy an office or place of profit in the company whose audit is being carried out. The auditor should be free from any kind of obligations and must not be linked to the company in any manner. Having a relationship with the company affects the decision making the ability of the auditor and leads to a biased decision that spoils the report and leads to controversy (Jubb, 2012). The auditor is also not allowed to be a shareholder in the company or a debtor or creditor. The reason for the same is that all this creates a feeling of belongingness with the company and then the auditor will not be in a position to provide an independent opinion on the true and fair nature of the financial statements. Hence in this case, even though Judith Durham does not actively participate in the management functions, but she occupies a position on the Board which is a clear violation (Hoffelder, 2012). Either Judith has to resign from the Board or resign as an auditor to ensure that there is no violation.
5. Working papers have to be maintained properly by the auditor and also for a longer period of time. Confidentiality of working papers is vital and the auditor is not permitted to share the same with any other third party or use the same for any other such personal benefit also without the consent of the client. The auditor is also not permitted to make unauthorized use of the working papers to his own benefit or for the benefit of any auditor’s related party. In this case, though the practice is sold by Emie to Jago, there is a breach of ethics as the client has not given consent to sell the working papers. The auditor should not reveal any information to the outside parties of the clients because the clients expect the auditor to hold the level of confidentiality. If the auditor fails to uphold the same, it is a breach and can lead to an immense loss of the clients.
6. Before taking up any new auditor professional assignment, it is the duty of the auditor to personally ascertain whether there is any breach of the code of conduct by way of threat to independence. A written consent has to be obtained from the previous auditor to ensure there is not irregularity involved with the company. An auditor is not permitted to provide different types of services like management advisory services and such other audit and non-audit services for the same client.  Providing different and various kinds of services lead to disturbance in the overall function and hence will affect the decision-making ability of the auditor. The reason for the same is that it creates a familiarity threat as the facts and knowledge obtained during management advisory services impact the independent decision-making ability of the auditor required for the audit (Guan et. al, 2008). Familiarity threat is a big risk to the company and if present can spoil the entire decision making process of the auditor. Thus in this case, there is a breach of regulations by Fred Nerk and the firm.
7. It is the duty of the management to prepare and present the financial statements and also preserve the supporting documents for the same. The duty of the auditor is to audit the prepared financial statements, carry out audit procedures and express an opinion on the true and fair nature of the financial statements. Moreover, an auditor is required to prepare the financial statements in a manner that projects the genuine position of the company.   Hence, upon completion of the audit, the auditor has to return all the source documents and data upon which the audit has been carried out. The auditor is only permitted to have the audit working papers to prove that the audit has been carried out as per the requirements of the Act and regulations (Gilbert et. al, 2005). In this case, All Good Chartered Accounting firm has maintained the financial records and books at their own office which is a great risk as this data might be manipulated or tampered at the auditor’s office posing a high risk of confidentiality. There are chances of misuse of the information for any competitor’s benefit also. Therefore, it is a clear-cut indication that the materials and the papers utilized for the audit purpose should not be kept at the auditor office as it might go in the wrong hands and lead to disruption in the services along with a fault in the decision-making process. Thus APES 110 has been breached in this case.
8. When a professional whether in practice or employment, is convicted by the court of law, whether it is in relation to the profession or not, it certainly brings disrepute to the organization that has conferred the professional qualification and so such a person will be guilty of professional misconduct. It poses a question mark on the integrity of the CPA as a person and as an individual and this integrity get carried forward to the audits carried out as well. It needs to be noted that when an employee works for a professional body he symbolizes that professional body and any misconduct might lead to disrespect to the fraternity. Therefore, it is advisable that when the professional is representing a professional body than any act that disrepute the fraternity must be avoided. Thus, in this case, Mr. James Jameson is guilty of other misconduct and hence disqualified from carrying out audits.

1. As the confirmation of balances from eight parties was not obtained due to non-response from the respective customers, the verification of the same was done through other audit procedures. In such a situation, the auditor is bound to complete the audit based on the available facts, figures and verification methods. In this case, it is a limitation on the part of the auditor and this fact has to be mentioned while expressing an opinion on the audit of the financial statements. The problem needs to be adequately discussed with the management and informed to the shareholders by way of stating a disclaimer that the balances of the respective parties are subject to confirmation (Ghandar & Tsahuridu, 2013). The disclaimer is a complete disclosure where the auditor stresses that the audit was undertaken with a deficiency in the records available. It is a deficiency and hence, needs to be pointed so that in the case of any contingent event the auditor should not be held liable.
2. Physical verification of fixed assets is a significant audit procedure. In this case, the client has restricted the auditor from verifying the assets which constitute to almost 35% of the total assets and the auditor has to adequately report and highlight this fact in the audit report. When there is a limitation to the performance of the auditor, the auditor must reflect the same in the auditor report so that any problem in the future course of time does not fall on the auditor.  There are chances that the assets are not in working condition and might have been manipulated by the client due to which the physical verification is being restricted. The management is not authorized to prevent or restrict the auditor from the physical verification and if the client does so, then the auditor has to indicate the seriousness of such an issue. The highlight of the issue will eliminate and reduce the chances of error (Fazal, 2013).  Hence this is a serious violation and if the auditor makes proper working papers detailing the restrictions and mentions the same in the audit report, then the auditor is not at risk.
3. Contingent liability need not be recorded on the face of the balance sheet, but provisioning needs to be done for the same based on the materiality and significance and chances of occurrence of the same. Apart from this, a footnote to the financial statements should carry a detailed not about the existence of the contingent liability and the quantification of the same in terms of the amount upon the occurrence of the same. In this case, as the contingent liability is likely to have a material impact on the actual occurrence, the action taken by the management with reference to the exclusion of the same is not justified and hence the auditor should highlight the same in the audit report (Parker et. al, 2011). As there are concealment and misstatement of the facts, it is best that the auditor issues an adverse opinion upon the financial statements. Since the contingent liability is not highlighted adequately it might transform into an actual liability and the onus might fell on the auditor (Roach, 2010). Therefore, the best safeguard for an auditor is to provide an adverse report that will protect him from any issues arising in the future.
4. The existence and operation of proper internal controls are similar to the nervous system of the organization. As the size of the organization increases, the internal controls have to be suitably modified and increased to ensure proper adherence to the accounting standards and procedures. With reference to cash sales, there is no direct verification procedure also which will impact the entries in the financial statements. A lot of other analysis like ratios and comparisons are dependent on the sales figures. Therefore, it needs to be noted that the major point is missing that is the sales and the entire financial statements might be affected if the wrong figure appears (Cappelleto, 2010). The auditor should recommend and discuss with the management about the significance and importance of maintaining the same. Apart from this, the auditor should also issue a qualified audit opinion with reference to the accounting of incorrect sales figure on the financial statements.
5. Verification of opening balances is the starting point for any audit. The final figures for the current year are largely dependent and can be changed by altering the opening balance figures. In this case, as the client is not providing the opening balances, there are chances of any manipulation being carried out in the same and it needs to be covered to present a good picture of the financial statements for the current year. But this becomes a high-risk factor for the auditor. The unavailability of the information means the auditor is unable to check and evaluate. The scope of the auditor is being restricted due to which the auditor will not be in a position to provide and accurate opinion on the financial statements (Elder et. al, 2010). Thus opening balances hold a special significance and the audit report has to carry a disclaimer of opinion with reference to the restriction laid on the same.
6. Business can be run by the client in their own way but the accounting and reporting should be in accordance with the Australian Accounting Standards. Financial Statements not prepared in accordance with the applicable laws and regulations are not acceptable by any third parties like banks, financial institutions, taxation and revenue authorities or even prospective investors. Such financial statements are also subject to deficiencies and frailties. Hence carrying out the audit of such financial statements is a risky proposition for the auditor and the auditor ahs to clearly issue a qualified audit opinion with reference to the gross negligence and non-adherence to the Accounting Standards and applicable provisions (Zhang et. al, 2007). The audit report should also carry an additional paragraph detailing the facts with the accurate reasoning for the same.
7. The Accounting Standards do not permit the usage of LIFO as an acceptable method for the measurement of inventory. If the client is adopting the same, then it means that it is a wrong policy and will have a material impact on the financial statements as it will lead to over valuation or under valuation of the inventory (Cappelleto, 2010). Hence the auditor should issue an adverse audit opinion as the financial statements pose a significant misstatement.
8. When adequate audit procedures have been carried out and the auditor is satisfied with the same, then an adverse audit report need not be issued. But the maintenance of proper accounting records is the primary responsibility of the company and a lapse in the same can lead to the leaking in of some deficiencies (Bhasin, 2008). Though these deficiencies might not be significant upon occurrence, it can become material at a later stage and such a situation has to be prevented. Hence the auditor has to only make the management and shareholders aware of such a situation and keep them informed by means of issuing qualified audit opinion. A qualified audit report is issued when the fundamental procedures are not followed and the auditor reflects the deficiencies in the same by addressing it in the audit report.

References

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