What Is The International Standard Professional Practice?
In the process of auditing, Audit Risk is considered as a major factor. Audit risk refers to the risk that an auditor expresses an incorrect opinion on the financial statements of the entities (Griffiths, 2016). As per the audit risk model, there are three types of audit risk and they are shown below:
Audit Risk = Inherent Risk * Control Risk * Detection Risk
From the above, it can be observed that Inherent Risk is a type of audit risk. Inherent risk refers to the risk of material missstements in the financial statements of the entities due to the presence of any error or omission caused by the failure of internal control. In this context, it needs to be mentioned that inherent risk is higher for the business entities having complex business and manufacturing operations. Moreover, it is not possible for the internal control of the business entities to protect or detect inherent risk of business. There is not any exception of these facts in case of MaxSecurity Limited (MaxSecurity) (Knechel & Salterio, 2016).
From the provided case information of MaxSecurity, the presence of some major audit inherent risks can be seen. They are discussed below:
As per the provided case study, the presence of inherent risk can be seen due to the complex manufacturing costing process of MaxSecurity. It can be observed that MaxSecurity has a complex manufacturing costing process for the production of high-tech armor-plated personnel carriers. In the presence of this highly complex manufacturing process, there is a large scope of error in various aspects of costing due to any omission in the values. This particular aspect can affect the figures in the financial statements and can cause material missstements in the financial reports (Leung et al., 2014).
Apart from the above, the presence of inherent risk can be seen due to the existence of old costing system. It has already been mentioned that MaxSecurity operates in a complex manufacturing process of high-tech armor-plated personnel carriers and there is a need for highly accurate advanced costing system to cope up with this highly complex manufacturing process. In the presence of this old costing system, there is a high risk of the omission of important costing information of the company as the system is not capable to produce a database of all the manufacturing units. In addition, the system is not able to integrate the costing information with the general ledger balances (Contessotto and Moroney 2014). Thus, all these aspects can create material missstements in the financial statements of MaxSecurity.
Apart from the above two aspects, the operation of MaxSecurity in a highly competitive market also creates inherent risk in the audit operation of the company and it can be considered as the industry risk. This type of risk can be seen in MaxSecurity due to the extreme pressure of the industry on the business operations of MaxSecurity and even the implementation of effective internal control cannot avoid this risk (Leung et al., 2014). These are the major inherent risks in the business operations of MaxSecurity.
At the time of conducting the audit operations of the business entities, the auditors have to plan every step of the audit operations. In this process, the auditors are required to consider the factors causing material misstatements in the financial statements. The assessment of materiality assists the auditors in the selection of audit procedures for the reduction of audit risk to an acceptably low level. Thus, for the selection of appropriate audit procedures and strategies, there is a requirement or the preliminary assessment of materiality for the determination of materiality level (Eilifsen & Messier Jr, 2014). There is not any exception of this fact in case of MaxSecurity as the auditors of MaxSecurity need to consider certain aspect for the preliminary assessment of audit materiality level. They are discussed below:
In the first step, it is needed for the auditors to measure the reliability of the provided information from the management of MaxSecurity as the information from the management has large role to play in the audit procedures. It is the responsibility of the management of MaxSecurity to provide the auditors with the information about the basis of preparation of the financial statements, the followed accounting standards and others. Thus, before taking this information into consideration for audit operations, it is required for the auditors to verify the reliability of them with the testing of internal control of the organization (Aobdia, Choudhary & Sadka 2017).
After that, it is required for the auditors to take into consideration all the relevant factors that may indicate the deviation from the normal business activities of MaxSecurity. From the provided information, it can be seen that the main business operation of MaxSecurity lies in the manufacturing of high-tech armour-plated personnel carriers. Thus, the main source of revenue of MaxSecurity should be the selling of the above-mentioned carriers. However, in case S&A, the auditors discovers any high amount of revenue from other activity apart from the manufacturing of high-tech armour-plated personnel carriers, they need to review this deviation from the normal business activity (Stewart, 2013).
Apart from the above two, the auditors are required to take into consecration the qualitative factors of the financial statements at the time of the assessment of preliminary materiality. It needs to be mentioned that the magnitude of material missstements is the major factor used for the preliminary assessment of materiality. There are five qualitative factors of financial statements. The Auditors of S&A is required to consider the inadequate or incorrect description of the accounting policies as it can mislead the users of financial statements. After that, the auditors are required to consider all the maters in MaxSecurity that can affect the integrity of financial reporting of the company. Most importantly, it is needed for the auditors of S&A to take into consideration all the weaknesses in the internal control of the company as they can cause material missstements in the financial reports (Chui & Pike, 2013). Hence, these are the major aspects that the auditors of S&A need to consider for the preliminary assessment of materiality.
In the accounting operations of Medical Services Holdings Group (MSHG), the process of debtor confirmation gives a documented report related with the presence of accounts receivable in the hospital. The auditors get external evidence about the accounts receivable of HCHG in case they get positive replies from the debtors. Apart from this, the process of debtor conformation provides the evidence about the obligations and rights of the company as evidence can be obtained related to the fact that whether HCHG actually owes the amount from the debtors or not. However, it needs to be mentioned that it is not possible to get reliable evidence about the valuation and allocation assertion of debtors, as the debtors do not provide the assurance related to the payment of their dues in the company (Zuca, 2013).
From the provided case study, it can be seen that the balance of receivable in Shady Oaks on 30 June 2017 was $3,974,569 and it is considered as material. At the same time, it needs to be mentioned that the payment term of the company is 14 days and the smaller part of the balance of debtors is due for more than 60 days. Thus, this particular aspect indicates towards the absence of effectiveness in the processing of the approval of credit and the collection of the outstanding amount of debtors. Apart from this, the confirmation from the debtors can be transferred to the large balances as 5 medical practitioners owes 60 percent of the debtors and this process helps to obtain correct evidence about their existence. However, at the same time, it is required for the auditors to obtain further auditing procedures in order to obtain reliable evidence about the valuation of the debtors (Com & CE 2016).
Apart from the bigger accounts, there are smaller accounts for the debtors that consist of 40 percent of the total amount of debtors. It needs to be mentioned that this small accounts of the debtors are in danger as most of these account balances has already crossed the allowance period of 14 days. The process of debtor’s confirmation helps in acquiring evidence about the existence of the amount of the debtors, there is a requirement of other procedures for the valuation of the account balances of the debtors (Zakari 2013). From the provided case study, it can be seen that the allowance of doubtful dent is considered directly against the accounts of trade receivable. For this particular reason, it is required for the auditors to conduct a check on the transactions. At the same time, it is needed for the auditors to run a check to discover the reason behind the poor credit control in Shady Oakes (Abou-Seada & Abdel-Kader 2017). Apart from above these procedures, it is also required for the auditors to review the receipts of the debtors and then analyze the characteristics of the debtor accounts so that proper evidence can be obtained on the valuation of the debtors accounts of Shady Oakes.
Based on the provided case study of Shady Oaks, Chan and Partners, the auditors of the hospital, is not likely to use the results of debtor confirmation as the only one evidence for the propose of audit. One of the major reason of this is that debtor confirmation will not be able to provide sufficient evidence on the valuation and allocation of the debtors in the company. Apart from this, another major reason is the presence of materiality in the accounts balance of debtors and the evidence that the smaller balances in the debtor accounts are due (Gupta & Paswan 2016).
In this situation, it is required for the auditors to review and test the assumptions, data and methods used by the management of Shady Oaks so that the reasonableness of the accounting treatments of debtors can be understood. At the same time, it is necessary for the auditors to discuss with the management about their procedures and approaches for the recognition of doubtful debts (Ashton, 2013). At the same time, it is required for them to conduct further audit procedures for ascertaining the valuation and allocation of the account balances of debtors. It needs to be mentioned that the auditors are required to conduct certain additional procedures for the testing of the balances of debtors. For example, the auditors are needed to conduct analysis on the receipts of the debtors and invoice of the debtors so that the huge outstanding balance of five practitioners can be taken into consideration based on their collectability (Kumar & Sharma 2015).
In the provided case study, one can mention about the Auditing Standard ASA 230 Audit Documentation. This particular audit standard examines the nature, timing and extent of the required audit procedures for the classification and valuation of the balance of the debtors in the companies. As per this standard, the auditors of Chan and Partners are required to consider certain aspects in case of the debtor balances of Shady Oakes. First, the auditors are required to identify the characteristics of specific matters related to the accounts balances of the debtors. Second, in the process of doing so, it is required for the auditors to comply all the necessary auditing rules and regulations. Third, the auditors are required to review all the information related to the accounts balances of the debtors in the company. Most importantly, it is necessary for the auditors of Chan and Partners to document the detailed analysis of the account balances of debtors (Ladda, 2014).
Thus, from the above discussion, it can be seen that it is not possible for the auditors of Chan and Partners to use the debtor conformation as the sole evidence of their audit operations. The main reason is the internal weakness in the process of collection from the debtors as there are certain loopholes in the total process. For this reason, it is required for the auditors of Chan and Partners to ensure the collection of the due balances from the debtors within the due date. This aspect will bring transiency in the whole accounting process of debtors collection.
From the provided case study, it can be seen that Meg Lithgow is engaged in the audit operations of Champion Securities. While doing the valuation of the major assets and liabilities, Meg has found that there are many assets and liabilities of the company that required to be written down. However, the CEO and chainman of the company has opposed the opinion of Meg by stating that the revaluation of assets and liabilities is a waste of time.
In Australia, Accounting Professional and Ethical Standards Board (APESB) provides the standards of APES 110 Code of Ethics and professional Accountants that contains all the ethical standards and principles that the auditors and accountants are required to comply with while providing professional services (apesb.org.au, 2018). As per APES 110, Meg faces some major ethical issues related to the revaluation of the assets and liabilities of Champion Securities. These ethical issues are discussed below:
Integrity: According to APES 110, Section 110, Integrity, it is required for the auditors and the accountants to be straightforward and honest while providing the professional services (apesb.org.au, 2018). For this reason, it is the responsibility of Meg to make sure that the valuation process of the assets and liabilities is done and there is write down or write up of assets as per the result of the valuation. However, the CEO and the chainman are not accepting this results due to their own benefits. Thus, as per APES 110, Section 110, Meg faces the ethical issue due to the breach of integrity principle.
Objectivity: As per APES 110, Section 120, Objectivity, it is the obligation on the auditors not to compromise their professional judgment in the presence of bias, conflict of interest or any undue influence (apesb.org.au, 2018). As per the provided situation, the CEO and the chairman of the company is asking Meg not to consider the write down of the values of assets. In case Meg agrees with the CEO and the chairman, she will violates the objectivity principles.
Professional Competence and Due Care: According to APES 110, Section 130, Professional Competence and Due Care, it is required for the auditors to comply with all the required technical and professional standards while delivering the professional services (apesb.org.au, 2018). As per the auditing regulations, it is required for Meg to revalue the assets. Failing in doing so will violate the ethical principle of professional competence and due care.
Professional Behaviour: According to APES 110, Section 150, Professional Behaviour, the auditors are required to comply with all the relevant laws and regulations and need to avoid any omission of action (apesb.org.au, 2018). In the presence of this regulation, in case Meg fails to consider all the issues related to the valuation of assets, she will beach the APES principle of professional behaviour.
In order to avoid these issues, Meg is required to comply with all the ethical principles of APES 110. More specifically, Meg should implement the strategy of training so that the accountants of the companies know the benefits to comply with the principles of accounting standards. In addition, it will make the accountants aware of the consequences of the violation of ethical principles. The implementation of effective corporate governance principles and professional standards is another major way to comply with the standards and principles of APES 110. Thus, based on the above discussion, it can be said that Meg is required to be straightforward, ethical and honest while conducting the audit operations as it will help her to reach to the correct decisions (Han Fan, Woodbine & Cheng, 2013).
From the provided case study, it can be seen that the CEO and the chairman of Champion Securities are not agreed with the audit opinion of Meg due to their personal benefits. For this reason, Meg has some specific options to release their audit report. In this context, it needs to be mentioned that there are four kinds of audit opinion; they are Unqualified, Qualified, Disclaimer and Adverse audit opinion (Chen et al., 2016). The auditors provide unqualified audit opinion when there is not any issue in the accounting operations of the companies and the financial reports have been developed as per the required accenting standard. However, it is not possible for Meg to develop unqualified audit report as there is major accounting issues related to the write down of the assets.
For this reason, Meg has the option to provide disclaimer audit opinion due to some major reasons. Disclaimer audit report is developed when the auditor is unable to provide definite opinion due to the insufficient audit evidence and the lack of support from the management. In case of Champions Securities, it can be seen that the management of the company is not supporting Meg in the correct accounting process (Habib, 2013).
At the same time, Meg has the option to provide adverse audit opinion. Adverse audit report is provided when there is a presence of material missstements in the financial statements of the companies. The same aspect can be seen in case of Champion Securities as the absence of the revaluation of assets can create manor material effect on the financial statements of the company. For this reason, Meg has the option to issue adverse audit opinion (Azzam et al., 2013). C
In this particular case, Meg is required to apply a specific course of action for the resolution of this ethical issue related to the revaluation of the assets of the company. They are discussed below:
In the first step, Meg is required to sit with both the CEO and the chairman of the company in order to make them understand the negative effect of the non-revaluation of assets on the financial position of the company (Houghton & Campbell, 2013).
In case the CEO and the chairman of the company still not agrees with Meg, then she needs to take this matter to the higher authority that is the respected accounting and authority boards. At the same time, it is required for Meg to publish the above-mentioned audit report in the annual report of the company so that all he shareholders and other stakeholders can know the facts (Pitt, 2014).
References
Abou-Seada, M., & Abdel-Kader, M. (2017). Behavioural aspects of auditors’ evidence evaluation: a belief revision perspective. Routledge.
Aobdia, D., Choudhary, P., & Sadka, G. (2017). Do auditors correctly identify and assess internal control deficiencies? Evidence from the PCAOB data.
APES 110 Code of Ethics for Professional Accountants. (2018). Apesb.org.au. Retrieved 18 April 2018, from https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf
Ashton, R. H. (2013). Some Early Contributions to the Study of Audit Judgment (RLE Accounting). Routledge.
Azzam, D. G., Neo, C. A., Itotoh, F. E., & Aitken, R. J. (2013). The Western Australian Audit of Surgical Mortality: outcomes from the first 10 years. The Medical Journal of Australia, 199(8), 539-542.
Chen, P. F., He, S., Ma, Z., & Stice, D. (2016). The information role of audit opinions in debt contracting. Journal of Accounting and Economics, 61(1), 121-144.
Chui, L., & Pike, B. (2013). Auditors’ responsibility for fraud detection: New wine in old bottles?. Journal of Forensic and Investigative Accounting.
Com, B., & CE, S. I. (2016). Advanced Accounting & Auditing.
Contessotto, C. and Moroney, R., (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), pp.393-418.
Eilifsen, A., & Messier Jr, W. F. (2014). Materiality guidance of the major public accounting firms. Auditing: A Journal of Practice & Theory, 34(2), 3-26.
Griffiths, P. (2016). Risk-based auditing. Routledge.
Gupta, R., & Paswan, A. K. (2016). Audit Quality, Auditor’s Independence and Other Parties. AAYAM: AKGIM Journal of Management, 6(2), 16.
Habib, A. (2013). A meta-analysis of the determinants of modified audit opinion decisions. Managerial Auditing Journal, 28(3), 184-216.
Han Fan, Y., Woodbine, G., & 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), 205-222.
Houghton, K., & Campbell, T. (2013). Ethics and Auditing.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Kumar, R., & Sharma, V. (2015). Auditing: Principles and practice. PHI Learning Pvt. Ltd..
Ladda, R. L. (2014). Nature of the Audit. Lulu. com.
Leung, P., Coram, P., Cooper, B. J., & Richardson, P. (2014). Modern Auditing and Assurance Services 6e. Wiley.
Pitt, S. A. (2014). International standards for the professional practice of internal auditing.
Stewart, T. R. (2013). A Bayesian audit assurance model with application to the component materiality problem in group audits.
Zakari, M. A. (2013). Does Audit Evidence Type Effects on Quality of Auditor’s Opinion?.
Zuca, S., 2013. AUDIT PROCEDURES-RECEIVABLE AND SALES. Romanian Economic and Business Review, p.18
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