Principles Of Auditing And Assurance Ethics

Consideration of Professional Accountant in Public Practice

Discuss about the Principles of Auditing and Assurance Ethics.

Considering the principles of Accountants Code of Ethics, it can be said that Peter Harmon has not violated the principles of professional ethics. As per the principles under section 240-241, Code of ethics B, consideration of professional accountant in public practice includes referral fee or commission if it is not received or paid that creates self- interest threat with respect to objectivity, integrity and professional competence and due care. Professional ethics on competence and due care requires the accountants to possess skills and knowledge to provide competent services in order to act diligently for clients (Bonaci et al. 2013). However, in the given case 10% commission received by Peter Harmon for sale of computer services is in accordance with the principles of Accountants Code of Ethics.

According to the principles of Accountants Code of Ethics, professional accountant or auditor is required to maintain the confidentiality of clients’ business and necessary information. In the given situation, David Smith, an auditor referred ten clients to the Allied Insurance Company without their awareness hence, it can be said that David has violated the principles of ethics in terms of confidentiality. Code of ethics regulation provides that professional auditor is required to maintain clients’ confidentiality to keep the business information private (Bampton and Cowton 2013). Auditor can disclose certain information only is it is required by legislation and with the permission of respective clients. David as an auditor referred ten clients without client’s knowledge hence, he is contented to have violated confidentiality and professional behavior and would be held under APES 110 for professional misconduct.

As per ethical code APES 110, profession accountants and auditor is required to maintain integrity, objectivity and professional competence and due care. Wrench & Company, Chartered Accountant in the given situation maintains details of clients in the computer records to use as per the requirement. In order to assist the clients for input data Wrench and company is able to arrange the members from administration as well as audit branch while the audit staffs can be involved for client audit if required by audit partners. Accordingly, the company said to have violated the ethical principles in terms of objectivity, competence and due care because requirement of audit partner cannot be replaced with the audit staffs.  

Accountants Code of Ethics and conceptual framework it is against the principles to make solicit approaches to the clients or professional parties through the electronic mode or by any other means. In the present situation, Stephanie Barry’s audit client Williams Pty Ltd uses the management services from another public accountant accordingly, Barry provides her firm’s literature to Williams for management services based on monthly records which was unsolicited. As per the regulation of code of ethics APES 110, unsolicited services are fair and common while solicited services are against the ethical principles (Tweedie et al. 2013). Therefore, Stephanie Barry cannot be said to have violated the principles of ethics and cannot be held for professional misconduct based on Accountants Code of Ethics.

Confidentiality of Clients’ Business and Necessary Information

Ethical Codes on professional accountant and auditors provides that an employee of the organization or a member of the company cannot be an auditor or audit assistant of the company. It is stated that the auditor of the organization should be independent and not to be involved in any business activities or any business decision which influence the auditor’s opinion (Soltani and Maupetit 2015). The present case of Katrina Ng, an audit manager of the non- profit organization as well as an honorary Board member which does not include her activities in management capacity. Principles of professional ethics provide that the auditor’s involvement in the company’s management affect the independence, confidentiality and competence. Therefore, it can be concluded that Katrina has violated the principle ethics on auditor independence being an honorary member of the audit company.

Services of professional accounting include auditing & assurance, tax advisory general business advisory and consultancy under the professional legislation. Peter Beattie in this case is a public accountant, provides services of tax advisory, management, book- keeping and auditing for the same audit client. In view of the professional services as per Accountants Ethical Code includes all the services providing by Peter Beattie to the audit client (Griffith, Hammersley and Kadous 2015). Accordingly, Peter Beattie cannot be held liable for violating the principles of ethics or professional misconduct under the regulations of APES 110.

APES 110 under Accountants Code of Ethics states that the professional accountants should not advertise their professional work or they should not be involved in case of inaccurate publicity. Further, code of ethics also provides that the professional accountants must not be involved in comparisons for professional capabilities with any other professional member (Han Fan, Woodbine and Cheng 2013). Accordingly, advertisement of professional audit work in the local newspaper with the colorful pictures of staff along with the comparison from other professional is said to be against the ethical principle of professional behavior and integrity. Therefore, Hornsby Auditors is to held liable for professional misconduct against the principle of ethics for integrity and professional behavior because the auditor entered into inappropriate publicity to obtain clients. As the auditor advertised the work in local newspaper and compared the professional work for providing benefit of higher tax deductions to the clients hence, Hornsby is said to have violated ethical principles.

Regulation of Accountants Code of Ethics provides that professional accountants are entitled to retain books and statutory documents of clients if there is a default in payment of audit fees. The auditor can take this action to exercise claim for the purpose of delayed audit fees against the audit work (Ma’Ayan and Carmeli 2015). In the given situation, David Cheadle audited the books and financial statements of Nestree Ltd for the year ended 30 June 2015 but the payment of audit fees had not been made. Accordingly, he is entitled to retain the books and documents of the audit client to claim against the dues, which is not against the ethical principles of APES 110 also he can continue the audit process for subsequent year 2016. 

Maintaining Integrity, Objectivity, and Professional Competence and Due Care

In the given case, auditor’s inability to obtain the confirmations from three major customers of the audit client that is included in the sample while the auditor satisfied himself for the available account balances used in other audit procedures. As the auditor failed to obtain the confirmations from third party with respect to the major customers of the audit client, there is information or details on the misrepresentation identification (Dombrowski, Smith and Wood 2013). Therefore, the auditor in this case should state “unmodified- emphasis of matter paragraph” as audit opinion in the audit report for the verification of client’s financial statements. This audit opinion is required because the auditor had not found any material misrepresentation or non- compliance of GAAP in the financial report hence, the auditor should highlight the fact of non- confirmation from third parties to draw the users’ attention.  

The auditor provides “Disclaimer of opinion” if there is limitation on the scope of audit procedures by the organizational management and as a result, auditor is not able to complete accurate audit report. In the present situation, auditor’s client restricted the auditor to examine the records of property, plant and equipment that forms a material part i.e. 20% of the total assets (Craft 2013). As per the standards of accounting and auditing, property, plant and equipment forms an integral part of the company’s total assets therefore, it is important to conduct proper examination and verification of the fixed assets to analyze the true and fair view of the financial information and disclosures. In this case, as the company restricted the auditor in verify the integral fixed asset, auditor is bound to provide disclaimer of opinion.

If the management governance of the audit client provides limitation on the scope of audit evidence then the auditor is required to state disclaimer of opinion in the financial report because the auditor could not present accurate audit report. Besides, unmodified opinion- emphasis of matter paragraph is to be given if the auditor finds that the financial statements are in compliance of GAAP and there is no misrepresentation but there is lack of confirmation from material sources (Tsipouridou and Spathis 2014). Hence, in this case, exclusion of contingent liability disclosure should be reported as an unmodified- emphasis of matter paragraph in the financial report to draw users’ attention. Moreover, in case the liability occurs as actual liability, it will affect the materiality of the financial position therefore, auditor should provide “disclaimer of opinion” due to the limitation in the scope of audit evidence.

Solicitation Approaches to the Clients or Professional Parties

If the financial statements have not been prepared in accordance with the regulations of GAAP, auditor is required to provide adverse opinion. In addition, if the financial statements represent gross misrepresentation due to fraud or error while recognizing and representing financial information then adverse opinion should be provided (Chen et al. 2013). In the given situation, significant proportion of cash sales and appropriate records of the retailer have not been maintained appropriately. To determine the appropriateness and accuracy of cash sales, no audit test can be performed in particular. Therefore, the auditor is required to provide adverse opinion because there was misrepresentation in the financial statements due to error in recognizing cash sales, which is an integral part in determining the profitability.

As per the auditing standards, it is important to examine the opening balance of books of accounts for the auditing financial year. The auditor performs the audit procedure for the current year on the basis of appropriate and accurate recognition of accounting balances of previous financial years (Lobo and Zhao 2013). However, in the present situation, the audit client refused to supply details and information on the opening balances of the accounts as the management contended that the financial information of the current year free from material misstatements. Therefore, it can be said that auditor should provide disclaimer of opinion since, there was limitation on the scope of obtaining audit evidence with respect to the opening balance of the previous year’s accounting balance.

In order to prepare and present the financial report of the organization it is important to follow the regulations of Australian Accounting Standards and GAAP to measure true and fair results. However, the organizational management is responsible to recognize the financial information in compliance with the principles and standards of accounting for the benefit of users. Auditor has reasonable responsibility to determine the correctness and accountability of organizational financial information (Skaife, Veenman and Wangerin 2013). Therefore, in case the auditor finds any misrepresentation or error in preparation of financial statements along with the non- compliance of GAAP then the auditor is required to provide adverse opinion. Hence, in the given situation, adverse opinion should be provided because the audit client did not follow the principles of Australian Auditing Standards from last five years.

During the process of audit, non- compliance of Australian Auditing Standards provides material effect on the accurate results of organizational financial statements. In such situation, auditor is required to provide adverse opinion stating the non- compliance of the regulations and principles that affect the transparency and accountability of the financial statements (Zimmerman 2016). In the present case, the client used LIFO method for inventory accounting, which is not permitted in accordance with the Australian Auditing Standards. Additionally, this method affected the financial position of the organization in terms of inventory value since it constitutes a significant part of the total assets. Therefore, auditor should provide adverse opinion for applying inappropriate method on valuation of inventory in presenting the financial statements.

Auditors’ Independence

Preparation of financial statements based on going concern framework is management’s responsibility whereas auditor is responsible to measure the appropriateness of going concern assumption as per ISA 570. Therefore, if the auditor discovers the company’s inability to maintain going concern then the “explanatory paragraph followed by the opinion paragraph” is to be given (Goh, Joos and Soonawalla 2016). Accordingly, in the given situation auditor identified substantial doubt on going concern but there was no material misstatement was discovered. Hence, modified opinion including an explanatory paragraph highlight reason on liquidation of organization’s major customers is to be provided.

Reference List

Bampton, R. and Cowton, C.J., 2013. Taking stock of accounting ethics scholarship: A review of the journal literature. Journal of Business Ethics, 114(3), pp.549-563.

Bonaci, C., Strouhal, J., Müllerová, L. and Roubí?ková, J., 2013. Corporate Governance Debate on Professional Ethics in Accounting Profession. Central European Business Review, 2(3), pp.30-35.

Chen, J., Cumming, D., Hou, W. and Lee, E., 2013. Executive integrity, audit opinion, and fraud in Chinese listed firms. Emerging Markets Review, 15, pp.72-91.

Craft, J.L., 2013. A review of the empirical ethical decision-making literature: 2004–2011. Journal of Business Ethics, 117(2), pp.221-259.

Dombrowski, R.F., Smith, K.J. and Wood, B.G., 2013. Bridging the education-practice divide: The Salisbury University auditing internship program. Journal of Accounting Education, 31(1), pp.84-106.

Goh, L., Joos, P. and Soonawalla, K., 2016. Determinants and Valuation Implications of Compulsory Stock Option Disclosures in a Weak Regulatory Setting—The Case of France. Journal of International Financial Management & Accounting, 27(1), pp.26-64.

Griffith, E.E., Hammersley, J.S. and Kadous, K., 2015. Audits of complex estimates as verification of management numbers: How institutional pressures shape practice. Contemporary Accounting Research, 32(3), pp.833-863.

Han Fan, Y., Woodbine, G. and Cheng, W., 2013. A study of Australian and Chinese accountants’ attitudes towards independence issues and the impact on ethical judgements. Asian Review of Accounting, 21(3), pp.205-222.

Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements. The Accounting Review, 88(4), pp.1385-1412.

Ma’Ayan, Y. and Carmeli, A., 2015. Internal Audits as a Source of Ethical Behavior, Efficiency, and Effectiveness in Work Units. Journal of Business Ethics, pp.1-17.

Skaife, H.A., Veenman, D. and Wangerin, D., 2013. Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading. Journal of Accounting and Economics, 55(1), pp.91-110.

Soltani, B. and Maupetit, C., 2015. Importance of core values of ethics, integrity and accountability in the European corporate governance codes. Journal of Management & Governance, 19(2), pp.259-284.

Tsipouridou, M. and Spathis, C., 2014, March. Audit opinion and earnings management: Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.

Tweedie, D., Dyball, M.C., Hazelton, J. and Wright, S., 2013. Teaching global ethical standards: a case and strategy for broadening the accounting ethics curriculum. Journal of business ethics, 115(1), pp.1-15.

Zimmerman, A., 2016. The Joint Impact of Management Expressed Confidence and Response Timing on Auditor Professional Skepticism in Client Email Inquiries. Managerial Auditing Journal, 31(6/7).