Audit And Professional Practice: Understanding The AAA And Mary Guy Models, And Risks To Audit Assertions

Role of Professional Accountants

Discuss about the Audit and professional practice.

The role of a professional accountant is to act in the interest of public and he should carry his auditing task in a way of not satisfying his employer or individual client. In this scenario, the auditor is to make the audit of the Steel Pty Ltd, when acquiring the Steel Pty Ltd by Bolts Ltd. the auditor has decided to make the verification of the cash flow statements in order to judge the accuracy of the statements provided. The financial officer of Bolts has asked him to focus on the sales and profitability rather than presenting the cash flow. The auditors have to comply with the code (Cimaglobal.com 2016). This may result in the threat to compliance of the fundamental principles. The two threats to compliance with the fundamental principles, which may arise from the discussion with the chief financial officer of Bolt Ltd are as follows:

• Threats relating to advocates- In this type of threat the objectivity of the auditor get compromised and this is because he promotes a opinion or position to such level. This threat arises because the independence of the professional auditor gets compromised. The auditor is defending the client’s business to such an extent where he or she is being viewed as part of the business of the clients (Hematfar and Hemmati 2013).
• Threats of intimidation- this type of threat arises when the professional auditors is being deterred from acting objectively which may happen due to the threats. This might happen because of the significant influence, the client might be exerting over the auditors, which cam be in terms of knowledge of unprofessional, interference with the work, or due to unethical behavior, dependency on the fee income.

• Principles of objectivity – This principle allow that the auditors would not act bias and he would not be influenced to override the professional judgment. The professionals have a risk of bias judgment due to the relationship with the client, which might influence the manner of conducting the professional service. This results in making the decision, which would be in favor of the clients, and not in public interest (Johnstone et al. 2013).
• Principles of integrity – This principle calls for being honest and straightforward in the business and professional relationships. However, this fundamental of principles would be at risk because the clients may influence the auditors and his integrity would be compromised if he makes decision in favor of clients in return for some gifts or if the client is giving some preferential treatment (Budescu et al. 2012).
• Principles of professional behavior – This principle require the auditor to comply with the relevant regulations and rules and should not act which would disregard his profession. If the professional is favoring the clients by listening to suggestions so that, the outcome is made in the client’s financial interest. If the auditors finds himself in a compromising position, due to which the professional competence and his integrity would be reflected badly (Duncan and Whittington 2014).

Therefore, the three fundamental principles are at risk of being breached all resulting from undue influence of the clients.

The American accounting Association model is a seven-step decision-making process. The model takes into consideration several ethical issues. Now, applying the AAA model to the scenario presented here, the several decision steps is listed down below (American Accounting Association 2016).

Step 1: Establishing the facts of the case

The fact is that Luke has recognized that the audit manager has not discussed the issue, which the client had with the working of Luke’s colleague Zane, for which Zane was himself unacquainted, and Luke suspects client having personality conflict with Zane.

Step 2: identification of ethical issues

In this step, the decision maker examines the ethical issues, which are at stake.

The ethical issues is that whether Luke should bring the Audit manager into light as he is silent on the issues that the client has with Zane. If Luke overlooks the situation, then he would be acting unethically and would be negligent on part of his professional duties (Kitching et al. 2013).

Step 3: Identification of principles, norms, values

In this case, the decision would be placed in context of being ethical, social and professional behavior. In this case, the norms, values and principles is that the auditors are assumed that they are performing their task with impeccable integrity and would provide a fair and true view of the data of the company. The auditors are liable to communicate the issues faced by the clients to the person concerned with the clients’ assignment. In this case, the complain regarding Zane about his negligence on his duty by his long time client is not communicated by the auditor to the concerned person. Anything that interferes with the objectives of the auditors would be failure on the part of auditor’s responsibility (Barth et al. 2014).

Compliance with Fundamental Principles

Step 4: Identifying alternative courses of actions

The first option to Mr. Luke is overlooking and ignoring the situation and resolve the issues himself and obtain good review, which would help in promotion. Option two is to take the actions accordingly and inform the Zane and Audit manager that the client has misled him.

Step 5: Identifying the best course of action consistent with the norms and values identified in step 3

The course of action that is consistent with the values and norms and should be taken by Mr. Luke is to inform the audit manager that he has been misled by the client, and should bring the unsupported allegations to the Zake’s attention.

Step 6: Consequence of each course of action

If Mr. Luke is overlooking the situation and is not bringing the attention to the matter, he would be able to gain promotion, which would increase his wealth and living standard but would compromise his principles of integrity, which is unethical (Gaynor et al. 2014). On the other hand, if he exposes the matter and informs the manager that he suspects the client having personal conflict with Zane, he might lose the opportunity but it would enhance and maintain the professional relationships (Google Books 2016).

Step 7: Taking decision

The decision should be option second and Mr. Luke should inform the audit manager and lake about the issues.

The Mary Guy model is a ten-step model and it is concerned with the ethical decisions referring to several values such as promise keeping, caring, honesty, integrity, pursuit of excellence, loyalty, fairness, accountability, respect for others.

Step 1: Defining the problem

The problem would be same as identified in the above model. The client has misled the audit managers.

Step 2: Goal identification

The goal is to make a choice that is consistent with the values of decision maker.

Step 3: Specifying dimensions of problem

The problem is related to the colleague of Luke and audit managers, clients who is outsider and also with Zane for whom the allegations has been made.

Step 4: Possible solution to problem are listed

The possible solution is to inform the manager that the client has misled him. Another solution is to make the client understand that Zake is honest in carrying out his duties, which is reflected, in his previous work.

Step 5: Evaluating alternative

The alternatives are evaluated with referring to the Luke advantage who is the decision maker.

AAA Model of Decision-making

Step 6: Eliminating costly alternative

This step of Mary Guy model is not relevant in this case

Step 7: Feasible alternatives are ranked

This step is not relevant in this case

Step 8: Developing overall solution

The two options are available to Mr. Luke, which is overall solution that is he can ignore the matter or make it aware of people in the office.

Step 9: Choosing final decision

The final decision would be consistent with the values of Luke and so he should not overlook the matter, take the actions accordingly, and make the managers aware of what he has suspected (Hecker 2012).

The decision in both the model would be same as both the model make decision consistent with the ethical context.

The assertions of audit are the representation made by the management in preparing the financial statements regarding the appropriate disclosures of elements. Since the issues concerning here is relating to the transactions, there are risks associated with the assertions. The two key assertions relating to accounts payable is

Assertion and Cut off

Risk of accuracy – The assertion of accuracy intends that the transactions have been recorded accurately and the recording of the amount relating to the transactions is done at the appropriate amount. In this case, the discrepancy has been found in accounts payable because of the inappropriate pricing of timber in the accounts (Budescu et al. 2012). The invoice of the suppliers is left unprocessed because of the difference in the pricing of the timbers supplied. Here, the assertions of accuracy would be at risk as the adjustment relating to the timber price is not reconciled and is not accounted for. There is difference in the amount requested for credit. Therefore, the company would suffer the risks of being inaccurate in the account payable assertion (Mock and Fukukawa 2015).

Risk of cut off – the cut off assertion relating to the accounts payable states that all the transactions relating to the trade payables have been recorded in the correct accounting period, which is the entry of the transactions relates to the current period. If there are any prepaid or accrued transactions, it should be accounted for. In the case of Peak saw mill limited , the transactions which is recorded is at different time and this is mainly due to the management informing the date of implementation of the contracts at a slower pace. The revised price is not informed to the accounting personnel at the appropriate time. The average number of days required for payment of creditors has declined. Therefore, there is cut off risk (Maksymov et al. 2014).

Mary Guy Model of Decision-making

Substantive tests relating to assertions

In order to identify the material misstatement, substantive tests are performed. The procedures of substantive test include test of details. However, substantive procedure for analyzing cannot be regarded as appropriate and sufficient audit evidence in response to the risk, which is assessed. The substantive test relating to accounts payable is that when the auditor’s audits trade creditors:

• The assistant of audit would select a sample of creditors from the creditors’ ledger at the year-end.
• In order to select invoices, the assistant vouches the each creditors balance and subsequent cash payments.
• The total of the creditor’s ledger is balanced with general ledger and the trail balance.

Now, the tests required that the assistant performed which of the assertion and such assertions should be identified on which the assistant should perform further testing. The last step would be to advise the assistant to perform the additional procedures relating to the identified assertion so that the sufficient audit evidence which is appropriate.

Substantive test for cut off assertion- in this type of substantive procedure, all the significant transactions relating to the current period is recorded and the transactions which are not significant for the commencing period is also recorded. For accounts payable, cut off tests are concerned with cash payment and shipment. The auditor identifies the last prenumbered sales invoice for the period and determines that higher numbers are recorded for the next period and lower numbers are recorded for the current period. Now, in order to test the proper cut off, the auditor, the auditors examine the transactions and this would be within the few days after and before the period. The last voucher, last payment of the current period is determined by the auditors by referring to the prenumbered sequence of related documents (Pennington et al. 2016). After this the transactions are instantly checked and in the current period, the cut off are recorded.

Substantive tests for assertion of accuracy- 

In designing the substantive tests for accuracy assertion, such items are identified by the auditors that have to be included in the class of transactions or in the account balance. After that, investigations are made whether they are actually included. This can be traced form the documentation procedure when the transactions originates or there is some other evidence of origination relating to the account balance. Efficiency in testing the account receivables is achieved by organizing the audit procedure documentation and it is done around the schedule for the trial balance of accounts payable. The accounts of creditors can be traced for further testing from aged trial balance. The adding up of trial balance and comparing the total value to the financial report and the general ledger would help the auditor in establishing the population, which is being sampled. At the same time, the clerical accuracy of the account payable balance is also established (Pizzini et al. 2014).

Audit Assertions at Risk

Reference:

Accounting, Financial, Tax. (2016).Substantive Testing: Cash, Receivables, Inventory And Fixed Assets. [online] Available at: https://accounting-financial-tax.com/2010/05/substantive-testing-cash-receivables-inventory-and-fixed-assets/ [Accessed 17 Aug. 2016].

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Barth, P.M.E. and Finance-Elect, V.P., 2014. AMERICAN ACCOUNTING ASSOCIATION.

Budescu, D.V., Peecher, M.E. and Solomon, I., 2012. The joint influence of the extent and nature of audit evidence, materiality thresholds, and misstatement type on achieved audit risk. Auditing: A Journal of Practice & Theory, 31(2), pp.19-41.

Cimaglobal.com. (2016). 100 Introduction and Fundamental Principles . [online] Available at: https://www.cimaglobal.com/Professional-ethics/Ethics/CIMA-code-of-ethics-for-professional-accountants/Part-A—General-application-of-the-code/100Introduction-and-Fundamental-Principles/ [Accessed 17 Aug. 2016].

Duncan, B. and Whittington, M., 2014, September. Compliance with standards, assurance and audit: does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.

Gaynor, L.M., Hackenbrack, K., Lisic, L. and Wu, Y.J., 2014. The Auditing Standards Committee of the Auditing Section of the American Accounting Association is pleased to provide comments on the PCAOB Rulemaking Docket Matter No. 029; PCAOB Release No. 2031-009: Proposed Rule on Improving the Transparency of Audit: Proposed Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor’s Report of Certain Participants in the Audit.

Google Books. (2016). Ethical Decision Making in Everyday Work Situations. [online] Available at: https://books.google.co.in/books/about/Ethical_Decision_Making_in_Everyday_Work.html?id=zsb3e9wSW7wC [Accessed 17 Aug. 2016].

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Kitching, K.A., Pevzner, M. and Stephens, N.M., 2013. Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the COSO request for comments on Internal Control over External Financial Reporting: Compendium of Approaches and Examples: Participating Committee Members and Other Contributors.Current Issues in Auditing, 7(1), pp.C30-C33.

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