Audit Assignment: Ethical Issues and Auditor Independence

This audit assignment discusses ethical issues faced by auditors and threats to auditor independence. It covers APES110 ethical principles, cases of ethical violations, and situations that threaten auditor independence. The article also provides references for further reading.

A dit A i nmentu ss g

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By student name
Professor
University
Date: 7th Sep 2018.
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Contents
e tionQu s 1...................................................................................................................................................3
e tionQu s 2...................................................................................................................................................5
e erenceR f s.................................................................................................................................................10
Question 1
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The APES110 states the ethical principles that the auditor should follow while discharging
his duties for his clients. The ethical principles include integrity, congeniality, professional
conduct and maintaining the highest level of professional judgement while conducting their
duties (Sithole, et al., 2017). In the given assignment few cases have been discussed that
highlights the ethical issues that the auditor might have gone through and same has been
highlighted below.
a) In the given case it be Peter has been offered tickets at 25 percent discount due to his long
association with the company, in this case Peter should not accept the tickets due to the
competency of him being the auditor of the company from past 6 six years. This is
against his professional conduct and is an ethical miss compliance of the principal of
Professional behaviour that states that the auditor should not do any such thing that might
bring disgrace to the profession. And thus, he should not accept the tickets at discounted
price because he is the auditor of the company.
b) Jana has been hired as an auditor for the audit of Gerona Company and he has been
working as the auditor for the past three years in the same industry. This is not a violation
of the ethical principles as an auditor can work for the audit of the company who is in the
same industry even if he has been working in the same industry for many years (Choy,
2018). The auditor just needs to maintain the confidentiality and integrity that should not
hamper the position of the companies that he has audited before (Jefferson, 2017).
c) In the given case Jack Deck has no prior experience in installation of computerised
machinery and he has taken help from an outside computer inventory consultant to do
the work of the client and has also not checked his work due to tight deadlines and
gives the cue for the installation of the machinery (Erik & Jan, 2017). In this case it
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can be said that the consultant is not working as per the ethical principles of APES
110 and has caused violation of many grounds. He did not maintain the
confidentiality principle for the client and gave in the information that was crucial for
him (Goldmann, 2016). He also failed on grounds of integrity in his professional
competence and let the inventory be installed without correctly checking him from his
own end. In case the company faces any loss because of that, the auditor would be
held liable.
d) In this case four working partners has been indulged in quality assurance reviewing of
another firm and then the reviewers are discussing the strength and weakness of the
audit with the auditor of another firm (Kim, et al., 2017). This is an unethical
approach on part of the auditor as they are not allowed to discuss the audit of one firm
with another (Werner, 2017). If they are discussing audit as a general concept and not
giving out the confidential information pertaining to the company, then that is not an
unethical approach, but in case they are discussing the audit of the company then that
would be an ethical violation of the principle of APES 110 (Trieu, 2017).
e) In this case Johan Goldens is a chartered accountant who also has an insurance
business that he does not runs on his own name. The company is running by his
manager and not in his own name and John has asked his manager to check the client
insurance manager (Sithole, et al., 2017). This is an unethical approach as this is a
congeniality issue for the auditor as he is sharing the information of his clients for his
own personal motives and that is not a feasible action. This is against the ethical
principles of APES110 and the auditor can be held liable for that on all grounds of the
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company. If the auditor is sharing client’s personal data for his own benefit then he is
taking undue advantage of his position as the auditor of the company.
f) In this case in a town there are only two partners and two accounting firms and these
companies are carrying on the audit of the companies in that area among themselves.
This is against the ethical principles of APES110 as the auditor is not allowed to
discuss the congenital information of the company among themselves and thus they
should be held liable on that grounds (Grenier, 2017). They should be held liable and
they should be asked to not share the information of the company with others. It is
important to maintain the congeniality of the information that they have of the client.
The client has shared this information based on lot of trust therefore that should not
be broken also the clients if get to know important crucial information about the
competitors they can misuse it for their own benefit.
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Question 2
Auditor independence refers to the independence that the internal or the external auditor
from all the parties that might be having any kind of financial interest in the company. It is
important that auditor should always maintain an independent approach so that the audit report is
correct and unbiased. The stakeholders depend on that to take important decision with regards to
the company and its official. There is multiple threat to an Auditors independence and we will
discuss few such situations below.
Situation One
In this case Keith Barnes who has been working as an auditor for Andrew Capizzi
Chartered Accounting firm has been asked by the partner of the company to express an opinion
only on the financial statement of the company and report in case there is any misstatement.
Indirectly he is saying that it is not Keith responsibility if the company is using the cheapest
method of waste disposal that can cause a lot of pollution and has not resorted to more
environment friendly methods that can help in reducing the pollution to lower level (Alexander,
2016). This auditing firm working with the stated Maitland Coal company, for last eight years
and it is also stated that the auditor has a share of 25% in the total revenue of the company. Thus,
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this can be considered as a situation to the independence of the auditor which can be categorized
as follow:
Self-interest Threat – The auditor is having personal interests involved with the company and the
auditor will try to modify the opinion, because they would be afraid of losing the client and the
major revenue that the company is providing the auditors of the company.
Relationship Threat – The auditor must work as per the directions of the partner, as he is working
in that audit firm and even he wants he cannot state the various issues that he might be facing
with the actions of the company and thus here comes the relationship threat that exists because of
position and company fears losing on to the client and the auditor fears losing on to the job for
that matter (Arnott, et al., 2017).
These threats put the auditor of the company in a very bad position and if the authorities
come to know that the coal mining company resorted to such cheap methods and have been
polluting the environment, they would be held liable. Also, it is the responsibility of the auditors
as per code of ethics to maintain their integrity whenever they are dealing with the company and
making an opinion on its financials (Belton, 2017). Both the person auditing and the firm would
be held liable for negligence and forming wrong opinion and that can also lead to cancellation of
their licenses and they would also be required to pay huge amount of penalty in such cases.
Situation 2
In the given situation the auditor of the company Ken Smith, has been working with
Moonies with past six years as their auditor and the company has not paid audit fees 20 percent
of the final settlement and has also used the services of one accountant of the company for their
own needs and are now thinking about making selection of auditors for the current period. Ken
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Smith has been joined as auditor for the current period by Dave Dunne who has been the auditor
of the company for past 9 years and by Teena Dean who is the daughter of the managing director
who has just finished her accounting degree with no prior work experience (Das, 2017). The
auditor has also found that the company is using inappropriate methods for inventory valuation
and is not following the appropriate accounting standard and has also done wrong treatment of
the research that has been carried down by them.
Based on the given case, the threat to the independence of the auditor can be considered
as follow:
Self-interest Threat – In case Kirk discusses all these discrepancies with Ken before the board
meeting for the selection of auditor of the company, there are high chances that the auditor might
be influenced since he has been working with the company past so many years. And, the auditors
are getting some amount of revenue from the company (Goldmann, 2016).
Advising Threat – It has been mentioned that the accountant of the audit firm has served as the
accountant of the company also. Thus, there are chances of advising threats as there are related
parties involved and this can also lead to a situation of multiple threats for the audit firm.
Relationship Threat – The managing director daughter is working with the auditor of the
company even though she is having no practical exposure of auditing and hence this can be a
case of relationship threat. It is very much possible that when the audit would be conducted the
related party who is the daughter will have an upper hand and can influence the opinion of the
auditor of the company.
The auditor is aware that the company is not abiding with the relevant accounting standards then
he should mention the same in his audit report without getting influence from outside sources. It
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is the responsibility of the auditors of the company to make sure that the financial statements are
free from all kind of misstatements and anything that process a threat to the independence of the
auditor should be briefly stated and highlighted. The shareholders depend on the audit report to
take important decisions with respect to the company. In case the same is found by the
authorities the auditor and the firm would be high liable and their license can also be cancelled.
They can be put behind bars and the company must face repressions also. Thus, the auditor
should maintain a firm ground (Farmer, 2018). He should falsify the audit report and give a
wrong information to the audiences.
Thus, it can be seen from the following situations that there are many things that can affect the
independence of the auditor but the auditor should always try to follow the code of ethics while
discharging their duty and should also state their correct opinion on the financials of the
company. The stakeholders depend on the audit report to take important decisions with regards
to the company and its investments. The auditor should always try to protect his position.
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