Breaches Of Ethical Requirements Of APES 110 And Types Of Audit Opinions Essay.

Situation Assessment

1. The following situations may or may not breach the ethical requirements of APES 110. You need to state whether they are or are not a breach of the ethical requirements of APES110 and if they are a breach of the ethical requirements state which ethical principle has been breached:

(a) The Mortdale Accounting firm had carried out several audits of public companies in the last year.It now provided the working papers to the Penshurst Accountants who were carrying out a peer review of the audits by Mortdale Accounting. The Mortdale Accounting firm does not advise its clients of these reviews.

(b) Jan Dungog,a CPA ,  applies to a local public accounting firm of Chartered Accountants, for a position ,but asks the local public accounting firm not to contact her current employer.The local public accounting firm do not contact her contact her current employer but hire her without contacting them or her other referees .

(c) Wendal Sailor ,a chartered accountant,acquires an insurance and superannuation business as well as conducting audits.During audits Wendal Sailor frequently contacts the firms during the audit advising them of their other services prior to providing their final Audit Opinion.

(d) Judith Durham is the partner on an audit of a not for profit charitable organisation.She is also a member of the Board of Directors  but this position is honorary and does not involve her performing
any management function.

(e) Ernie Dengate sells his accounting practice which includes bookkeeping, tax and auditing.He obtains permission for the release of tax working papers but does not request permission for the others.He releases all the working papers from these functions to the new accountant,Jago ,who has
bought the practice .

(f) Fred Nerk ,a public accountant in a small country town,provides tax services,management advisory services and does audits for the same clients.Sometimes the same person provides all these services.

(g) The Allgood Chartered  Accounting firm maintains its records on various computers in its office.It does audits on the Branch company and the Branch company has found its computer facilities are inadequate for its needs and so the Allgood Chartered Accounting firm has maintained certain of the accounting records of Branch company on its computers.

(h) James Jameson ,a public accountant,stays too long at the annual Christmas party  of his firm,the Balgowlah Accountants and consumes too much alcohol and drugs. He subsequently goes into town and is involved in a fight and is charged with assault on a person at a hotel as well as drunken and disorderly behaviour when he attempts to drive off.He is subsequently convicted and sentenced to 3 month in gaol as well as having his license suspended for 1 year.       

2. Indicate the type of opinion that should be expressed in each of the following situations,providing reasons for your choice

(a) The auditor was unable to obtain confirmations from eight  of the client’s major customers that were included in the sample however the auditor was able to satisfy himself about the balances of these accounts using other audit procedures.

(b)The client restricted the auditor from carrying out procedures  to verify   the  property ,plant and equipment .The property, plant and equipment comprises 35% of total assets.

(c) Management have excluded from the financial report the necessary disclosures in relation to a contingent liability .If this becomes an actual liability it will have a material effect on the financial report when it becomes an actual liability.

(d) A significant proportion of a retailer’s sales are made on a cash basis but the internal controls are inadequate and the value of these cannot be verified . There are no audit tests that can be done to assure yourself that cash sales are being recorded or are correct

(e) You have been asked to do the audit for a new client this financial year .While you are satisfied that there appears to be no material misstatements for the information during the current financial year the client will not provide any information about the opening balances of accounts at the start of the financial year.

(f) You have just started auditing the financial statements of a client which has not been following the Australian Accounting Standards since it began operating four years ago.

(g) A client has been using the LIFO method of accounting for inventory  which is disallowed under the Australian Accounting Standards.This has had a material effect on the financial  statements however its effect is currently limited to the effect on the Inventory value

(h) The auditor of Numark has just completed the audit and is satisfied that there are no material misstatements however the client’s continuation as a going concern is in extreme doubt as its major customer has gone into liquidation and it appears very unlikely that other customers will take its place due to the highly specialised nature of its products.  

Situation Assessment

a) The Principle of Confidentiality along with the Principle of Integrity has been challenged in the given case. In accordance with the principle of confidentiality, the auditor is required to maintain the confidentiality of each and every document that he obtains during the course of the audit of that company. Also he is not required to disclose or share the verbal material information of the client with anyone else (Tsahuridu, 2014). This principle of integrity states that the auditor shall be honest in all the functions performed by him.

As per the given situation, the accounting firm has disclosed all the confidential information to another audit firm without taking permission of the client. In this manner the principle of confidentiality has been breached and simultaneously the principle of integrity has been breached in the manner that he has not informed the client about the peer review activity.

b) As per the principle of the professional behavior, every auditor or every member of the Institute of the Certified Public Accountants have to follow the code of conduct that have been prescribed by the Institute and in case they do not follow the spirit of the same then they will held at the guilty for professional misconduct.

In the given situation, Jan Dungong who has applied to the other accounting firm resists the employer to contact and find details from her previous employer. As per the code of conduct of professional behavior the new employer shall obtain the reasons from the previous employer as to why she has left the job. But the current employer has recruited her without contacting the previous employer and thus breached the principle of professional behavior.

c) As per the principle of the Objectivity, the auditor of the company shall be objective in framing the opinion on the financial statements of the company and shall not in any manner persuaded by any interest that he might have received or will be receiving from the client. In case he does not follow the objectivity then he may be liable for professional misconduct.

As per the given case Wendal Sailor, chartered accountant apart from engaged in the auditing services have the business of the insurance and the superannuation. While visiting the client for audit purpose, he purposefully starts talking of the insurance and superannuation and persuades the people to have it from him. In this manner, he has violated the code of conduct and will be held for the professional misconduct.

Types of Breaches

d) The principle of objectivity also states that the auditor of the company shall not be in direct relation or indirect relation of the client for whom he has to conduct the audit and frame the opinion in the financial statements. This has been defined as the ethical code. It has been regarded as the ethical code because of the reason that the relation might have the effect of getting the financial statements of the company authenticated with undue and unfair means.

As per the given circumstances, Judith Durham who is the partner of the audit firm who conducts the audit of the nonprofit making charitable organization on which she is holding the Director position. Though she does not takes part actively in the managing the affairs of the company but there may be the chances where the audit objections may be cancelled or routed because of her presence on the board. Also there might be the possibility that even the audit would not have been conducted or greater manipulations would have been done. Thus, the principle of objectivity has been breached.

e) As per the code of conduct relating to the confidentiality, the auditor of the company is not required to disclose, reveal, share or transfer any of the documents or the information or the books of accounts to the other persons without obtaining the permission of the client to whom the auditor is providing the services. Also the documents or the information or the books of accounts can be shared if it is required by the operation of law (CPA Australia, 2014).

In the given case, Enrie Dengate is selling the practice to Jago, the new accountant who will take up all the work in future. On selling the practice to Jago, Enrie Dengate has received permission or all the purposes of transfer except the tax working paper and has transferred without obtaining the prior permission for the same. It depicts that the principle of confidentiality has been evaded and violated in the bad manner.

f) Also as per the principle of the objectivity, an auditor of the company is not allowed to cater to their client with the services of the audit as well as the service of the accounting, book keeping, filing returns and management advisory and tax services. If he provides the other forms of services along with the audit services then the principle of objectivity will be violated in the sense that the auditor will not be able to give the true and fair opinion rather will be posed under the threat of Self review.

Type of Audit Opinions

As per the given situation, Fred Nerk is providing the audit services along with the taxation and management consultancy services. In this case the opinion of the auditor framed during the audit will be affected by the threat of Self review and thus the objectivity and the independence of the auditor will be hurted.

g) As per the principal of professional competence and due care, the auditor of the company shall have such system in place which ensures that the firm have installed the required system with the new and innovative technologies related to the work available like accounting , tax etc. The work shall be done with the team of the qualified chartered accountants and the tax experts. In case the audit firm does not have such system then there will be breach of professional competence and due care.

In this situation, the Allgood Chartered Accountants firms maintains the system where the audits of the branch company.. But the client observes that the company has the inability to perform the talks in an efficient manner as the required infrastructure has not been made available for the work. Thus, there is the breach of principle of professional competence and due care.

h) As per the defined code of conduct, any chartered accountant will be held guilty of professional misconduct if he is found to be engaged in any illegal practices or due to any of his act he has been imprisoned for the specific period of time and his license is temporarily suspended for few months or years by any court of law.

As per the given situation James, public accountant has in the drunken manner have had the fight at the hotel and has behaved in the very bad manner which is not susceptible from the Chartered Accountant. He has been imprisoned for 3 months and his license has been suspended for 1 year. Thus, under these circumstances he will be held as the guilty of professional misconduct and professional behavior.

2a) As per the given case, the auditor will issue the clean report or give the unqualified opinion. It is because of the fact that the though the auditor was unable to obtain the confirmations and does not tallies the balance of the customers as shown in the books of accounts of the company along with the supported bills or invoices but has been able to perform the audit procedures which have helped him to obtain the reasonable assurance that the accounting has been made correct and the financial statement have been made in true and fair manner which clearly gives the true and fair view of the financial position and the financial performance of the company. Thus, auditor will issue unqualified opinion (AASB Official Website, 2013).

b) As per the given case, the auditor will give the disclaimer of opinion while issuing the audit report. The disclaimer of the opinion is issued when the client restricts the objectivity of the auditor by either not providing the documents, clarifications or the information as required by the auditor or allowing the auditor to perform the additional procedures. In such manner whenever the auditor scope is restricted then the disclaimer of opinion is issued. Here the client restricts the auditor to check the major item of Property plant and equipment. Thus, it shows that the auditor scope is restricted and thus disclaimer of opinion is issued by the auditor.

c) As per the given situation, the auditor is liable to issue the adverse opinion in his audit report. It is because the adverse opinion is given by the auditor while framing the audit report and is issued when he discovers that the company has intentionally not disclosed the material facts which otherwise should become the part of the financial statements and made available to the users of the financial statements to make them able to take their decisions on the basis of financial statements of the company. This non disclosure will result the suspicion in the mind of the auditor who will further issue the adverse report. In the given case contingent liability have not been disclosed in the notes to accounts and if disclosed will become part of the actual liability. Knowing of this fact, the auditor has issued the adverse report.

d) In the given case, the auditor is unable to verify the retail cash sales of the client because the internal controls relations to verify the cash sales transaction are very weak in the company. It depicts that the recording of the cash transactions are not being made on the regular basis. Thus, in such a situation, the auditor does not left with any procedures which can be applied to assure self that the cash sales that have recorded in the books of the company are verifiable and can be easily verified with the sale invoices. In such a case, as the scope of the auditor is restricted, the auditor will issue the disclaimer of opinion.

e) In the given situation, the auditor is unable to verify the opening balance of the company as the client has denied straightly that the company will provide the detail of opening balance. Although the auditor is satisfied with the entries made in the books of account of the company for the current financial year under audit and found that there are no material misstatements have occurred, but the non availability of the opening balance and its verifiable documents has induced the auditor to issues the qualified report (Bedard, 2010).

f) In the given situation, the company has been in operation for the last four years and it has been mentioned that the company has not been following the accounting standards and thus has not been preparing the books of accounts of the company in accordance with the provisions defined by the accounting standards. As the company is not following any accounting standard, the auditor will issue the adverse opinion on the financial statements of the company. The company has the chance to revise its financial statements of the company and get the audit report revised with unqualified opinion.

g) In the given situation, the company has been following the LIFO method of valuation of inventory which is strictly disallowed by the Australian accounting standard and the international reporting financial standards. The use of this method had material effect on the financial statements of the company as the old stock value may be valued at higher of the net realizable value. This is the clear cut case of the manipulation of accounts and the auditor shall issue the Qualified and Adverse Opinion on the financial statements of the company.

h) In the given situation, although the auditor has not identified any material misstatements which may affect the financial statements of the company but there exist the material fact which can challenge the financial statements so prepared. The Company major customers have gone into liquidation due to which the company turnover will drastically get down and other customers will also finds some other company. In this case, as the company going concern assumption will be hampered, the auditor will issue qualified opinion.

References

Tsahuridu E,(2014), An Overview of APES 110- Code of Ethics for Professional Accountants available at https://www.apesb.org.au/uploads/meeting/board_meeting/24112014043919_agenda-item-16-f-cpa-australia-s-overview-of-apes-110.pdf accessed on 24/05/2017

CPA Australia Official Website, (2014), A guide to Understanding Auditing & Assurance available at https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-resources/auditing-assurance/guide-understanding-audit-assurance.pdf accessed on 24/05/2017

AASB Official Website, (2013), Forming and Opinion and Reporting on a Financial Report available at https://www.auasb.gov.au/admin/file/content102/c3/Jul13_Compiled_Auditing_Standard_ASA_700.pdf accessed on 24/05/2017

Bedard, J.C., 2010, Audit quality indicators: A status update on possible public disclosures and insights from audit practice Current Issues in Auditing, 4(1), pp.C12-C19.