ACC707 | Auditing | Violation Of The General Ethical Principles

1. The following situations involve potential violation of the general ethical principles. You are asked to advise whether they involve a violation or not of the ethical principles and if there is a violation explain which ethical principle has been violated and the reason(s)why it is or isn't a violation.

a) Peter Sung is the Senior Auditor on the audit of The Musical Company Pty Ltd , a large music business which publishes music,sells musical instruments and runs promotions where entertainers come to Australia .Dave Thompson,the CFO asks Peter Sung if he wants tickets to the next two concerts at a 25% discount due to his long term relationship with the Musical Company having been the Auditor for the past six years.

b)Jana Went is the auditor on the audit of Genoa Company .Jana is auditing the company for the first time but has been auditing other companies in the same industry for the past three years.

c)A client requests the assistance of Jack Dack ,a chartered accountant ,in the installation of a new computerised inventory system for maintaining production and inventory records. As Dack has no experience in this type of work he engages a computer inventory consultant who he has confidence in to carry out the review.Due to the highly technical nature of the work and other time pressures Dack is not able to review the computer consultant's work and once the client has agreed Dack gives the go ahead for the installation of the inventory system.

d)Four chartered accounting firms have been taking part in a quality assurance working paper review program.Under this review each firm reviews the working papers of another firm and the reviewer discusses the strengths and weaknesses of the audit with the auditor from the other firm.

e)Johan Geldens, a chartered accountant ,also runs an insurance agency which complements his auditing ,tax and superannuation services .He doesn't use his own name on anything relating to insurance agency and has a highly competent manager,Janine Borg, who runs it .Geldens often requests that Borg review the adequacy of the client's insurance with management if the client seems underinsured.

f)Edith Bailey, a public accountant in a small country town,runs a small partnership accounting firm which provides tax services,management advisory services ,bookkeeping services and conducts audits for the same client .Since the firm has only two partners and there are only two accounting firms in this town frequently the same person carries out these services over the last ten years.

2. The following situations refers to threats to the Auditor's independence.You are asked to state what the different threats to the Auditor's independence are and explain how these threats impact on the Auditor's independence and any other implications for yourself and your firm.

Keith Barnes has been working as an auditor for the Andrew Capizzi Chartered Accounting firm for the past five years and has just started an audit on the Maitland Coal company, a local listed public company .The company has been producing coal for the past fifteen years and uses the cheapest legally permissible method to dispose of its waste and has not adopted the new anti pollution proposals by the government which must be adopted by the end of the year .You know that this company has previously had unfavourable articles about it in the local press. Your Audit Manager ,David Mann , has stated that it is your responsibility just to provide an opinion on the financial statements with the emphasis being on providing an opinion on whether the financial statements are true and fair and whether there are any material misstatements.The Andrew Capizzi firm has been the Auditor for the Maitland Coal company past eight years and the audit adopted the new anti pollution proposals by the government which must be adopted by the end of the year .You know that this company has previously had unfavourable articles about it in the local press. Your Audit Manager ,David Mann , has stated that it is your responsibility just to provide an opinion on the financial statements with the emphasis being on providing an opinion on whether the financial statements are true and fair and whether there are any material misstatements.The Andrew Capizzi firm has been the Auditor for the Maitland Coal company past eight years and the audit comprises 25% of its total fees revenue currently. 

Ken Smith ,Senior Auditor of Artarmon Accountants ,has just started to do the audit on the latest financial statements of Moonies and has just made the following notes from the opening interview with Kirk Wilson,CEO of Moonies. Kirk has apologised for not making the final payment of 20% of the prior years audit fee but has explained that he will ensure the cheque is written once his monthly fees come in.Kirk has thanked your firm for providing the services of Emma Feeney one of your firms Accountants as Assistant Accountant at the firm for the past four months while the previous person was on leave . Kirk has advised that the firm will be able to start deliberations about the selection of Auditor for the following year.The audit at Moonies comprises thirty percent of the annual audit fees for the firm . This is the sixth year Ken Smith has done the audit at Moonies .This year he is joined by Dave Dunne who has been on the audit of the company for the past nine years and Teena Dean who has just finished her Accounting degree the previous week and is the daughter of the Managing Partner of the Managing Partner of Artarmon Accountants and has done no previous Accounting or Auditing work. Ken Smith is concerned with several aspects of the current audit as Moonies do not appear to be following the accounting standards in their valuation of inventory and their treatment of the research carried about by the firm. Kirk wants to discuss this with Ken the day before the Board considers the selection of Auditor.

1. Requirement a

According to the given information, Peter Sung has been auditing the Musical Company Pty Ltd. One can observed from the provided information that Dave Thompson who is the CEO of the company says to Peter that he would receive 25% discount on the price of the tickets of the next two concerts in the presence of the longstanding relation between them; and this whole situation can contribute to the threat of audit principles. According to APES 110, Section 260, Gifts and Hospitality, if an auditor accepts any kind of gift, hospitality and offer from the audit client while providing the professional services, it can contribute towards the threat to non-compliance with the required standards of audit ethics (apesb.org.au 2018). In the presence of this threat to audit ethics, there is a possibility for the violation of the standard of APES 110, Section 110, Integrity as it can question the ability of the auditor to be straightforward and honest while providing the professionals services. Thus, in the presence of the above-discussed audit guidelines, it can be concluded that there will be the violation of the standard of APES 110, Section 110, Integrity due to the acceptance of the certain offer from the CEO of the audit client company (Han Fan, Woodbine and Cheng 2013).

Requirement b

According to the given information, Jana Went has the responsibility to conduct the audit of Gerroa Company for the first time; but the information indicates towards the fact that Jana has conducted the audit of other companies in the same industry and for this reason, there is a high potential fo

Requirement c

As per the provided scenario of Jack Dack, in order to maintain the production process along with the records of inventory, the responsibility is on Jack for the installation of a new computer inventory system within the organization. Jack made the appointment of a computer inventory consultant for this position due to the fact that he does not possess the required expertise for the job. After that, Jack provides the approval to install the computer program without the review of the work of the consultant as there was less time along with highly technical nature of the job. The guiding principles of APES 110, Section 130, Professional Competence and Due Care states that the auditor must possess the required knowledge and skill for providing the professional services related to audit and assurance to the audit client (Van Akkeren and Tarr 2014). At the same time, this regulation states that the auditors are needed to act diligently by complying with the required technical standard. Thus, the presence of this regulation puts the obligation on Jack hat he should have accepted the job in the presence of the required knowledge and competency. Thus, this aspect leads to the violation of ethical principle of APES 110, Section 130, Professional Competence and Due Care. Apart from this, the requirement for Jack was to review the work of the hired consultant that contributes towards the breach of the general ethical audit principle (Chapple et al. 2014).

Requirement d

It can be seen from the givens scenario that there is a involvement of four chartered accounting firms in a review program of quality assurance working paper. In this review, there is analysis and evaluation of the working papers of the other companies with the aim to discuss both the strengths and weaknesses of audit. This given scenario can lead to the violation fo the general ethical principle of auditing. It needs to be mentioned that the quality assurance programs help to improve the audit quality of the companies. However, one should not ignore the confidentiality aspect in the given scenario of quality assurance program. According to APES 110, Section 140, Confidentiality, it is a prime requirement on an auditor not to disclose the secret business information of the audit client obtained while providing the assurance services to any outside firm or perform without informing the client (de Burgh-Woodman et al. 2015). This particular regulation can be applied in the given scenario. It can be seen from the provide information that the quality review program involves in the analysis of the audited papers of the companies and this will provide the companies with the chance to review the confidential business information that is against the regulation of APES 110.Thus, it can be said in the presence of this information that there can be the breach of the regulation of APES 110, Section 140, Confidentiality due to the quality assurance review program (Houghton et al. 2013).

Requirement e

The provided scenario indicates towards the fact that Johan Geldens is a chartered accountant by profession and he has established an insurance agency in order to complement different kinds of services like taxation, superannuation and others. Janina Borg takes care of the business activities of the businesses of Johan due to the presence of his highly competent nature. For this reason, the responsibility of Janina is the review of the insurance adequacy of the client. It needs to be mentioned that this situation can lead to the violation of ethical principle of auditing. According to APES 110, Section 220, Conflicts of Interests, the responsibility is on the auditor for the identification of the special situation that can contribute towards the development of conflict of interest in the companies (Townsend 2014). It can be seen from the provided situation that there is the potential for the development of the conflict of interest due to the fact that there can be deficiencies in the process of the internal control of the client organizations and thus, Johan is discussing the adequacy of insurance with Janina. At the same time, it needs to be mentioned that Johan discloses the crucial financial information of the business of his audit clients with Janina at the time to discuss about the adequacy of insurance of the clients. APES 110, Section 140, Confidentiality puts the responsibility on the auditors for not disclosing any private business information. Thus, it can be said in the presence of this regulations that the actions of Johan can lead to the violation of APES 110, Section 140, Confidentiality (Menzel 2013).

Requirement f

According to the provided scenario, besides providing the audit and assurance related services, Edith Bailey also provides their customers with different non-audit services like management advisory services, taxation related services and others. In the presence of only two accounting and audit firm in the town, Edith Bailey has been providing these services for the last ten years. The presence of all these facts can lead to the violation of the ethical principles of audit profession. It needs to be mentioned that the regulation of APES 110 states that it is not the accountability of the auditors to provide the non-audit services to the audit clients; and in case they provide non-audit services, they are needed to consider the extent to which it will not affect the audit ethical principles. For this reason, the requirement for Edith Bailey is the determination of the level to which it will not create any negative effect on the ethical principles of audit profession. As per APES 110, Section 120, Objectivity, auditors must not compromise their professional judgment and opinion in the presence of any personal interest (Marley and Pedersen 2015). It can be happened in case of Edith Bailey can compromise his professional audit judgment in order to provide non-audit services. Thus, it can create the violation of APES 110, Section 120, Objectivity.

2. Situation 1

The provided scenario indicates towards the fact that Keith Barnes is working for Andrew Capizzi Chartered Accounting firm for the last five years and has been appointed as the auditor of Maitland Coal Company. As per the scenario, the company is using the most cheap legally permissible method for the disposal of waste and has not complied with the regulation of anti-pollution of the government. Due to all of these reasons, some unfavorable articles have been published about the company.

While providing the professional services in auditing, the auditors are needed to follow the regulations related to auditor’s independence. There are five types of audit independence threat; they are Self-interest threat, Self-review threat, Advocacy threat, Familiarity threat and Intimidation threat. The auditors are needed to be independent from mind and appearance in the audit profession. It can be observed that the managements of the client organizations often create direct or indirect pressure on the auditors so that they cannot conduct the audit in the most objective manner. The analysis of the provided situation shows that the management of the client organizations has not put any kinds of pressure on Keith Barnes that stops him from acting objectively (Sarwoko and Agoes 2014).

It needs to be mentioned in this context that analysis and inspection of the financial statements of the companies with the aim to find any kind of material missstements is the main responsibility of the auditors; and the same rule is also applicable for Keith Barnes. Thus, it needs to be mentioned that it is not his responsibility to provide the client with the advice in the aspects of illegal waste disposal and non-compliance with environmental law. For this reason, this situation does not involve the violation of auditor’s independence (Gul, Wu and Yang 2013).

Situation 2

It can be seen from the provide scenario that there are some major violence of auditor’s independence. The scenario states that Kirk Wilson who is the CEO of Moonies has made 20% of the previous year’s audit fee due because he has not received his fees. This scenario indicates towards the intention of the CEO to create indirect pressure on Ken Smith by not paying the whole audit fee and the intention can be to obtain sympathetic audit result from the auditor. According to APES 110, Section 100.12, Threats and Safeguards, there can be the progress of the threat of audit independence in case the auditors fail to act in the objective manner due to any personal interest or any pressure (Ball, Tyler and Wells 2015). As per this regulation, the above discussed situation has the potential for the threat of Self-interest threat of audit independence.

The provide case study also shows the situation of Emma Feeney. As per APES 110, Section 100.12, there can be the development of Self-review threat of audit independence in case an auditor does not involve in the appropriate evaluation of the working papers and audit results of the previous audit partner. For this reason, the situation of Emma can lead to the self-review threat of audit independence in case Emma does not properly evaluate the audit results of the previous audit partner (Carey, Monroe and Shailer 2014).

Moreover, the provided situation also indicates towards the situation of Teena Dean. In this context, there can be the development of Familiarity Threat of Audit Intendance when the audit partner has any relationship with the audit client; and thus the situation of Teena Dean can lead to the auditor’s independence threat. It can also be seen from the provided information that the company is not complying with the required standard for inventory valuation and reserahgc; and this can lead to the violation of Self-interest Threat of Audit Independence as per APES 110, Section 100.12 (Clout, Chapple and Gandhi 2013).

References

Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. [online] Available at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 17 Sep. 2018]

Ball, F., Tyler, J. and Wells, P., 2015. Is audit quality impacted by auditor relationships?. Journal of Contemporary Accounting & Economics, 11(2), pp.166-181.

Carey, P.J., Monroe, G.S. and Shailer, G., 2014. Review of Post?CLERP 9 Australian Auditor Independence Research. Australian Accounting Review, 24(4), pp.370-380.

Chapple, L., Crofts, P., Ferguson, C. and Hronsky, J., 2014. Professional independence and attachment bias: an exploratory study.

de Burgh-Woodman, H., Saha, A., Somasundram, K. and Torrisi, A., 2015. Sowing the Seeds for Ethical Business Leadership through Business Education. In Business Law and Ethics: Concepts, Methodologies, Tools, and Applications (pp. 57-79). IGI Global.

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Han Fan, Y., Woodbine, G. and 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), pp.205-222.

Houghton, K., Ng, J., Jubb, C. and Kend, M., 2013. The future of audit: Keeping capital markets efficient (p. 700). ANU Press.

J. Clout, V., Chapple, L. and Gandhi, N., 2013. The impact of auditor independence regulations on established and emerging firms. Accounting Research Journal, 26(2), pp.88-108.

Marley, S. and Pedersen, J., 2015. Accounting for Business: An Introduction. Pearson Higher Education AU.

Martinov-Bennie, N. and Mladenovic, R., 2015. Investigation of the impact of an ethical framework and an integrated ethics education on accounting students’ ethical sensitivity and judgment. Journal of Business Ethics, 127(1), pp.189-203.

Menzel, D.C., 2013, March. The ethics of public officials: Strong, bent, broken. In 5 Th Annual A. David Kline Public Philosophy Symposium" Municipal Ethics.

Sarwoko, I. and Agoes, S., 2014. An empirical analysis of auditor's industry specialization, auditor's independence and audit procedures on audit quality: evidence from indonesia. Procedia-Social and Behavioral Sciences, 164, pp.271-281.

Townsend, S.R., 2014. The regulation of auditor ethical behaviour in Australia: the problem of conflicts of interest and proposal for structural reform.

Van Akkeren, J. and Tarr, J.A., 2014. Regulation, compliance and the Australian forensic accounting profession. Journal of Forensic and Investigative Accounting, 6(3), pp.1-26.