Ethical And Governance Issues In Auditing

Background

1: It is always crucial for an auditor to manage the various aspects of client governance during the conduction of audit operations. For this reason, ASA 315 is formulated, which intends to detect and analyse the risks of material misstatements arising out of frauds or errors at the levels of assertions and financial reports. This is mainly carried out by having a clear understanding of the organisation and its environment including internal control. This would help the auditors in developing a basis to design and implement responses to the evaluated material misstatement risks.

It has been identified that the auditors need to obtain a fair understanding of the client governance aspects, which are summarised briefly as follows:

According to “Paragraph A70 (a) of ASA 315”, the management of an organisation is needed to develop as well as maintain legal, honest and ethical culture and communicate the behavioural and ethical standards to its staffs through codes of conduct and policy statements (Legislation.gov.au, 2018).  

“Paragraph A70 (b) of ASA 315” states that the auditors require to possess considerable knowledge of the competence levels of the staffs for specific jobs and the way such levels could be converted into the required skills and knowledge.

It is evident from “Paragraph A70 (c) of ASA 315” that the control consciousness of a business organisation is considerably affected by those having governance charges. Hence, the auditors need to evaluate their independence from management, degree of involvement, stature and experience and the suitability of their actions (Contessotto & Moroney, 2014).

In accordance with “Paragraph A70 (d) of ASA 315”, it could be observed that the philosophy and operating style of the management includes attitude of the management to response towards business risks, information processing, financial reporting along with accounting personnel and functions. The auditors need to evaluate whether the targeted earnings are realistic along with the availability of alternative accounting estimates and principles. As a result, the auditors could gain a fair understanding of the attitude of the management regarding its internal control (Carey, 2015).

According to “Paragraph A70 (e) of ASA 315”, this structure provides the framework on the ways of planning, implementing, controlling and reviewing the activities of the organisation.

Allocation of authority and responsibility:

“Paragraph A70 (f) of ASA 315” cites that if an organisation has an established framework or structure, it becomes easy for the auditors to identify the major authority lines and authority areas. In addition, they could perceive the internal control implementation by understanding the reporting relationships as well as the organisation structure (Bagshaw & Selwood, 2014). 

Question 1

Human resource policies and practices:

As mentioned under “Paragraph A70 (g) of ASA 315”, these policies and practices take into account orientation, training, recruitment, counselling, promotion, compensation as well as remedial actions. Such information would help the auditors to gain a fair understanding of the client governance.

Thus, it is clearly evident from the above discussion that the auditors have to comply with the above-stated guidelines for reviewing the vital aspects related to client governance.

Issue	Impact on raising audit risk	Recommendation	Reduction in audit risk because of the recommendation
The first issue could be identified as inadequate rigour and consistency, since there were not enough face-to-face meetings between the Chairman and former CEO for developing a targeted agenda (Apra.gov.au, 2018). In addition, there is lack of oversight on the top management while there is preservation of managerial responsibilities.	This issue could increase the manipulation possibility as well as financial frauds, which could enhance audit risk.	In order to address this issue, it is necessary to develop a special independent committee so that suitable oversight could be maintained. Moreover, the chances of financial manipulations are minimised while ensuring full control of the financial aspects.	With the help of this recommendation, it is possible to ensure better governance as well as control of the financial aspects associated with the bank for ensuring that the audit risk is minimised appropriately. Moreover, a heightened visibility needs to be ensured for ensuring a clear tone at the top in action as well as messaging.
The second issue that could be identified is the inadequate rigour of BAC urgency and rigour. The BAC members have not obtained red audit report copies timely and the owners did not appear in front of the BAC members. As a result, timely follow up was not taken by the BAC members.	Due to such ineffective follow-ups and lack of negligence of the business owners, the internal audit risk could be increased, as the bank would not be accountable for the illegal financial activities (Wang & Fargher, 2017).	In order to address this issue, the board processes and practices along with its audit and risk committees need to be in line with internal better practices for managing risk.	This specific recommendation would help in assuring the top management of the bank in becoming highly accountable for the financial activities. Moreover, improved processes would ensure in decline in audit risk of the organisation.
Another issue identified is the insufficient communication between the board committees.	In this case, there is significant rise in audit risk, as the bank might face troubles in detecting the financial risks. As a result, this creates hindrance for the bank, since the members could not collaborate for meetings in a timely manner (Chen et al., 2018).	For minimising this risk, direct involvement needs to be involved with the business units and owners of support functions related to significant issues. Moreover, it would ensure timely and effective closure of these issues.	With the help of this recommendation, all the errors could be eliminated and accordingly, appropriate decisions would be undertaken.
Another issue is associated with the operating risk pertaining to the framework of risk management due to the absence of proper working processes. There is lack of over-confidence and benchmarking that could be observed as well.	Due to this issue, the auditors are bound to face troubles in carrying out their auditing processes effectively; thus, in turn, the overall audit risk is increased (Siriwardane, Kin Hoi Hu & Low, 2014).	For dealing with this audit risk, it is necessary to enhance authority as well as capability of the management framework for minimising the overall operational risk. As a result, the accuracy could be ensured in auditing operations.	When an adequate framework is designed, it would help the bank management to reduce the audit risk and other financial risks (Abdallah, 2018).

2:

American Accounting Association Model	Decision making process
1. Determine the facts	According to the provided information, a team consisting of three persons is involved working on loan applications for the clients, which are to be delivered to the partner. Out of the three individuals, John did not attend office on a particular day by telling that he was suffering from ill health. Another team member, David, has received information from one of his flatmates that John was seen to be spending time with his girlfriend.
2. Define the ethical issues	In the provided case, one of the team members has taken leave by telling about poor health condition; however, he was seen to be spending time with his girlfriend. On the other hand, the other team members are making significant contributions to ensure timely completion of work. The ethical issue that has taken place in this case is the wrong information of sickness provided by John, while the other team members are making honest efforts for completing the work.
3. Identify the major principles, rules and values	Competing rights: In terms of competing rights, there are two angles that need to be analysed in this case. These angles include the right of John’s life against the right of doing correct things (Cannon, & Bedard, 2016). Based on the above case, it is true that John had his own life and it is his choice to do those things, as per his likings. However, for personal benefits, John could not utilise other people. In the provided case, ethics is not maintained, since John has taken leave on due date by providing a fake reason. Thus, John’s right of life could not offset his incorrect ethics in the office environment, as his presence was deemed to be important. Unethical behaviour: According to the provided information, unethical behaviour was pursued by John, since he has adopted unethical reason for granting leave, in which there is connection of incentive with the work (Stewart, Kent & Routledge, 2015). Instead, if he admitted the truth in the initial stage to his other team members, it would have been ethical on the part of John.
4. Specify the alternatives	In this case, John and the other two team members could discuss among each other regarding the incentive. In case, John has no issues to distribute his share with the other team members without failure, it would be justified.
5. Compare values and alternatives	If the values and alternatives are contrasted with each other, alternatives are not considered significant in opposition to values. The other way to resolve the problem is the presence of alternatives (Apesb.org.au, 2018).
6. Assess the consequences	The future projects might not be fruitful due to negative impact on team spirit The team members would not be able to trust each other The office work might be affected The relationship of friend might not be the same between David and John
7. Make your decision	It could be stated that alternatives are not superior to values. Since John has taken leave by providing a fake reason and there is direct connection between work and incentives, John should not be eligible for any incentive and he needs to apologise for the mistake.

3: It is the responsibility of the auditors of the financial statements for carrying out the audit operations to conform to the applicable auditing standards for making appropriate expression of the opinions on the financial statements (Lennox, Wu & Zhang, 2014). There is no change in the role of the auditors with the inclusion of the auditors and statutory cap on their liability. The liability of the auditors is restricted to the expression of opinion on the financial reports. The inclusions of the auditors and statutory cap on auditor’s liability have restricted certainly the liability of the auditors. Hence, the management of the organisation is needed to prepare and present the financial statements to the auditors. Therefore, if the management provides misleading or false information to the auditors, there is every chance that the auditors would provide ineffective opinion on the financial statements (Philipsen, 2014).

However, it is crucial for the auditors to utilise suitable auditing techniques and tools for carrying out the audit to comply with the auditing standards. Hence, if it is assumed that the auditors are involved in utilising suitable auditing standards and carrying out audits in an effective fashion, the liability of the auditors would not go beyond the expression of opinion on the financial reports (Paolini, 2015). A compensation cap could be formed, in which a maximum cap amount could be set by the management of the organisation. Hence, when the share of the auditors is equivalent to or above the set cap, the charge of compensation needs to be made above the set cap to the auditors (Gimbar, Hansen & Ozlanski, 2016). This implies that the auditors have the duty to ensure full compensation for any fault rendered to the client. Hence, the overall liability of the auditors could be minimised with the help of statutory cap.

Therefore, it could be stated that the liability of the auditors is restricted considerably by taking into consideration the auditors perform their auditing operations appropriately and accordingly. The inclusions of auditors and statutory cap on the liability of the auditors have performed considerable role in restricting the overall liability of the auditors.

References:

Abdallah, S. (2018). External auditor type, discretionary accruals and investors’ reactions. Journal of Accounting in Emerging Economies, 8(3), 352-368.

Apesb.org.au. (2018).  Retrieved 17 August 2018, from https://www.apesb.org.au/uploads/standard1.pdf

Apra.gov.au. (2018).  APRA releases CBA Prudential Inquiry Final Report and accepts Enforceable Undertaking from CBA | APRA. Retrieved 17 August 2018, from https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report-accepts-eu

Bagshaw, K., & Selwood, J. (2014). Core auditing standards for practitioners. John Wiley & Sons.

Cannon, N. H., & Bedard, J. C. (2016). Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), 81-114.

Carey, P. J. (2015). External accountants’ business advice and SME performance. Pacific Accounting Review, 27(2), 166-188.

Chen, W., Khalifa, A. S., Morgan, K. L., & Trotman, K. T. (2018). The effect of brainstorming guidelines on individual auditors’ identification of potential frauds. Australian Journal of Management, 43(2), 225-240.

Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), 393-418.

Gimbar, C., Hansen, B., & Ozlanski, M. E. (2016). The effects of critical audit matter paragraphs and accounting standard precision on auditor liability. The Accounting Review, 91(6), 1629-1646.

Legislation.gov.au. (2018).  ASA 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment – October 2009 . Retrieved 17 August 2018, from https://www.legislation.gov.au/Details/f2009l04079

Lennox, C. S., Wu, X., & Zhang, T. (2014). Does mandatory rotation of audit partners improve audit quality?. The accounting review, 89(5), 1775-1803.

Paolini, A. (2015). Auditors’ Liability and Corporate Fraud in the UK: Does Corporate Size and Structure Matter. J. Bus. & Tech. L., 10, 245.

Philipsen, N. J. (2014). Limiting auditors’ liability: the case for (and against) EU intervention. The Geneva Papers on Risk and Insurance-Issues and Practice, 39(3), 585-597.

Siriwardane, H. P., Kin Hoi Hu, B., & Low, K. Y. (2014). Skills, Knowledge, and Attitudes Important for Present?Day Auditors. International journal of auditing, 18(3), 193-205.

Stewart, J., Kent, P., & Routledge, J. (2015). The association between audit partner rotation and audit fees: Empirical evidence from the Australian market. Auditing: A Journal of Practice & Theory, 35(1), 181-197.

Wang, I. Z., & Fargher, N. (2017). The effects of tone at the top and coordination with external auditors on internal auditors’ fraud risk assessments. Accounting & Finance, 57(4), 1177-1202.