Business Accounting And Ethical Standards: An Overview

The Duty of an Auditor

Describe about the Business Accounting and Ethical Standards.

A) The duty of the auditor arises from the ASA 315 which in conjunction with ASA 570 on Going Concern wherein he has to see if there is an environment which leads to misstatement of records. He should accordingly recalibrate his assessment. With the new evidence, he should check if there exists a material uncertainty and therefore conjectures to the ability of the company to continue as a Going Concern. With the new evidence, the auditor will see the following that there is an immense doubt on the fact whether the company can continue as a Going Concern and therefore adequate disclosures are made pointing to such events which creates such conjectures on the company to continue as a Going Concern.

Here, King & Queen (K & Q) auditor are auditors of Impulse since 2005. They should be aware that there are liquidity problems in the company. Hence applying ASA 570 and dictated by their duty in Sec 295 (4) of the Corporations Act, K & Q auditor should have done additional audit procedures to check the viability of the Going Concern assumption. These could include points like valuation of inventory,  receivable realisations. This will stamp the fact that if there is a risk of Going concern and whether such facts will be disclosed. Hence they have not done their duty as per audit standards and common law. As a result, there is a transgression of proper professional skill and standards

In a case of Esanda Finance Corp Ltd vs. Peat Marwick Hungerford’s[1], there is a landmark High Court ruling. This has thrown light and made it clear about their view on earlier judgements and revised their mistakes in the past judgements. They have now eliminated the liability of the auditor in a third party liability. In that they have tested the combined facts of Proximity, Reliance and Causation. The case is similar to this case study where Esanda had an economic deprivation when they sanctioned the loan to the company on the back of the auditor’s report analysis. It satisfied itself whether auditor to be held liable. The courts concluded that there was a mere reporting to the shareholders and not to the financiers. They did not have any clairvoyance that lenders would act based on this report. This is in spite of the fact that they were aware that report did not indicate a true and fair view of financial statements. Since they did not anticipate that the financier will be using the report, K & Q auditor should have made it clear that the report would be analysed and used verbatim by the lenders and hence a probability of loss could be there; It is stated that Esanda unreasonably depended on the audit report and did not perform diligence themselves to convince of the finances of the borrower

The Court held that auditor has not breached duty of care and used the test of Proximity & Causation in their conclusion. Depending on this case, K & Q auditor were not aware that the report would have been used by EFL Finance for lending. The finance company lent to Impulse by relying on the report and did not conduct an independent diligence. Depending on the case of Proximity, Reliance and Causation, K & Q auditor remained within their limits of duty of care and hence are not liable to EFL Finance

Importance of Independence in an Auditor

b) If Esanda had ab initio mentioned to K & Q auditor that they will use the report for deciding on lending to Impulse, it can be concluded that the test of Proximity and Reliance are maintained. Hence K & Q auditor may exercise reasonable care keeping in mind that one of the intended audiences is EFL Finance who will rely on the audit procedures of K & Q auditor. Hence they need to collect audit evidence and reach a conclusion in their audit report keeping in mind the reader. Even after such mention, if the procedures on inventory and debtors are not done by K & Q auditor, then they have transgressed the precincts of care and their compliance with Proximity, Reliance has failed. As a result, the Causation factor or cause of economic loss has been triggered and accordingly K & Q auditor will be liable to EFL Finance in this scenario

2A) This is defined by APES 110 Code of Ethics for Professional Accountants, Independence comprises of:

Independence of Mind (Actual Independence) – This expects a mental state which ensures that the auditor acts as an objective and independent person. His opinion will therefore be free from any vested interests and influences.

Independence in Appearance (Perceived independence) – Auditor to maintain his image and standard such that any third party will not raise any doubt on his independence and credentials to form an opinion.

Independence of the mind or actual independence involves objectivity of the mental condition and mental state and his objectivity to react to specific situations. An auditor who is truly independent has the ability to make non vested decisions in spite of the prejudices. However, since the state of mind where he is perceived to have colluded with the company and compromised his principles is highly volatile, it cannot be objectively benchmarked with respect to time and environment. Therefore, the test of Independence in Appearance or “Perceived Independence” needs to e upheld wherein he shows the same consistency in behaviour to a knowledgeable person and his client equally. Perceived independence can be measured based on how close the audit member is to the client and he gets any pecuniary benefits for the same. This could also include a dependency test on his economic drive with one client measured to his total revenue. Perceived independence accentuates the credibility of the report and opinion expressed by the auditor and therefore his opinion is worth the salt.

(i) Bob – Principle of Confidentiality is a key point of APES 110 Code of Ethics for Professional Accountants wherein information extracted in a professional engagement is not to be disclosed to any third party without specific authority nor use it for personal benefits provided there is no legal and official reason to reveal.

In the instant situation, Bob copied confidential information which was used for his personal benefit of finishing his university assignments though it did not contain the Club Casino name. Even if you remove the name of the client in the assignment, it does not remove the fact that confidentiality was predominantly breached. This being used for vested interest and not professional interest, there is no possibility of cover up with any alternate action.

(ii) Wendy – Wendy is a partner in an audit firm. She has been assigned post of Company Secretary (CS) position in the same company who is her audit client. This triggers Clause 290.142 of APES 110 Code of Ethics for Professional Accountants. Assignment of such staff is pointing to a self review threat which could have been absolved if it was for only a temporary period. But that not is the case, wherein Wendy has been given the post on a permanent basis. Her position is close to the company triggering self-review and advocacy threats. Hence there is no way the threat can be brought to acceptable level. Per AUST290.148.1, a Company Secretary is an Officer under the Corporations Act. Wendy cannot act as a temporary partner in the client.  The only way is to resign from the audit engagement.

(iii) Leo- Leo is a close member of the audit group and his elative prepares the financials and statements in the firm. The opinion to be expressed on such cash flows has a conflict for Leo. The threat therefore can be minimised to Acceptable level if Leo is replaced and he is restricted from working on such assignments where his relative has an influence in making the base documents to be audited. Per APES 110 Code of Ethics for Professional Accountants, it is recommended that Leo to be removed from the audit since his father has a more than significant influence

(iv) Chan & Associates – If Chan holds stake, such stake will not create an independence threat if the business relationship is insignificant to Chan, his audit form and the company where he holds stake. Such stake should also not create an ability to control the company and it is immaterial to him. But here Chan has 25% equity in the entity which is high and can create two threats namely self interest/intimidation. Per APES 110 Code of Ethics for Professional Accountants, Chan has to relinquish his stake and resign from his audit engagement responsibility of Classic Reproductions.

References

Accounting Professional & Ethical Standards Board, (2008). APES 110 Code of Ethics for Professional Accountants. Australia.

Auasb.gov.au. (2016). Australian Auditing Standards. [online] Available at: https://www.auasb.gov.au [Accessed 12 Dec. 2016].

Auditing and Assurance Standards Board, (2013). Auditing Standard ASA 570 Going Concern.

Austlii.edu.au. (2016). ASA 570 – Going Concern – April 2006. [online] Available at: https://www.austlii.edu.au/ [Accessed 12 Dec. 2016].

Cpaaustralia.com.au. (2016). Accounting professional and ethical standards. [online] Available at: https://www.cpaaustralia.com.au [Accessed 12 Dec. 2016].

Nguyen, V. and Rajapakse, P. (2008). An Analysis of the Auditors’ Liability to Third Parties in Australia. Common Law World Review