Report On Auditor’s Responsibility And ASIC Recommendations On Governance Issues

The Responsibility of Auditors with Respect to Client Governance

Miller Yates Howarth (MYH) is an accounting firm that has offices throughout the major regional centers of Queensland and NSW. The firm is considered the second largest in Australia and it has currently been appointed auditors of a community bank. The main purpose of this paper is to provide a report summarizing and justifying the responsibility of auditors with respect to client governance as well as explaining recommendations of ASIC in reducing associated audit risks.

Question 1:

1. Auditor’s Responsibility to Review the Governance of an Audit Client

According to Audit Standard ASA315, an auditor is not charged with a direct responsibility of corporate governance but he should ensure that important aspects of the client’s system of governance is reviewed (Aicpa, 2017). It is also important for an auditor to have a detailed understanding of the nature of the business of the client as well as its environment. This helps him or her in assessing the associated level of audit risks, and establish strategies for performing effective procedures of audit. The issue of corporate governance is becoming increasingly disseminated since failure of audit worldwide (CPA Australia, 2012). The main aim of audit is ensuring that a company’s operations are done by its management in good faith without making any use of resources for self-benefits and interests. Therefore, the primary role of an auditor is making sure that an opinion is rendered on operations of the management from a point of view of doing such roles in good faith and for the sole benefit of shareholders (Cosserat & Rodda, 2009).

The external auditor should review corporate governance of the client to ensure that financial statements are prepared accurately and they are a true and fair reflection of its financial position and performance in the given financial period. If in the event of this review the auditor discovers anything that seems fraudulent, then he is expected to bring it to the notice of the company management. However, if the management tend to ignore the concerns raised by the issue or they try to cover up the issue, then the auditor should turn away from the review. It should be noted that investigating fraud is not the role of an external auditor (Collings, 2014).

External auditors are also expected to ensure that the client’s control systems especially the internal controls for financial items are implemented and followed correctly. In order to gain a better understanding of the effectiveness of the client’s internal controls, the auditor should consider reviewing questions or issues that are raised by regulatory agencies regarding the client’s business. By assessing the internal control system of the client, the auditor gets a chance to gain an understanding of the client’s control environment as well as corporate governance. It is therefore the role of the auditor to review the corporate governance of the client in order to assist him in deciding on the most appropriate approach of audit to be adopted (Collings, 2011).

Review of the ASIC Report on the Commonwealth Bank

According to the International Standards on Auditing (ISAs), the responsibility to design and implement sound systems of internal controls lies with the top management or directors of the client. The external auditor’s role of reviewing and ensuring that the client maintains quality financial reporting is highly facilitated and enhanced by systems of internal controls (Hayes, Gortemaker & Wallage, 2014). If in the process the auditor discovers some weaknesses in the client’s internal controls suggesting that they are not reliable, then he should consider carrying out more substantive tests with a view to gaining more evidence on the same. He is then required to inform the management of the client about the weaknesses in the internal control system. According to ISA 400, this should be done through a letter of weakness (Reding & Institute of Internal Auditors Research Foundation, 2013).

1. Impact of Each of the ASIC Identified Commonwealth Bank Governance Issues on Audit Risk

Upon reviewing the ASIC report on the commonwealth bank detailing the issues of governance raised by ASIC, a table showing the impact of each of these issues has been prepared as seen below. The table also gives an explanation of why each of the ASIC recommendations would reduce audit risk.

Issue	Impact on Raising Audit Risk	Recommendation
Inadequate oversight by the Board	There has been inadequacy and challenges faced by the board in managing emerging risks that are considered non-financial.	CBA should execute a more rigorous governance of non-financial risks at both the executive committee level and board level.
Unclear Accountabilities of the Executive Committee	Lack of ownership has led to increased audit risks especially at the level of executive committee.	The bank should reinforce appropriate standards of accountability through improving its practices of remuneration.
Lack of urgency in management of issues and risks	CBA has been experiencing weaknesses in identifying issues, risks and incidents as well as escalating them through the institution due to lack of urgency in resolving and managing the risks subsequently.	CBA should make substantial changes in its culture that is moved towards dialing from reactive to challenging and empowered best practices in identifying and remediating risks.
Bureaucratic processes of making decisions	There have been bureaucratic and complex processes of decision making in CBA, which have led to lengthy procedures in detecting failings of risks.	CBA should consider decentralizing authority and power so that the bureaucracy and complexity in its decision making processes are significantly reduced or totally eliminated.
A non-practical framework of operational risk management	CBA has had a framework of managing operational risks that is more theoretical and less practical. This has been coupled with under resourced as well as immature function of compliance.	The capability and authority of managing operational risks as well as compliance functions should be upgraded substantially.
Inappropriate framework of remuneration	The remuneration framework of CBA favored senior managers at expense of materializing good outcomes of customers.	CBA should inject into its DNA “should we” question that relate to how it deals with its customers as well as decisions regarding such.

Question 2:

Outlining the Ethical Issues and Decision Using the American Accounting Association (AAA) Decision Model

1. Determining the Facts of the Case

The facts are that David has discovered that John, his team member and friend, conducted himself unethically by taking a sick leave when he was actually not ill. He instead spend the weekend with his girlfriend at a new restaurant in town, and did not therefore contribute to working in partnership with his team of three partners (Marx, 2011).

1. Defining the Ethical Issues

The ethical issue in this case is whether David should report John to his partner and if John should be allowed to enjoy the great incentives yet he did not work with his team members in making sure that the client’s work is completed in time as required (Knechel, 2017).

1. Identifying Major Principles, Rules and Values

The major principles, rules and values are that audit team members are required to uphold integrity in working in together in order to complete the audit assignments offered to them by the primary auditor. The team members are also entrusted with responsibilities of making active contributions to the work of the team in ensuring that the task given to them is accomplished with due diligence and care as needed (Matani, Chartered Accountants Australia + New Zealand, & Global Accounting Alliance, 2015).

1. Specifying the Alternatives

In this case, David has two alternative courses of actions. The first option involves covering up John so that he gets the lucrative share from the proceeds of the audit assignment although he did not make contributions to accomplishing the client’s tasks. David would do this since John is his friend with whom they have been playing together in the same touch football team. The other alternative is choosing to disclose the information to the other partner or team member that John had deceived them and he was not actually sick as he had said earlier. He instead spent time with his girlfriend in town. In taking this course of action, David would ensure that john does not get paid for what he did not ethically work for, although he is his great friend (Cosserat & Rodda, 2009).

1. Comparing Values and Alternatives

Impact of Each ASIC Identified Commonwealth Bank Governance Issue on Audit Risk

The second option of disclosing the information to the partner would be the best alternative that is consistent with the accepted principles, rules and values as well as professional code of conduct. David should report John to the other team member so that he does not get paid for what he did not actually work for (Collings, 2011).

1. Assessing the Consequences

If in his first alternative David chooses to spare his friend John and not to disclose anything to the partner about John’s whereabouts during the weekend, he would be at a risk of facing possible professional troubles in case the partner gets to know the truth. David would also be feeling guilty for not acting professionally and ethically, in failing to disclose the matter to the audit team members. However, considering the second option or alternative, David faces a risk of losing his friendship with John if he reports him to his partner. This could potentially ruin their personal relationship in future (Russell & ASQ Quality Audit Division, 2013).

1. Making the Decision

David should consider choosing the second alternative, since it is the best decision and the most ethical. Although John is his great personal friend, he should report his professional misconduct to the other member of their audit team (Pflugarth & CPA Australia, 2011).

Question 3:

Role That Incorporation of Auditors and a Statutory Cap on Auditors’ Liability Have On the Limitation of Auditors’ Liability

Both capping and incorporation of auditors play a main role in limiting the statutory liability of auditors. For instance, due to joint and several liability law, accounting firms operating as partnerships have various consequences in terms of liability of partners since actions of one of the partners can have severe implications for other partners if the partner is proven to have been negligent on his actions. Incorporation of auditors would help them in overcoming these challenges related to management of partnerships (Collings, 2011). The major roles of incorporation in limitation of auditor’s liability are as follows.

1. It fails to address the potential liability issue arising from joint and several liability law of audit partnerships for negligence resulting from third parties where the damages were caused partly by the actions of the audit firm (Marx, 2011).
2. It gives auditors an opportunity to be placed on a similar ground to other commercial parties, since they are neither provided with any special benefits nor exempted from standard rules of liability (Cosserat & Rodda, 2009).

• The private assets of the company audit members are protected from the severe consequences of negligence by any auditor member of the firm.

1. The audit company is held fully responsible and liable for any amount exceeding its professional indemnity insurance (Messier, Glover & Prawitt, 2010).

The following are the main roles of introducing a statutory cap on the liability of auditors.

1. The auditor’s liability or that of the entire audit firm is limited according to an approved scheme limiting the liability.
2. Capping also deprives plaintiffs their possible legal rights in case the claim exceeds the amount capped (Arens, Elder & Beasley, 2017).

• It places professionals in a more privileged position than other defendants.

1. While incorporation holds the negligent individual auditor liable to the full extent of the damage caused, the statutory cap would as well limit the liability of this individual auditor (Millichamp & Taylor, 2012).

Conclusion

As discussed above, although an auditor does not have a direct responsibility in corporate governance, he should review the important aspects of the client’s system of corporate governance. In doing this, the auditor would review the internal controls of the client by interacting with the management and also reviewing concerns raised by regulatory agencies (Moeller, 2016).

References

Aicpa. (2017). Auditing Standards 2017: Codification of Statements on Standards for Auditing Standards. John Wiley & Sons Inc.

Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and assurance services: An integrated approach.

Collings, S. (2011). Interpretation and Application of International Standards on Auditing. Hoboken: John Wiley & Sons.

Collings, S. (2014). Frequently Asked Questions in ISAs. Hoboken: Wiley.

Cosserat, G. W., & Rodda, N. (2009). Modern auditing. Chichester, UK: John Wiley & Sons.

CPA Australia. (2012). Auditing, assurance and ethics handbook 2012. Frenchs Forest, N.S.W: Pearson Australia.

Hayes, R., Gortemaker, H., & Wallage, P. (2014). Principles of auditing: An introduction to international standards on auditing. Harlow: Pearson Education Limited.

Knechel, W. R. (2017). Auditing: Assurance and risk. New York: Routledge.

Marx, B. (2011). Fundamentals of auditing. Durban, South Africa: LexisNexis.

Matani, N., Chartered Accountants Australia + New Zealand, & Global Accounting Alliance (Firm). (2015). Auditing assurance and ethics handbook 2015: New Zealand incorporating all the standards as at 1 December 2014. Milton, Qld: Wiley.

Messier, W. F., Glover, S. M., & Prawitt, D. F. (2010). Auditing & assurance services: A systematic approach. New York: McGraw-Hill/Irwin.

Millichamp, A. H., & Taylor, J. R. (2012). Auditing. Andover, Hampshire: Cengage Learning EMEA.

Moeller, R. R. (2016). Brink’s modern internal auditing: A common body of knowledge. Hoboken, NJ: Wiley.

Pflugarth, G., & CPA Australia. (2011). Auditing, assurance and ethics handbook 2011. Frenchs Forest, N.S.W.: Pearson Australia.

Reding, K. F., & Institute of Internal Auditors Research Foundation. IIARF. (2013). Internal auditing: Assurance & consulting services. Altomonte Springs, Fla.

Russell, J. P., & ASQ Quality Audit Division. (2013). The ASQ auditing handbook: Principles, implementation, and use. Milwaukee, Wis: ASQ Quality Press.