Understanding Auditor Responsibility & Ethical Issues In Governance Review

Auditor Responsibility in Governance Review

The current report aims to evaluate the case information of Miller Yates Howarth (MYH), which is an accounting organisation having branches in New South Wales and Queensland. The first segment of the report would focus on summarising the responsibility of the auditor for reviewing the governance of the audit client by taking into consideration the standard called ASA 315. The second segment would highlight the ethical issues by using the American Accounting Association Decision Model in relation to the provided auditing work. Finally, the report would shed light on explanation of the role that inclusion of auditors and statutory cap on the liability of the auditors have on the drawbacks on the liabilities of the auditors.

1. When the audit functions of the organisations are conducted, it is necessary for the auditors to govern various client-related aspects. In this context, the standard that contains special attention is “ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”. This includes all accountabilities of the auditors in order to review the client governance.

In accordance with ASA 315, the auditors are obliged to gain fair overview of the industries of their clients, regulatory authorities in relation to the clients, framework for financial reporting as well as other external factors (Auasb.gov.au, 2018). Along with this, the auditors are liable to collect information about the operations, ownership structure, governance structure, financial sources of the clients. Furthermore, they need to accumulate information for gaining an insight of the application and selection of accounting estimates, causes for change and understanding the suitability for the selected organisations (Wang & Fargher, 2017).

More precisely, the auditors need to be obliged to understand the enforced internal client control, since the auditors are required to judge whether the internal control is relevant for the audit risk. At the time to obtain fair overview of internal control, the auditors should take into account internal control design. Besides, ASA 315 mandates the need for the auditors to gain a thorough insight regarding the different components of the control environment related to the audit clients (Contessotto & Moroney, 2014). Hence, all individuals need to be analysed having roles in the governance process of the organisation and it is a part of the auditors’ responsibility. Such analysis would assist the auditors in gaining an understanding of the fact whether a culture of honesty coupled with ethical behaviour exists in the business organisations.

ASA 315 states that it is the duty of the auditors to gain insight regarding the fact whether the clients possess the needed processes in order to identify the financial reporting risks (Bagshaw & Selwood, 2014). These risks need to be estimated and they are to be evaluated, which is a significant duty of the auditors. After conducting such evaluation, they formulate the necessary strategies for auditing. According to ASA 315, the auditors are responsible to gain overview of the internal information system of their audit clients and the importance of such system with financing reporting system of the clients. Henceforth, it is clearly understood that it is the responsibility of the auditors to review the crucial aspects associated with client governance for complying with ASA 315.

Issue	Impact on raising audit risk	Recommendations	Reduction in audit risk because of the recommendation
The board members  and financial and audit committee have not conducted adequate oversight (Apra.gov.au, 2018)	This issue has the potential of raising the possibility of manipulation and financial fraud, which, in turn, could result in audit risk	For addressing this issue, legal governance processes could be used for minimising the scope of manipulation and fraud in financial aspects. Moreover, an executive committee and a rigorous board need to be formed to ensure that the financial aspects are controlled appropriately.	Such strategy formulation would enable the organisation to govern the various financial activities related to the bank correctly for assuring that the audit risk is minimised.
The unclear responsibility from the top management of CAB is identified as another issue. Moreover, absence of ownership of the significant risks could arise from the end of the executive committee.	When this issue is inherent, the top management of the bank is not liable for any type of illicit financial activities, which increase the audit risk.	Under this scenario, it is necessary to reinforce the different accounting standards by seeking assistance of various types of management practices (Louwers et al., 2015).	This step would ensure the higher-level management of the bank to be responsible for its financial activities and the process would contribute to fall in the audit risk of the bank.
Another issue could be observed as highly complex and bureaucratic procedure in order to undertake decisions.	The audit risk is increased, as the technique to identify the financial risks of the bank is slowed down. In addition, it results in an impediment for suitable result by formulating over timely collaboration (Kend, Houghton & Jubb, 2014).	In order to resolve this issue, all the pertinent aspects need to be taken into account before making decisions.	This method would be highly beneficial to minimise errors when the final decision would be undertaken.
The next significant issue could be observed in operating risk of the management framework, as practical working procedures are not maintained. In this technique, there is presence of under-resourced and immature compliance function.	When such inefficient risk management is inherent, the probability of audit risk is increased along with certain financial risks. Moreover, such aspect results in hurdle for the auditors to conduct the auditing processes in an effective fashion.	In order to overcome this situation, the primary recommendation would be to improve the authority and the ability of management framework related to operational risk in the bank. This would help in ensuring accuracy in compliance function. These are the most crucial recommendations for addressing the situation.	When the risk management framework is not effective, the bank management would be able to minimise the audit risk from its business activities coupled with other risks.
Finally, the other issues could be observed in relation to remuneration framework. It denotes that the framework designed for remuneration for the top management of CAB is highly ineffective.	When the remuneration framework is not effective, it has negative impact on the audit risk, as it might lead to wrong identification of audit risk associated with financial operations.	Under such situation, the primary recommendation is the enforcement of a suitable remuneration framework by adhering to the necessary norms and standards. Along with this, CAB is required to incorporate a cultural change in the organisation in order to identify risks effectively and the remedial procedures.	The senior management of the bank would become efficient and thus, this strategy would help in minimising the overall audit risk.

Ethical Issues in Auditing Work

2. 

American Accounting Association Model	Decision making process
1. Determine the facts	In accordance with the provided information, David Little has obtained information that John has been out for spending time with his girlfriend at a new restaurant in the town. However, he did not turn up to the office by saying about his poor health condition. These are the facts that have been gathered from this case study.
2. Determine the ethical issues	In this situation, an ethical issue is deemed to be inherent. Primarily, John has not attended the office by not providing a genuine reason while the other fellow colleagues of his team have been working hard for achieving the set goals. This has violated the ethical principle of the business, since John has not paid attention to his professional responsibilities (Christensen, Glover & Wolfe, 2014).
3. Identify the major principles, rules and values	This specific scenario takes into account certain ethical values, principles and rules. It is noteworthy to mention that the auditors need to be responsible for maintaining the integrity associated with the profession by maintaining honesty and straightforwardness (Earley et al., 2016). Along with this, the professionals would not compromise their responsibilities and duties in any type of circumstances. Moreover, they need to adhere to the pertinent regulations and laws so that any type of unprofessional acts could be avoided (Apesb.org.au, 2018).
4. Specify the alternatives	In this scenario, two courses of action are deemed to be inherent. In accordance with the initial course of action, David Little needs to coordinate with his other members regarding the illegitimate action of John for assuring that the other members receive more appreciation than John. The second course of action states that David would not disclose any actions of John and thus, he would allow John to receive the same credit for the job despite of restricted efforts.
5. Compare values and alternatives	It could be found that the initial course of action fully ensures adherence to all the values, principles and norms related to auditing profession. David is required to share such action with his other team members, since John has not acted in professional, honest and integrated manner in his auditing profession (Collier, 2015).
6. Assess the consequences	In the initial course of action, it is necessary for David to inform his team members regarding the illegitimate action of John in order to assure that John receives the same appreciation. From such aspect, John would obtain a lesson associated with integrity, professionalism and honesty required in audit profession, which would debar him from undertaking such kind of action in future. From the second course of action, David would abstain from informing his team members regarding the actions of John and thus, he would restrict John from obtaining the same credit like his fellow colleagues. This might lead to the fact that John would repeat the same action in future (Williams & Ravenscroft, 2015).
7. Make your decision	Based on the above evaluation, the initial course of action is recommended, as David should inform his other team members about the actions of John.

3. A significant role of the inclusion of auditors as well as statutory cap could be observed on the restriction of the auditors’ liability. In this statutory cap, the availability of few alternative liability arrangements could be seen (Hu, 2015). In accordance with the first agreement, at the time an injured party is involved in filing a claim, they have the accountability for obtaining the damages caused. Along with this, the injured parties possess the accountability of claiming all damages from the auditors, if the misinterpretation aspect could be observed in the financial statements. The presence of this alternative could be witnessed to the injured part, if the tortfeasors are accountable for the damages (Paolini, 2015).

For this option, it is the duty of the auditors to assure entire compensation or a bigger portion of the compensation for the fault conducted. In case of the second agreement, the liability percentage for every tortfeasor to the injured party is considered as a part of fault. Due to this reason, the injured parties do not enjoy the right of raising the overall share of compensation (Gimbar, Hansen & Ozlanski, 2016). According to the rule, the auditors are responsible for paying compensation exceeding the proportionate fault level, if the tortfeasors could not bear the total payment. Due to this reason, the higher risk proportion remains with the injured party, instead of the auditors and tortfeasors. This implies minimisation in the overall liability of the auditors.

The formulation of a compensation cap could be observed in third type of arrangement. In this arrangement, a maximum cap amount has been set for compensation to be imposed on defendants. Therefore, when the auditors’ share is more than or equal to the set cap, compensation could not be charged above the cap to the auditors (Abugu, 2014). The regulation is similar for tortfeasors as well not able to pay their compensation portions. Hence, this system plays a crucial role in minimising the liability of the auditors.

Conclusion:

Based on the above discussion, it is inherent ASA 315 is an auditing standard, in which the auditors analyse whether their clients have the needed processes in place for measuring their financial reporting risks. Certain issues are deemed to be observed in case of the first situation, which include lack of oversight, ineffective executive committee and others. Accordingly, recommendations have been provided to address the various issues identified. Moreover, the American Accounting Association Model used in the second situation state that John has undertaken an unprofessional action for which David Little needs to provide proper information to the appropriate authority. Finally, it has been analysed that the inclusion of auditors and statutory cap would help in minimising the liability of the auditors.

References:

Abugu, J. E. (2014). Re-examining the basis of auditors’ liability in Nigeria and the United Kingdom. International Journal of Disclosure and Governance, 11(3), 231-254.

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 2 August 2018, from https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report-accepts-eu

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

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