Auditing Issues in Far Faraway Pastoral Limited

This report analyzes the auditing issues in Far Faraway Pastoral Limited and provides recommendations for compliance with ASX corporate governance and AAA model. It also discusses the failure of exercising due care in the audit of TRC and the contributory negligence of FFA. The report concludes with the duty of care to McCarran Pastoral.

Running head: ACC568 AUDITING
ACC568 Auditing
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Introduction......................................................................................................................................3
Answer 1..........................................................................................................................................3
Answer 2..........................................................................................................................................5
Answer 3..........................................................................................................................................9
Exercising due care in audit of TRC............................................................................................9
Guilty of contributory negligence................................................................................................9
Duty of care to McCarran Pastoral............................................................................................10
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................11

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Introduction
Samway Baker Fitzgerald (SBF), the accounting firm with offices at various places of
Australia has most of the clients are from agriculture, manufacturing and mining industries. After
discussing regarding the auditing details for one of its major clients Far Faraway Pastoral
Limited (FFA), the audit manager came across some issues regarding 3 of the senior auditor of
the audit team. The objective of the report is to advise Samantha Gabrielle, one of the senior
auditors regarding the ASX Corporate governance and the recommendations that may have been
breached by her. The report will further, analyse the information provided by another senior
auditor Steve Barker through using the American Accounting Association (AAA) model.
Moreover, the report will focus on whether SBF failed in exercising due care in audit and
whether FFA is guilty for contributory negligence (Abbott et al., 2016).
Answer 1
As per the information provided by Samantha Gabrielle, board of FFA is comprised of
CEO, CFO and 3 non-executive directors. As per the requirement of ASX corporate governance
principal 2 – structure of the board for adding value, the listed entity shall have board of
appropriate composition, size, commitment and skills that will enable it to discharge the duties
effectively (Asx.com.au, 2019). As per the requirement of corporate governance, the listed entity
shall have effective and high performing board for proper governance of the entity. Board of the
entity must have the nomination committee that must have at least 3 members, majority of which
shall be independent directors and must be chaired by any independent director. It shall further
disclose the charter of committee, members of the committee and number of times the members
of the committee met during the year (Asx.com.au, 2019). However, if the company does not

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have any nomination committee, the same shall be disclosed and the entity shall further disclose
the procedure it shall use for addressing the succession issues of the board. Here in the given
case of FFA though it is provided that out of total 5 members of the board, 3 members that is
maximum number of directors are non-executive directors. Though maximum numbers of the
members of the board are independent, one of the non-executive directors Kevin Oliver will not
be considered as independent as he has substantial shareholding that is 11% in the company
(Asx.com.au, 2019). Further, as per the recommendation of 2.3 the director will not be
considered as independent if he is or was within the period of last 3 years in the material business
relationship as a customer or supplier with the entity. However, one of the non-executive
directors Mathew James was a major supplier for the entity. Hence, none of the directors of the
board will be considered as independent (Asx.com.au, 2019).
Further, as per recommendation 2.5, the chair of the board shall be an independent
director. However, in case of FFA the chair of the board Kevin Oliver will not be considered as
independent as he has substantial shareholding of 11% in the company. As per the
recommendation 2.2 the entity shall have and must disclose the skills matrix that will assist is
identifying the gaps, if any in collective skills of the board. It will help in analysing the absence
or presence of particular kill by particular director (Asx.com.au, 2019). As per the given
information, one of the non-executive directors of the company Jacqueline Grace is an
orthopaedic surgeon. Hence, he does not form appropriate skill for carrying out the activities as a
director for an agricultural entity. Therefore, the company is violating the various
recommendation of corporate governance requirement of principal 2.

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Answer 2
American Accounting Association (AAA) model recommend logical, 7 step procedures
for the purpose of decision making that take into consideration the ethical issues. Different steps
involved under AAA model are as follows –
 Step 1 – establishment of the facts of case that means while the decision making process
starts, no ambiguity shall be there regarding under consideration.
 Step 2 – identifying the ethical issues involved in the case. It involves examining case
facts and identifying the ethical issues at risk (Apesb.org.au, 2019).
 Step 3 – identifying the principles, norms and the values associated to the case. It
involves placing of the decision in context of ethical, social and professional behaviour
(Kassem & Higson, 2016).
 Step 4 – identifying each of the alternative course of the action that involves stating each
case without considering the values, principles and norms
 Step 5 – values, principles and norms recognised under step 3 shall be overlaid on the
options recognised under step 4
 Step 6 – considering consequences of outcomes
 Step 7 – making the decisions (Zager, Malis & Novak, 2016).
With regard to the information delivered by Steve Barker for the audit of FFA, AAA
model can be used as follows –
1. Determination of facts
 ASIC reported that the method of revenue recognition followed by FFA is questionable.

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 Dissenting statement regarding revenue recognition has not been included in the audit
working papers rather offered to mention the same through a letter
 It seemed from the case study that the senior audit partner for FFA, Skye Martin is
carrying on the audit for last 10 years (Baharud-din, Shokiyah & Ibrahim, 2014).
2. Determining ethical issues
 The listed entity must recognise the revenues as per the requirements of AASB 15.
 As per the objectivity principle of APES 110 the professional shall not compromise
business or professional judgement owing to conflict of interest, bias or the undue
influence of others (Apesb.org.au, 2019).
 It will raise question to the auditor’s independence and will create familiarity threat if the
senior personnel has long association with the assurance client (Knechel, 2016).
3. Identifying major values, rules and principles
 As per recognition criteria of AASB 15, revenue shall be recognised if the rewards and
risks associated with the goods has been transferred to the buyer from the seller, seller
does not have any control on over the sold goods, revenue amount as well as the revenue
cost can be measured reliable. However, if the revenue does not meet the recognition
criteria it shall not be recognised (Aasb.gov.au, 2019).
 Member may be exposed to the situations that may impair the objectivity. It is not
practible in defining as well as prescribing all of such situations. However, the member
shall not perform the professional service if the circumstances unduly influences or biases
the professional judgement of the member (Aasb.gov.au, 2019).
 Self interest as well as familiarity threat will be created if the same senior personnel are
used for long time on assurance engagement. However, the threat are dependent upon the

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term for which the person is the member of assurance team, role of the person in the
team, nature of assurance engagement, whether the client of the management team
changed and nature and the complexity of subject matter of information that has been
changed (Glover, 2014).
4. Specify the alternatives
 The entity shall eliminate the revenues from cattle sales that comprises 50% of total
revenue and is questionable by ASIC.
 The entity shall not compromise the business or professional judgement owing to interest
conflict, bias or undue influence of others (Aasb.gov.au, 2019).
 Alternative for long association with the firm is rotating the person off the team of
assurance, the member who was not the member of assurance team shall review the work
performed by senior person and regular independent reviews of engagement for external
as well as internal quality (Church, 2014).
5. Compare values and alternatives
 Value of overstatement is 50% of the total revenue and the alternative is the entity shall
eliminate the revenues from cattle sales that comprises 50% of total revenue and is
questionable by ASIC (Aasb.gov.au, 2019).
 The value involved in this case is the professional must maintain objectivity while
performing the audit service. The alternative involved here is the auditor shall not
perform the professional service if the circumstances unduly influences or biases the
professional judgement of the member (Furiady & Kurnia, 2015).
 Self interest as well as familiarity threat will be created if the same senior personnel are
used for long time on assurance engagement. Alternative for the same is rotating the

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person off the team of assurance, the member who was not the member of assurance team
shall review the work performed by senior person and regular independent reviews of
engagement for external as well as internal quality (Hadi et al., 2014).
6. Assess the consequence
 Profits of the entity will be overstated by 50% and it will lead to unfair representation of
financial information in the financial statement of the company. If the information
presented in the financial statement is not true it will mislead the users of the statements
including the creditors, existing and potential investors and the shareholders (Barr-
Pulliam, Brown-Liburd & Sanderson, 2017).
 If the auditor carries on audit under this scenario it will breach the ethical principle of
objectivity as per APES 110 (Apesb.org.au, 2019).
 Consequence of having long term association will be creation of self-interest and
familiarity threat which in turn will hamper the auditor’s independence (Tepalagul & Lin,
2015).
7. Make your decision
 In this scenario the auditor shall issue qualified report
 The auditor shall not perform the professional service if the circumstances unduly
influences or biases the professional judgement of the member (Aasb.gov.au, 2019).
 Mr Skye Martin shall be replaced by some other person having skills, knowledge and
experience in the same field or his work shall be reviewed by any member who was not
the member of assurance team (Knechel & Salterio, 2016).

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Hence, the above mentioned issues were involved in case of the audit for FFA and it
violated the ethical principle that will in turn have an adverse impact on the independence of
auditors.
Answer 3
Exercising due care in audit of TRC
As per the fundamental principle of the professional competence and the due care the
professional shall provide professional competent service that requires application of sound
judgement while using the professional knowledge and the required skill while performing such
service (Apesb.org.au, 2019). If the auditor does not have required knowledge or it is not
possible for him in any circumstances to carry out the same he shall hire any subject matter
expert for carrying out the same (Laing & Hoy, 2018). However, in the given case the hired
expert could not identify the error that was made by TRC. Hence, it is concluded that SBF failed
to apply due care while auditing records of TRC.
Guilty of contributory negligence
Contributory negligence that is used in context of legal liability of the auditors is defence
used by the auditor while she or he claims that the user or client had the responsibility in legal
case. In the given scenario, the auditor may claim that the management of FFA was aware of the
potential for the fraud owing to deficiencies in the internal control, however refused to make the
necessary correction (Barr-Pulliam, Brown-Liburd & Sanderson, 2017). Hence, in the given
circumstances the client FFA contributed to fraud through not correcting the material weakness
in the internal control.

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Duty of care to McCarran Pastoral
For a third party to sue the auditor under negligence of due care the plaintiff shall prove
the below mentioned 4 criteria –
1. Auditor owed the duty of care that is the user of the financial information is known user
2. Auditor breached the mentioned duty of care
3. Plaintiff suffered real loss
4. Casual connection is there among negligence of auditor and loss of plaintiff (Zager, Malis
& Novak, 2016).
5. All the above mentioned conditions are satisfied in the given case. Condition 1 is
satisfied as the user that is McCarran Pastoral is the known user as it already owned 15%
of TRC’s share, condition 2 is satisfied as the auditor breached the duty of care as
mentioned in part 1 of question 3, condition 3 is satisfied as McCarran Pastoral suffered a
loss as the inventory as well as net asset of TRC was overstated by $ 16.6 million and
condition 4 is satisfied as there is a connection between auditor’s negligence and loss of
McCarran Pastoral. Hence, SBF owes the duty of care to McCarran Pastoral (Zager,
Malis & Novak, 2016).
Conclusion
From the above it can be concluded that various issues are there is auditing of FFA by
various audit partner of SBF. Hence, the audit entity SBF shall take necessary action in all the
above mentioned issues and plan for the next audit accordingly.

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