The independence is crucial matter for the auditor to ensure that the auditing services are performed in the best interest of the society. Auditor’s independence implies independence of the auditor from the entity and its management or any other outsider having impact on the auditor’s ability to perform professional services diligently. It is generally expected that the auditor would find out mistakes and non-compliances with the laws and regulations in preparation of the financial statements while auditing the financial statements (Adelopo, 2016). However, if the auditor’s independence is jeopardized, he would not be able to find the irregularities and even if found it is more likely that he would not report such irregularities. The recklessness on the part of the auditor in performing his duties would not only affect the entity and its stakeholders but it would also be problematic for the society (Adelopo, 2016).
Therefore, it is very important for the auditor to maintain independence and provide qualitative services. In this context, an essay has been presented here that covers an issue involving allegations on the auditing firm of a listed company. An Auditor is obliged to follow the auditing standards and accounting standards in audit of a company. Further, the relevant provisions of the corporation’s act 2001 are also required to be followed by an auditor of a company (Tomasic, Bottomley, and McQueen, 2002). When the allegations are made on the auditor, it is essential to probe the violations on the part of the auditor. This essay provides discussion on the violations of auditing standards, accounting standards, and provisions of corporation’s act 2001.
Issue called into Question the Professionalism, Skill, and Knowledge of an Audit Firm
Dick Smith Holdings Limited, which was engaged in consumer retail of electronic items in Australia and New Zealand, collapsed due to manipulations in the financial statements and fraudulent reporting practices. The company was earlier a group company of Woolworths Ltd and then in 2012-13 it was acquired by Anchorage. After this acquisition, the company was listed on the Australian Stock Exchange with the objective of expanding the business with a rapid pace (Anchoragecapital, 2017). However, the company would not sustain for long and it went into liquidation. The major reason for liquidation as given in the company’s liquidators report was falsified accounting.
It was noticed that the company was manipulating the sales and inventory records. The financial statements were window dressed to show profitable position and good financial health of the company (Malley, 2016). It was all done to purchase goods from the suppliers on credit. The company bagged huge amount of inventory on supplier’s credit. The script to failure of Dick Smith was written when the company was planned to be listed on the Australian Stock Exchange. Anchorage bought a loss making company from Woolworths Ltd as it had plans to revive it but it could not happen. However, the shareholders of Anchorage made huge profit from boost in the stock’s price when the company was listed on the Australian Stock Exchange (Keall, 2016).
An environment was created in the market that the company is going to achieve a massive success in the future times. The top management created overambitious plans which laid the company to purchase excessive inventory. In a short span of time, the company accumulated a large quantity in inventories coupled with large amount of payables outstanding. The short term debt mounted on the company which singled that the company is facing or it might face serious problems (Conversation.com, 2017). The company’s auditors failed to trace manipulations in the financial statements. Deloitte was the auditing firm of Dick Smith which was alleged to have failed in capturing the false financial reporting practices.
The standards of professional ethics require that the auditor should perform its duties with integrity and honesty. Though capturing the concealed fraudulent practices of management is difficult for the audit, but he should maintain professional skepticism to such events.
The accounting standards govern accounting and financial reporting aspect of the business. It is mandatory for a company to follow the accounting standards prescribed by the supreme accounting boy of the country in preparation of the financial statements. The Australian Accounting Standard Board looks after formulation of accounting standards for the business entities (Mills and Woodford, 2015). The auditor’s role in an audit of the financial statements of a business entity is to check strictly that whether the accounting standards have been followed properly or not. The auditor should focus while verifying the items of the financial statements that whether they are valued as per prescribed accounting rules and presented as required. In case the auditor finds deviations either in regards to valuation or the presentation of the items of financial statements, he should report the case in his report. This means that the auditor’s report should be qualified as regards deviations found in preparation and presentation of the financial statements. There are no reasons to give a clean audit report in such instances.
In the case of Dick Smith, Deloitte (audit firm) could not capture the irregularities in the accounting of inventories and sales. The AASB 102 prescribes accounting treatment of inventories. As per the rules prescribed in AASB 102, the inventories are to be valued at the lower of market value or cost. This rule ensures that the value of inventories is not inflated on the balance sheet (AASB 102, 2009). Further, the AASB 118 provides for recognition of revenues in the books of an entity. As per the rules prescribed in the accounting standard, the entity should recognize revenues only when they are accrued or earned by the entity. This ensures that unearned revenues are not taken to the profit and loss statement thereby escaping profits from being inflated.
In the case of Dick Smith, the inventories and sales were found to be inflated which is in violation of the respective accounting standards. Thus, the auditor failed to seek compliance with the accounting standard 102 and 118 in the audit of Dick Smith.
The corporation act 2001 requires that the audit of companies must be conducted in accordance with the Australian Auditing Standards. Those auditing standards require that the auditor must properly plan the audit work, maintain professional skepticism, collect evidences, and report the findings diligently (Knapp, 2016). ASA 200 states that the auditor’s primary objective is to take assurance that there is no fraud or error in the financial statements. In taking such an assurance the auditor should maintain the highest degree of professional standards and perform his duties as per required under the laws and regulations. In the case of Dick Smith, the auditor (Deloitte) signed a clean audit report for the year 2014-15 but afterwards it was discovered that the financial statements were manipulated.
In this case, it is implied that the auditor did not perform his duties diligently as has he performed, he would have identified the manipulations in the financial statements. The financial statements were manipulated in regards to inventories and sales which are two important items of income statement and balance sheet. Further, it was also apparent to the auditor that the company is bearing high risk because it was running business in loss under the management of Woolworths Ltd. The ASA 300 requires that the auditor should carefully plan the audit and the risk assessment is an important element of planning. The auditor should assess the risk in accordance with the provisions of ASA 315 (ASA 315, 2013).
From the study of the case of Dick Smith it appears that the auditor did not carry out the risk assessment carefully, thus, violating the provisions of ASA 315. The violations of provisions of ASA 315 automatically mean violation of ASA 300 because if the auditor could assess the risk properly this means that he could plan the audit properly. Further, ASA 240 prescribes responsibility of the auditor in regards to detection of frauds and misstatements in the financial statements (ASA 240, 2013). ASA 240 clearly states that it is the prime responsibility of the management to safeguard the assets from being misapplied. The management is to assume responsibility to prevent and detect the frauds and misstatements in the financial statements. Thus, the auditor is only required to carry out the routine process without being necessitated to indulge in special fraud detection processes.
It is difficult for the auditor to dig out the frauds done by the top management because the facts of the fraud are concealed. However, the ASA 240 requires that whenever there is doubt over the reliability of the financial statements, the auditor should make additional efforts to unveil the doubt (Leow, 2009). The auditor should revise the risk assessment alongside revision in the evidence collection process. In the case of Dick Smith, the financial statements were doubtful from the year the company got listed on the stock exchange. There were earlier indications of fraud but the auditor did not give due regard to this situation. Despite having the doubtful situation on hand, the auditor did not verify the inventories and sales in detail. The recklessness on the part of the auditor resulted in manipulations in the financial statements (Leow, 2009).
The registered companies are required to get the financial statements audited by a certified auditor each year. Thus, it is mandatory on the part of the company to cause the audit of the financial reports done. The corporations act imposes responsibility on the auditor to comply with the provisions of the corporations act in conducting an audit of the company registered under the provisions of the corporations act. As per the provisions contained in the corporations act, the auditor is required to state in his report that whether the financial statements of the company comply with the provisions of section 296 or 304 and 297 or 305 (Austlii.edu, 2017). The section 296 or 304 stipulates that the auditor to check whether the financial statements prepared by the company are in accordance with the accounting standards. Thus, the auditor is obliged to verify and identify the deviations from the accounting standards. Further, the section 297 or 305 states that the auditor is required to check that whether the financial statements of the company portray a true and fair view (CCH Australia Limited, 2011).
Apart from the above, the section 307A of the corporations act requires that the audit should be conducted in accordance with the auditing standards. Departure from the auditing standards by the auditor would result in violations of the provisions of the corporation’s act 2001. Further, under section 307C the auditor is required to give declaration in regards to independence (Berrington and Bhandari, 2011). In the case of Dick Smith, the auditor violated the provisions of section 296, 297, 307A, and 307C. The company did not follow the accounting standards appropriately as depicted from the fact that it manipulated the inventories and sales figures. The auditor failed to report such fact in his report. Further, since the accounting standards were not followed, it is obvious that the true and fair view was violated. The circumstances reveal that the auditor also did not follow the auditing standards as depicted from the lack of planning, poor risk assessment, and reckless verification of inventories and sales.
Conclusion
The essay presented here covers discussion on the issues raised on the auditor in regards to audit of Dick Smith, a company listed on the Australian Stock Exchange. Dick Smith failed miserably due to adoption of the false financial reporting practices. The audit firm of Dick Smith namely Deloitte was called into questions after revelations of the reasons of failure of the company. It was identified that the company manipulated the financial figures of inventories and sales to depict profitable position and good financial health to the investors. The auditors of the company were alleged to have been careless in reporting the irregularities in the financial statements to the investors. The auditors did not comply with the auditing standards, they failed to report non compliance with the accounting standards and they also failed to comply with the provisions of corporation’s act 2001.
References
AASB 102. 2009. Inventories. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-04_COMPjun09_01-09.pdf [Accessed on: 02 July 2017].
Adelopo, I. 2016. Auditor Independence: Auditing, Corporate Governance and Market Confidence. Routledge.
Anchoragecapital. 2017. Dick Smith Holdings Limited. [Online]. Available at: https://www.anchoragecapital.com.au/case-study-dick-smith/ [Accessed on: 02 July 2017].
ASA 240. 2013. The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report. [Online]. Available at: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_240.pdf [Accessed on: 02 July 2017].
ASA 315. 2013. Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. [Online]. Available at: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_315.pdf [Accessed on: 02 July 2017].
Austlii.edu . 2017. Commonwealth Consolidated Acts. [Online]. Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s307.html [Accessed on: 02 July 2017].
Berrington, M. and Bhandari, V. 2011. Pinnacle Financial Statements, Volume 2. IFRS System.
CCH Australia Limited. 2011. Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. CCH Australia Limited.
Conversation.com. 2017. Some answers, more questions over Dick Smith failure. [Online]. Available at: https://theconversation.com/some-answers-more-questions-over-dick-smith-failure-62485 [Accessed on: 02 July 2017].
Keall, C. 2016. Five serious questions about Dick Smith collapse. [Online]. Available at: https://www.nbr.co.nz/opinion/five-serious-questions-about-dick-smith-collapse [Accessed on: 02 July 2017].
Knapp, M.C. 2016. Contemporary Auditing. Cengage Learning.
Leow, J. 2009. Australian Master Superannuation Guide 2010/11. CCH Australia Limited.
Malley, A. 2016. Dick Smith collapse raises more questions for accounting profession. [Online]. Available at: https://www.smh.com.au/business/retail/dick-smith-collapse-raises-more-questions-for-accounting-profession-20160721-gqagz5.html [Accessed on: 02 July 2017].
Mills, A. and Woodford, W. 2015. Company Accounting. Pearson Higher Education AU.
Tomasic, R., Bottomley, S., and McQueen, R. 2002. Corporations Law in Australia. Federation Press.
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