Understanding ASA 315 And Auditors’ Responsibility For Client Governance

Overview of ASA 315 guidelines on client governance

When the audit operations are conducted, it is vital for the auditors to take into account the pertinent factors, out of which governance mechanism is the most significant. In Australia, ASA 315 is inherent containing all guidelines and principles for the auditors in considering the audit client governance. The primary intention of this report is to analyse the accountability of the auditors in reviewing the audit client governance by taking into account ASA 315. The latter section of the report would focus on evaluating the significant governance issues in Commonwealth Bank coupled with the recommendations of ASIC.

1. During the auditing procedure, it is necessary for the auditors to take into account the client governance mechanism. In order to fit this purpose, the auditors need to follow the guidelines of “ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”, since the auditors are provided with the necessary steps of reviewing the governance mechanism associated with the clients (Apesb.org.au, 2018). This is a significant aspect for the auditors, as these guidelines need to be followed by them for carrying out the audit operations. The significant parts of this regulation could be discussed as follows:

As per ASA 315 standards, it is the accountability of the auditors in gaining overview regarding the significant factors of the clients such as industry nature, significant regulatory authorities, investment types, structure of ownership and the available financial resources associated with the clients. More significantly, it is necessary for the auditors to obtain information, which would enable them in gaining an overview of the processes of the clients for choosing and applying policies of accounting along with their suitability with the business operations of the clients (Arens et al., 2015). All such aspects are necessary for the auditors in the initial stage of the auditing operations for gathering information regarding the significant activities of the audited organisations.

ASA 315 enforces the auditors to gain a thorough insight of the implementation procedure of internal control of the client in order to make judgements on the suitability of such control with business risks. Along with this, the auditors are needed to take into consideration the procedure of internal control design while obtaining insight regarding the internal control of the audited organisations. Therefore, it could be stated that ASA 315 mandates the need for the auditors to obtain all information regarding the internal control dimensions of their clients (Beasley, 2015). In this method, the auditors are required to consider the staff assessment process accountable to enforce sound governance within the organisations. By obtaining information about such influential dynamics, it would be easy for the auditors to analyse the extent of fair practices and ethical behaviour inherent in the businesses of the clients.

Significant aspects of ASA 315

Moreover, ASA 315 states that the auditors are accountable to gain insight regarding the appropriateness of the procedures related to governance so that the financial reporting risks of the organisations could be identified accordingly (DeFond & Zhang, 2014). In this method, the auditors have to play a crucial role in the risk estimation as well as risk assessment procedures, since the outcomes of such identification and analyses are necessary to develop effective auditing strategies. Besides, ASA 315 has imposed obligations on the auditors to gather information regarding the system of internal information within the entities coupled with the role towards the financial reporting procedure of the audit clients. Therefore, it is evident under ASA 315, the auditors are obliged to review the various governance aspects as well as internal control of the audited organisations (Furnham & Gunter, 2015). 

Issue	Impact on raising audit risk	Recommendations	Reduction in audit risk because of the recommendation
It could be observed that the board members of the bank, the audit and finance committee members have not conducted adequate oversight (Apra.gov.au, 2018).	This issue has the potential to raise the likelihood of fraud related to financial reporting and manipulations as well.	For dealing with this issue, procedures of legal governance need to be formulated in order to minimise the scope for potential fraud and manipulation. Moreover, an appropriate executive and board committee is necessary to keep the financial reporting process under review from time to time (Gendron & Power, 2015).	By following these recommendations, the bank could ensure sound governance of its financial activities resulting in reduction of audit risk.
The top level management of the bank has not undertaken the needed responsibilities in terms of ownership, which could result in considerable risks from the part of the executive committee.	When this issue is inherent, the higher-level management of the bank has not taken the responsibility of any type of illicit financial activities, which would raise the audit risk.	In this situation, it is advised to the top management of the bank in order to reinforce the various accountability standards for dealing with the fraudulent activities related to financial reporting.	This method would increase the responsibility of the top management of the bank for its financial activities and as a result, there would be decline in audit risk.
The significant issues in the bank could be observed in the process of decision making, which is bureaucratic and complex.	This issue could reduce the risk identification process from the financial reports. In addition, impediments would be created in order to gain financial reporting results.	For dealing with this issue, the pertinent factors related to decision making process are to be taken into consideration.	The significant outcome of this recommendation would be to minimise errors in the process of financial decision making.
The next issue could be detected in the framework of operational risk management for the bank, since practicalities are missing in its operating procedures. The compliance process is not matured and the resource functions are not up to the bank.	The availability of this kind of ineffective framework could result in greater likelihood of risks associated with financial reporting. Moreover, hindrances are encountered in the auditing operations as well because of such ineffective framework.	For addressing this issue, it is necessary to increase the ability as well as authority of the framework for risk management of the bank (Gimbar, Hansen & Ozlanski, 2016).	The availability of suitable framework for risk management would assist the bank to handle the business operations along with the financial risks of the bank.
The bank remuneration framework comprises of some significant issues made up of the ineffective remuneration framework.	The inappropriate framework for executive remuneration results in formulation of audit and financial risks in financial reporting procedure.	For dealing with the issue, the bank should take into account the enforcement of a suitable framework for executive remuneration for conforming to the needed policies and regulations (Glover, Taylor & Wu, 2016).	This recommendation would minimise audit and financial risks.

2. 

American Accounting Association Model	Decision making process
1. Determine the facts	The provided situation states the awareness of David regarding the fact that John was found to be roaming with his girlfriend in a new restaurant of the town. However, the reason that John had shown for not attending the office was due to illness and thus, this information represents the facts of the case.
2. Define the ethical issues	It could be identified that the excuse of illness was used by John for not turning up to the office; however, the fellow colleagues have been working hard to ensure timely work completion. This implies that John is negligent in terms of professional duties breaching the ethical principles of the business (Hay, Knechel & Willekens, 2014).
3. Identify the major principles, rules and values	As per the auditing standards, the auditors are accountable to maintain integrity and professionalism by remaining honest and transparent (Auasb.gov.au, 2018). Moreover, they are accountable to adhere to the required norms, principles and regulations in order to avoid unprofessional activities.
4. Specify the alternatives	For dealing with this issue, two options are available. Firstly, to ensure that John did not receive the same appreciation like his fellow colleagues, David should disclose the actual incident that occurred to the other team members. Another option is to hide the actual facts from the team members for maintaining sound relationship with John on the part of David.
5. Compare values and alternatives	Based on the two above-stated alternatives, the first option seems to be in line with the required norms, regulations and values of the audit profession. For this alternative, David is needed to arrange some time with his team members to disclose about the deliberate unprofessionalism of John in relation to auditing regulations (Hayes, Gortemaker & Wallage, 2014).
6. Assess the consequences	If the first option is chosen, John would not receive the same appreciation like his other team members, since he did not attend the office by providing a fake excuse, which violated the ethical principles of business. In this situation, an appropriate lesson would be provided to John regarding the maintenance of professionalism in workplace to comply with honesty and integrity principles (Knechel & Salterio, 2016).  For the second alternative, John would have no realisation for the mistake made and he would receive the same appreciation like the other team members, which would not be appropriate. Instead, there is a possibility that John might repeat the similar incident in future, as no actions would be taken against him.
7. Make your decision	After careful and detailed evaluation, the first option is preferable, as the unethical activity of John could be brought into notice to his other team members.

3. The auditors are responsible to conduct the audit operation to adhere to the various standards in order to make suitable expression of opinions on the financial statements (Louwers et al., 2015). The role of the auditors would not change by incorporating along with statutory cap on their liability. The auditors are accountable in restricting the expression of opinion on the financial statements. The incorporation of the auditors and statutory cap on their liability has certain limitations on the liability of the auditors. Hence, it is necessary for the management of the organisation in preparing and presenting financial statements to the auditors. Hence, if falsified or wrong information is provided by the management to the auditors, it is likely that the opinions to be provided by the auditors would not be correct on the financial statements.

However, the auditors are needed to adopt effective auditing procedures in their audit operations so that full conformance to the standards could be ensured. Therefore, if assumption is made that the auditors are engaged in using effective standards to conduct audit work appropriately, there is little or no chance for the liability of the auditors in progressing beyond the expression of opinion on the financial statements (Meyer & Meyer, 2014). There could be establishment of a compensation cap where the management of the business organisations could fix a maximum cap value. Thus, at the time the auditors’ share is identical or beyond the set cap, compensation is charged beyond the set cap to the auditors (Power & Gendron, 2015).

Conclusion:

Based on the above evaluation, it could be stated that as per ASA 315 standards, it is the accountability of the auditors in gaining overview regarding the significant factors of the clients such as industry nature, significant regulatory authorities, investment types, structure of ownership and the available financial resources associated with the clients. More significantly, it is necessary for the auditors to obtain information, which would enable them in gaining an overview of the processes of the clients for choosing and applying policies of accounting along with their suitability with the business operations of the clients. From the second scenario, it has been analysed after careful and detailed evaluation that the unethical activity of John could be brought into notice to his other team members so that he did not receive the same appreciation like others. Finally, it has been found that at the time the auditors’ share is identical or beyond the set cap, compensation is charged beyond the set cap to the auditors.

References:

Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. Retrieved from https://www.apesb.org.au/uploads/standards/apesb_standards/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

Arens, A. A., Elder, R. J., Beasley, M. S., & Jones, J. (2015). Auditing: The Art and Science of Assurance Engagements. Pearson Canada.

Auasb.gov.au. (2018).  Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. Retrieved from https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf

Beasley, M. S. (2015). Auditing cases: An interactive learning approach. Prentice Hall.

DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2-3), 275-326.

Furnham, A., & Gunter, B. (2015). Corporate Assessment (Routledge Revivals): Auditing a Company’s Personality. Routledge.

Gendron, Y., & Power, M. K. (2015). Research forum on qualitative research in auditing. AUDITING: A Journal of Practice & Theory, 34(2), 1-2.

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.

Glover, S. M., Taylor, M. H., & Wu, Y. J. (2016). Current practices and challenges in auditing fair value measurements and complex estimates: Implications for auditing standards and the academy. Auditing: A Journal of Practice & Theory, 36(1), 63-84.

Hay, D., Knechel, W. R., & Willekens, M. (Eds.). (2014). The Routledge companion to auditing. Routledge.

Hayes, R. S., Gortemaker, H., & Wallage, P. (2014). Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.

Meyer, M. J., & Meyer, T. S. (2014). Accounting case search: A web-based search tool for finding published accounting cases. Journal of Accounting Education, 32(4), 16-23.

Power, M. K., & Gendron, Y. (2015). Qualitative research in auditing: A methodological roadmap. Auditing: A Journal of Practice & Theory, 34(2), 147-165.