Breaches In Ethical Requirements Of APES 110 And Types Of Audit Opinions

Scenario: Mortdale Accounting firm and Penshurst Accountants

As per the provisions of APES 110 Codes of Ethics for Professional Accountants states that an auditor must maintain confidentiality about any information which the auditor had access to during the course of audit (Cpaaustralia.com.au 2018). As per section 140.1 of APES 110, an auditor is not required to disclose any information which he has came across during the course of the audit to any third party or outside business. The auditor generally notes down important audit findings and information in working papers which is known as the process of documentation (Backof 2015). As per section 140.6 of APES 110, the auditor cannot disclose any information of his client even after auditor’s terms of engagement is over with that particular client. The auditor cannot disclose any information of his former client to anyone.

In the given case study, Mortdale Accounting firm is engaged in auditing of various public sector companies and it has handed its working paper of one of its clients to a new firm which is Penshurst Accountants who wants to review the audit process. As per the provisions of APES 110, it is clear that Mortdale Accounting firm must not disclose or provide its working papers to any one unless law requires it to. Therefore in the above case there is a breach in ethical principle.

The provisions of APES 110 do not state anything particular on the case study as given in the question. However any firm must run a background check on the new employee whom it is employing in the business. Another thing is that professional competence must also be ensured that is whether the person is capable of performing the job or whether the individual has the required skill and knowledge in the field.

Therefore it can be said that there has been no breach in ethical standards as required by APES 110. As per APES 110, it does not contain any provisions relating to the problem stated in the case study.

As per section 120.1 of APES 110, the principle of objective states that an auditor should not compromise their judgement or become bias under undue influences of others. Another main principle of audit is that an auditor must be independent in making judgement on the financial statements of the client. As per section 220.1 of APES 110 a conflict of interest may arise when the auditor is engaged in the same business and is competing with a public firm. This threatens not only objectivity but also the principle of confidentiality. Moreover an auditor cannot advise a firm on its services prior to issuing an audit opinion on the same.

Scenario: Jan Dungog and local public accounting firm

As per the case study, Wendal sailor has acquired an insurance and superannuation business and he is also maintains its auditing professions. Moreover Wendal advises it clients on services before issuing an opinion. Hence it is clear that Wendal sailor has clearly breached the ethical standards of APES 110. 

As per the provisions of section 290 of APES 110, an auditor must be independent from the client. Independence as per section 290 can be classified in two kind independence of mind and independence in appearance. The concept of independence is crucial to the principles of integrity and objectivity for quality of the audit  (Rahmina and Agoes 2014). Section 290 of APES 110 also makes it clear that if an auditor takes up or has a position in the client’s company such as the post of the director or if the auditor has some financial interest in the client’s company than such will be considered as threats to independence. Thus in the case given in the question there is a clear breach of ethical standards as the auditor holds the position of a director in the non profit firm.

1. As per the case given in the question Ernie Dengate sells her bookkeeping, tax and audit working papers to another individual who bought the business. As per the provisions of APES 110 Codes of Ethics for Professional Accountants, an auditor must maintain confidentiality about any information which the auditor had access to during the course of audit. As per section 140.1 of APES 110, an auditor is not required to disclose any information which he has came across during the course of the audit to any third party or outside business. The auditor is not supposed to show his working papers to anyone even after his term of engagement with the client is over. The auditor will preserve his working papers for a specified period of time as required by regulations. Therefore in this case the auditor is in clear violation of his ethical standards as per APES 110 as Ernie Dengate has released all his working papers to jago the new accountant of the business.
2. As per the provisions of Section 200.2 of APES 110, a person should not engage in any activity or occupation which might impair the integrity, objectivity and good reputation of the profession of auditing. The case study shows that Fred Nerk an individual of a small countryside provides tax services, advisory services and audit services to its clients. Sometimes he does all three for the same client which violates the ethical standards. This will affect the integrity, objectivity and even independence of the auditor and thus it violates the ethical standards (Knechel et al. 2012).
3. The case as mentioned in the question is that Allgood Chartered Accountancy firm maintains the information of his client Branch Company in computer which is fine as per the regulations of the audit. Allgood Chartered Accountancy Firm has not violated any ethical standards as per APES 110. The auditing firm can maintain information of its clients in computers as long as the principle of confidentiality is maintained.
4. As per the provisions of Section 200.2 of APES 110, a person should not engage in any activity or occupation which might impair the integrity, objectivity and good reputation of the profession of auditing. The case given in the question shows that a public accountant James Jameson has drunk excessively on a Christmas night and gets into a fight which is why he gets convicted and is sentenced for 3 months. The behaviour and sentence will disrepute the auditing profession, hence it will be considered as violation of ethical standards.

1. In the case given in the question the auditor is unable to get confirmations from the suppliers of the client however he is satisfied about the balances considering other audit evidences. There is no misstatement and limitation on the part of management, therefore the auditor will be issuing an unqualified report (Chen, Ma and Stice 2016).
2. In the given case in the question the client has restricted the auditor to carry out audit procedures on assets like plant, property. The fixed assets form a material part of the financial statements and discrepancies can be there. Due to the limitation on the part of the management the auditor will be issuing a qualified report (Blandón and Bosch 2013).
3. As per the case given in the question the management has not shown disclosures of contingent liability which if become an actual liability will affect the business. The auditor in this case will consider the chances of the liability to actually occur in a future date (Holder et al. 2013). He will advise the management to record the same in financial statement. The auditor will be issuing a qualified report for the misstatement of contingent liability as if the liability becomes an actual liability, it will have a material impact on the financial statements.
4. The auditor will be advising the management on the weakness of the internal control and also the inefficiency of the internal control (Munsif, Raghunandan and Rama 2012). The auditor will be issuing a qualified report due to ineffectiveness of the internal control as the cash values cannot be measured.
5. As per the case given in the question the management refuses to provide the information on the opening balance at the start of financial year. This is a limitation on the scope of audit and therefore the auditor will be issuing qualified report.
6. In the case given in the question the auditor will be issuing an adverse report as the client company has not been following auditing standards which are of fundamental consideration on the part of auditor (Cullinan et al. 2012).
7. In the case given in the question the auditor will be issuing an qualified report as the company has not been following relevant standards of auditing in inventory management and the effect has a material impact of the business.
8. As per the standard issued by the FASB on Going concern states that the when there is a significant doubt of auditor on the going concern of the client then the auditor must make comment on the same in the explanatory paragraph in the auditor’s report. The auditor will be issuing an unqualified report which will contain an explanatory paragraph which will explain the management’s going concern problem (Goh, Krishnan and Li 2013).

Reference

Cpaaustralia.com.au. (2018). APES 110. [online] Available at: https://www.cpaaustralia.com.au/professional-resources/accounting-professional-and-ethical-standards/apes-110-code-of-ethics-for-professional-accountants [Accessed 8 Jan. 2018].

Backof, A.G., 2015. The impact of audit evidence documentation on jurors’ negligence verdicts and damage awards. The Accounting Review, 90(6), pp.2177-2204.

Knechel, W.R., Krishnan, G.V., Pevzner, M., Shefchik, L.B. and Velury, U.K., 2012. Audit quality: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 32(sp1), pp.385-421.

Rahmina, L.Y. and Agoes, S., 2014. Influence of auditor independence, audit tenure, and audit fee on audit quality of members of capital market accountant forum in Indonesia. Procedia-Social and Behavioral Sciences, 164, pp.324-331.

Chen, P.F., He, S., Ma, Z. and Stice, D., 2016. The information role of audit opinions in debt contracting. Journal of Accounting and Economics, 61(1), pp.121-144.

Goh, B.W., Krishnan, J. and Li, D., 2013. Auditor reporting under Section 404: The association between the internal control and going concern audit opinions. Contemporary Accounting Research, 30(3), pp.970-995.

Blandón, J.G. and Bosch, J.M.A., 2013. Audit firm tenure and qualified opinions: New evidence from Spain. Revista de Contabilidad, 16(2), pp.118-125.

Munsif, V., Raghunandan, K. and Rama, D.V., 2012. Internal control reporting and audit report lags: Further evidence. Auditing: A Journal of Practice & Theory, 31(3), pp.203-218.

Cullinan, C.P., Wang, F., Yang, B. and Zhang, J., 2012. Audit opinion improvement and the timing of disclosure. Advances in Accounting, 28(2), pp.333-343.

Holder, A.D., Karim, K.E., Lin, K.J. and Woods, M., 2013. A content analysis of the comment letters to the FASB and IASB: Accounting for contingencies. Advances in Accounting, 29(1), pp.134-153.