1. Would King & Queen be liable to EFL? Provide specific case references to support your answer?
2. Would your answer change if EFL had written to King & Queen advising you that they intended to make a loan to Impulse and were relying on the 2012 audited financial report to assist them in making their decision?
3. Define actual and perceived independence, and explain the importance of each?
4. For each of the above independent situations list any professional standards and regulatory requirements breached and discuss possible alternative courses of action the auditor should have taken in order to properly discharge their professional responsibilities?
1. On analysing the mentioned case, it is understood that King and Queen being an auditor of Impulse Pty. Ltd had given an incorrect audit report, hence is liable to EFL for the losses suffered by them. Reason being simple, had the auditors conducted their work with integrity and due diligence, they would have come to know about the debtors and the inventory turnover drop and thus would have mentioned the same in the audit report issued for the period 30 June 2012 basis which the financier had extended loan to them. Unfortunately the auditors gave an unqualified audit report wherein the going concern was questionable at the time of the issue of the report which should have been highlighted. Also the auditors did not conduct the valuation of the assets of Impulse because of which there was incorrect presentation of the asset balances in the balance sheet, thus misleading the various users of the audit report.
An auditor is expected to comply with ASA 200 ‘ Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Accounting Standards’. As per this auditing standard, one of the major areas of accountability for an auditor is to ensure the suitability of the management’s usage of the finances while preparing the financial statements (Auditing and Assurance Standard Board. 2009). An auditor should take all the necessary steps to accumulate an insight into the present condition of the auditing client with regards its level of performance and the risks attached with the client presently which may lead to doubts upon the company’s future performance and competency.
The pronouncements made in the case of Pacific Corporation v Forsyth (1970) 92 WN (NSW) 92 make it evident that an auditor should conduct his professional duty with due care and diligence. Professional scepticism is what is expected out of all professional. As per requirement, the auditor should seek the help of an expert in case he r she is not proficient enough in that area. The kind of vigilance that the auditor should conduct would depend upon the situation and in this scenario it was very clear that Impulse Pty Limited was not performing too well (Glover & Prawitt, 2014).
Therefore since EFL had financed on the basis of the audit report that King and Queen had given which revealed that the audit client had been performing well even though it was not, the financier has full right to claim losses from the auditor also along with the Company.
2. An audit report is issued for the outsiders of the company, be it the investors or the financiers. Thus in this case the auditor is liable to the financier since he had given an incorrect report. Therefore as per my opinion, the auditor would still be held responsible for the incorrect reporting due to non-compliance of the auditing standards. The auditors failed to conduct their duty ethically and independently. The auditors in spite of being aware of the actual scenario of the Company, yet gave an unqualified report proves the unethical conduct on their part (Colson, 1999). Therefore it can be rightly concluded that the audit was not performed as per the Australian Auditing Standards.
Further to this, had EFL asked the auditor about the condition of the Company prior to giving loan to them and even then King and Queen would have kept silent on the same, then in that case also EFL would have full right to hold the auditor responsible. This is basically a case of lack of independence and due diligence on the part of the auditing professionals.
3. Actual Independence: As the term says, actual independence means independence in the real sense. Thus it means freedom from any influence of the external as well as internal auditors who have any major interest from the audit client. Thus while performing the professional duty, independence, integrity and objectivity is maintained. Unbiased and unprejudiced performance is what is perceived out of any auditor. Thus actual independence means real freedom of the actual state of mind. Therefore it concentrates upon the actual state of mind and how an auditor deals with varying scenarios and situations (Benjaminson,& Doherty, 2012). The said term has importance in the auditing parlance as it emphasises upon the fact that the audit report is free from any biasness and the opinion is stated without any undue influence from the client’s side. If there is no financial gain or such other material interest of the auditor from the auditing client, then actual independence is not defeated.
Perceived Independence: Independence that looks like one is defined as perceived independence. There are times when the auditor is in a position to negotiate with the client. But even after being in such a position, if the auditor is able to take independent decisions and calls and state opinion which is true and fair, he is said to have applied perceived independence. Thus in such a situation, there generally exists a relationship between the client and the auditor due to which he or she is expected to perform his task with some deviations. In such a situation, professional judgement plays a vital role. Even though perceived independence does not safeguard the client from all possible risks related to audit, yet it would try to safeguard the auditor from being questioned upon his or her integrity and objectivity (Holland, & Lane, 2011). Therefore just as working independently in the actual sense is important, simply pretending to be independent in one’s task is equally important.
4. In the current scenario, Bob is said to have violated the provisions of Section 140.1 of the APES 110 Code of Ethics of Professional Accountant simply because during the conduct of audit as an audit assistant of Club Casino, he had come across certain financial information which according to him was best suited for his university assignment, hence used the same after removing all the references so as to maintain confidentiality of data but failed to take due permission from the client. The code specifies that an auditor cannot use the financial data of the client for his personal use until and unless he has obtained prior permission from the particular client (APESB, 2013). Using of any data of a company for the personal gain which would cause any kind of harm to the client should be refrained. The conduct of Bob was in contravention to the AICPA’s revised confidentiality rule Sec 7216 even if he had removed all the references which would prove that the information was related to Club Casino (Blatch, 2015).
Rule 301 clearly states that an auditor is not allowed to unveil any classified data of any client without prior permission from the client. Although the said rule does not define any special method of obtaining permission, but Rule 391 makes it specific to obtain permission in writing. Although the data was presented in a manner wherein the identity of the client was hidden, yet the Confidential Client Information Rule limits the ways and means of revealing the client’s information and the manner of adhering to the same. Therefore Bob should obtain prior approval from Club Casino mentioning the details about the data that he is using, the details of the university and the person to whom the same would be disclosed along with the purpose of the usage of the data.
Section 273 of the Companies Act 2006 specifies that an auditor can perform the duties of a company secretary even if he or she is not qualified as a company secretary but he or she cannot perform dual duties. Therefore in this case Wendy is eligible to perform the duties of a company secretary even though is not qualified. But Wendy has violated the Act as it specifies that the same person who is auditing the books of account of a company, cannot act as a Company Secretary as well at the same time. Simple reason being that it would be in contradiction to the independence of an auditor as a company secretary is considered to be an officer of a company who help the directors of the company perform their work with due diligence and care.
Thus if Wendy is to be appointed as the company secretary for a period of six months then he will have to step down from the position of an auditor of Ace Limited for that time period so as to safeguard the independence of an auditor.
Independence is the core to successful audit. An auditor’s duty as a professional is to ensure that he gives the audit report which is true and fair and does contain any kind of biasness. The shareholders should be able to trust upon the same. However in the present scenario there is a violation of the independence of the auditor as Leo’s father is a factory foreman of Precision Machinery Limited and therefore sending him to conduct the audit of the internal control of the cash payment system would not be acceptable and hence would be in contravention to the auditor’s independence (Corplaw.ie. 2014). There is a self interest threat attached with the with such an engagement as the father who is connected with the auditor is expected to have financial interest with the client.
Therefore Section 290.28 of the APES 110 clearly defines that the client should be well intimated from advance about any such kind of a linkage and relation which may have a material effect on the audit report being issued (APESB, 2013).
Thus in this case, Leo can be appointed as the auditor only after intimating the client about the existence of such a relationship and obtaining prior approval from the same before making such an appointment (Fearnley,et.al. 2005). Further to this, even if Leo is appointed after permission from the client, yet the task performed by him should be reviewed by another independent senior auditor from the same firm in order to ensure that there is no prejudices attached to the same.
In the present scenario, the auditor had threatened the client of resigning from the services if the previous dues are not cleared. But any professional, should ensure that such a threatening should not be given as there may be a situation wherein the auditee would have agreed to the same and not even paid the dues. Thus, in such a case the auditor should have delayed the audit procedure so that his engagement with the client is not endangered.
In this case study, the client is not keen to leave the present auditors Chan and Associates and so offers them new furniture in lieu of the outstanding dues even though the furniture basically covered just half of the audit fees due. If all the partners of the audit firm are in agreement of the said arrangement then it is said to be in line with the Act (aicpa.org, 2014). However if the said arrangement is not in agreement with the other partners then settling the entire fees against half the value of the furniture is contravention to the auditor’s independence. Therefore an alternate solution would be settling the remaining 50% in cash.
The second part to the question talks about the fact that a partner of the firm was offered 25% shareholding in a company which was unrelated to Classic Reproduction Pty. The said act is not in line with the code of ethics defined by the Act and also contradicts the independence of the auditor as well.
An auditor can accept gifts from a client only after informing the other partners about such a gift and obtaining permission from them before accepting. In his case since the audit firm agrees to clear the dues in the form of a new furniture, hence the said gift would take the shape of a bribe. To rectify the said stance the auditor should have intimated the other partners in advance and taken there permission before accepting the same (Suseno, 2013). Lastly the auditors should have delayed the audit work but performed the same at the same time.
References
aicpa.org, (2014), New Ethics Rulings under Rule 102 – Integrity and Objectivity and Rule 101- Independence, Available at https://www.aicpa.org/InterestAreas/ProfessionalEthics/Resources/Tools/DownloadableDocuments/Gifts_Basis_Document.pdf (Accessed 26th January 2017)
Suseno, N.S., (2013), An empirical analysis of auditor independence and audit fees on audi quality, International Journal of Management and Business Studies, vol.3, no.3, pp. 82-87, Available at https://internationalscholarsjournals.org/download.php?id=278598407560124372.pdf&type=application/pdf&op=1 (Accessed 26th January 2017)
Corplaw.ie. (2014). Importance of Auditor Independence . Retrieved from https://www.corplaw.ie/blog/bid/369348/Importance-Of-Auditor-Independence
Fearnley, S., Beattie, V., & Brandt, R., (2005), Auditor Independence and audit risk: a reconceptualisation, Journal of International Accounting Research , vol. 4, no.1, pp. 39-71, Available at https://eprints.gla.ac.uk/482/1/Audrisk21June_03.pdf (Accessed 26th january 2017)
APESB, (2013), Compiled APES 110 Code of Ethics for Professional Accountants, Available at https://www.apesb.org.au/uploads/news/media_release/28112014034818_compiled-apes-110-code-of-ethics-for-professional-accountants-nov-2013.pdf (Accessed 13th December 2016)
Auditing and Assurance Standard Board. (2009). Auditing standards ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards. Retrieved from https://www.auasb.gov.au/admin/file/content102/c3/asa_200_27-10-09.pdf
Glover, S.M., & Prawitt, D.F., (2014), Enhancing Auditor Professional Scepticism : The Professional Scepticism Continuum, American Accounting Association, vol.8, no.2, pp. 1-10, Available at https://aaajournals.org/doi/pdf/10.2308/ciia-50895?code=aaan-site (Accessed 26th January 2017)
Colson, R.H., (1999), Professional Responsibilities: Due Care, Available at https://www.questia.com/magazine/1P3-663573281/professional-responsibilities-due-care (Accessed 26th January 2017)
Holland, K., & Lane, J., (2011), Perceived audit independence and Audit firm fees, Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1935898 (Accessed 26th January 2017)
Benjaminson, E. and Doherty, L. (2012). Independence in Fact and in Appearance. Retrieved from https://www.diva-portal.org/smash/get/diva2:546244/FULLTEXT01.pdf
APESB, (2013), Compiled APES 110 Code of Ethics for Professional Accountants, Available at https://www.apesb.org.au/uploads/news/media_release/28112014034818_compiled-apes-110-code-of-ethics-for-professional-accountants-nov-2013.pdf (Accessed 13th December 2016)
Blatch, M.L. (2015). AICPA’s Revised Confidentiality Rule , Sec 7216 and the Tax Professional. Retrieved from https://www.thetaxadviser.com/issues/2015/feb/tpr-feb15.html
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