James Bromley is an auditor who is about to retire in a few days and has obtained permission from his clients to reveal only the tax details to the new accountant purchasing his practice. Apart from tax details, James has also provided some other helpful information to Jayne about products, services, and potential services.
In this case, there is no violation of the ethical principle of confidentiality. The principle of confidentiality required that the professional should not disclose any such information with the third parties which can be advantageous to the professional or the third party without client’s permission unless there is professional right or duty to disclose such information (Gay & Simnet, 2015). If any information is provided to a third party, it will lead to a breach of the code of conduct thereby questioning the integrity of the auditor. In the given case, James had shared the said information only to help Jayne in carrying out the audit and other services fluently after James retires and this information has been shared as a part of his professional duty (Elder et. al, 2010). Hence, there has been no violation in this scenario.
It is the duty of the professional to possess professional knowledge for every related aspect and also to ensure his clients of competence of professional services being provided to them. Moreover, it is the duty of the professional to provide the accurate and updated knowledge to the client so that the work is not hampered. Also, he must be aware of the current developments in practice and all recent updates with regard to his profession (Gay & Simnet, 2015). In the given case, Fred has not been into practice for 6 years and was not doing anything related to his professional field. He was pursuing some sports activity on a professional level. Hence, he is not up to date with the current legislation and laws and as such, it can be said that he is not professionally competent enough at present to undertake any audit work. Hence, it is a violation of ethical principles (Roach, 2010).
According to the professional behavior ethical principle, the professional should ensure to follow the relevant laws and regulations and not to do any such activity which may bring disrespect to the profession. If any disrespect is brought to the profession then such a matter can be questioned and the violation can lead to termination or cancellation of the degree. In all probability, the professional should maintain the integrity so that there is no case of a violation (Heeler, 2009). In marketing about the profession, the professional should not make any announcements regarding the fees charged by them or make exaggerated claims about the services he offers or makes comparisons with other professionals’ work. The Asquith Accountants are advertising an exaggerated statement in the local paper that they guarantee to provide their clients with a tax refund within 10 days. Hence this is a violation of ethical principles.
Amy Harriss is an Auditor for a chartered accounting firm and has been asked to be the treasurer of the local athletics club which is a not for profit institution. The firm in which Amy is an auditor does not audit the athletics club. A professional cannot accept any work position in the organization for which he is an auditor as there occurs a threat to his audit independence (Johnstone et. al, 2014). But in the given case, Amy has been offered a membership from a non-client and hence there is no violation provided that he intimates such appointment to the regulating institute as per the relevant laws.
Objectivity principle requires the professional that he should not be biased in his opinion or there should not be a conflict of interest or his opinion should not be based on any undue influence. This implies that an independent decision should be provided and there should be no cases of influence (Wood, 2011).
The Gordan Accountants carried out the Audit of Simtec Ltd from July 7th to the 2nd September 2016 and Simtec have advised Gordan Accountants that the final payment is dependent upon receiving an “appropriate” final report. If Gordan Accountants accept the terms of the client, then it will be a violation of objectivity principle because he is under an undue influence from a client for not getting fees until he issues a report favoring the client.
According to the professional behavior ethical principle, the professional should ensure to follow the relevant laws and regulations and not to do any such activity which may bring disrespect to the profession.
Here, David Dale, a local accountant, has been asked by Insurance Company to share his client details and has been offered a commission of 5% for each new client. If David accepts the terms of the Insurance Company, it will bring disrespect to his profession as this is not an accepted practice from a professional. Hence, David should not put an interest to the terms and conditions of the insurance company as it will disturb the smooth decision-making process (Church et. al, 2008).
Self-Review threat occurs when any work or judgment needs to be re-evaluated by a person who has done that work.
In the given case, Ellen Davis was appointed in place of Senior Accounts Manager for a period of four months in Jenkins Ltd. Now, the firm Thornleigh Accountants has been appointed for an audit of Jenkins Ltd. If Ellen is included in the audit team, there is self-review threat as she had worked for the client firm and is aware of all the facts and figures and she will not change her review about the reports she had already submitted.
In the given case, the audit manager John Dargin has received the accounts from the client Winmalee Ltd. in the accounts the company has treated the development expenditure as a capital expenditure and included in intangible assets. The client has also provided supporting details taken from various standards which are sympathetic to their approach to valuation of these assets. The reports have been prepared by senior staff whose bonuses are related to the company’s profit performance. The client company has provided the auditor with every possible evidence which can prove that the treatment of development expenditure is correct (Gilbert et. al, 2005). It is a kind of self-interest threat as the auditor may have a fear of losing the client if he does not agree with the full explanations and details provided by the client.
The Chocolate company has asked the audit firm to carry out the audit of its financial statements and before completion of the audit, the client company has invited the auditor to its seconds chocolate shop where considerable discount is being offered.
As it is not given clearly, it may be assumed that the invitation to the auditor was on the offering of gifts. The acceptance of any gifts to the client may impose familiarity threat as the auditor may become sympathetic to the interests of the client due to acceptance of gifts. Hence, any influence will affect the independent decision making and will lead to disturbance in providing the report. So, the invitation can be tagged as a familiarity threat as it will be a level of familiarity in the mind of the auditor (Geoffrey et. al, 2016).
When the auditor has any financial or other interest in the client firm, in such as case there is the possibility of self-interest threat. It includes factors such as financial interest in a client, concerns about losing the client, etc.
In the given case, the client was considering the appointment of the auditor for the upcoming year. The auditor whom the client is considering has been the auditor for past 2 years. Now the client is planning to expand his business and has asked the auditor to be flexible in his approach for the audit of the upcoming year and has asked for an answer. This may create a fear in the mind of the auditor that if he does not agree to the client’s offer, he may lose his audit assignment (Vause, 2009). Hence, this is a case of self-interest threat.
Familiarity threat occurs where the auditor may become sympathetic to the interests of the client because of various reasons like acceptance of gifts, the close relationship of any member of the audit team with any officer or director or member of the client, etc (Carcello, 2012).
In the given case a senior member of the audit team, Elaine Ong is engaged to James Bing who is the senior accountant at Elmtree which is the client firm. In such case, there is a big possibility that the independence of audit report and the whole audit process gets affected due to the above-said relationship. Hence, there are chances of familiarity threat to audit independence.
Familiarity threat occurs where the auditor may become sympathetic to the interests of the client because of various reasons like acceptance of gifts, close relationship of any member of the audit team with any officer or director or member of the client, personal friendships or relation or association between members of the audit team and the client company, etc (Black, 2010).
In the given case, the senior auditor of the audit firm are in association with the senior accountant and other staff members of the client company Rangers Ltd. as they play on the same softball team. Hence there may build up personal relations between them and as such there may be the possibility of familiarity threat to audit independence due to the involvement of senior auditor of the audit team (Matthew, 2015).
An audit report is a written report where the auditor has provided an opinion in written in respect of the financial statement of the organization. The report is done in a standard manner that is guided by the general accepted auditing standards. GAAS helps in providing certain changes to the report resting upon the audit situations where the auditor is engaged. The audit report has two divisions that are the scope of the audit and the responsibility of the audit.
The Audit Report to the Financial Statements consists of two parts:
In the first part of the report, the auditor’s opinion is there which states that whether the financial reports provided by the directors of the company are in compliance with the Corporations Act 2001 or not. If the compliance has not been done completely, the reasons for the same are also mentioned therein (Guerard, 2013). Further, it is also mentioned whether the financial statements are complying with the Australian Accounting Standards and the IFRS (International Financial Reporting Standards) or not and if not then the effect of the same on the financial statements are also mentioned.
The main information in this part that is given is to give an opinion on whether or not the financial statements give a true and fair view of the financial performance of the company and whether or not all the required information and explanations have been provided during the course of audit (Knapp, 2013). Other disclosures are also given regarding whether or not the company has provided all the documents and financial records called for by the auditors for completion of audit (Guerard, 2013). Also, it is mentioned that whether or not the company has maintained records and registers requisite under the Corporations Act 2001. Finally, it is reported whether or not the audit was conducted as per the Australian Auditing Standards.
In the second part of the audit report, the auditor’s opinion is there about the availability of the information, documents and records with the client and whether or not these have helped in conducting an audit (Vause, 2009). It is mentioned by the auditors that they have given an unbiased and independent opinion on the information in financial statements and reports. Also, they give a declaration that their opinion should not be taken as a guarantee for the authenticity of each and every record and financial viability of the company.
Conclusion
In case according to the auditors, the financial statements do not present a true and fair view of the financial position of the company or do not comply with the relevant rules, laws, and legislation, the auditor issues a modified audit report (Carcello, 2012). In few situations, the emphasis of matter paragraphs is also mentioned.
References
Black, W. K 2010, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and Crises, Working paper, University of Missouri-Kansas City.
Carcello, J 2012, ‘What do investors want from the standard audit report?’, CPA Journal vol.82, no. 1, pp. 7-12
Church, B, Davis, S & McCracken, S 2008, ‘The auditor’s reporting model: A literature overview and research synthesis’, Accounting Horizons vol. 22, no. 1, pp. 69-90.
Elder, J. R, Beasley S. M.& Arens A. A 2010, Auditing and Assurance Services, Person Education, New Jersey: USA
Gay, G & Simnet, R 2015, Auditing and Assurance Services, McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S & David A. W 2016, ‘Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors’, Accounting Horizons, vol. 30, no. 1, pp. 143-156.
Gilbert, W. Joseph J & Terry J. E 2005. ‘The Use of Control Self-Assessment by Independent Auditors’, The CPA Journal, 3, pp. 66-92
Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY: Springer, pp. 78-81
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting. Pearson Press
Johnstone, K, Gramling, A & Rittenberg, L.E 2014, Auditing: A Risk Based-Approach to Conducting a Quality Audit, 10th Edition, Cengage Learning
Knapp, M.C 2013, Contemporary Accounting, Cengage Learning
Matthew S. E 2015, ‘ Does Internal Audit Function Quality Deter Management Misconduct?’, The Accounting Review, vol. 90, no. 2, pp. 495-527
Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.
Vause, B 2009, Guide to Analysing Companies, Bloomberg Press
Wood, D A 2011, ‘The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision,’ The Accounting Review, vol. 86, no. 6
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