Audit Assignment: Principles of Ethical Behavior and Independence of Auditor

This audit assignment discusses the principles of ethical behavior and independence of the auditor. It covers various situations where the auditor's independence can be at risk and how to maintain it. The content also includes references to APES110 and relevant accounting standards.

A dit A i nmentu ss g

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By student name
Professor
University
Date: 12th Sep 2018.
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Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................5
References......................................................................................................................................10
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Question 1
The auditor needs to follow the code of ethics while discharging his duties and there are few
principles that have been highlighted by APES110 for the auditors in general. The APES110
states these principles on ethical behavior by the auditor and they should follow it always. The
code of ethics includes principles like integrity, congeniality, professional conduct and
professional judgement and confidentiality of information while conducting the audit
(Alexander, 2016). In case the auditor fails on these grounds he would be held liable for the same
and that would be against his professional competence to indulge in such activities. In the given
assignment few such cases related to the auditor and his ethical situations have been discussed
below:
a) In the given case Peter who works for a music company as an auditor from past six years
has been offered tickets for a music show at 25 percent discount. These are being offered
to him due to his professional competency as the auditor of the company. Given the
principles of APES110, he should not accept it. He should not do anything for self-
interest and any such thing that might bring disgrace to the situation must be avoided.
And therefore, he should not accept the tickets at the discounted prices that the company
is offering. He should reject the offer in a polite way (Arnott, et al., 2017).
b) Jana has been appointed as an auditor in a new company in the same industry for which
he has been working from past three years. This is not a violation of the ethical principles
as per APES110. An auditor can work for many companies in the same industry and there
is no restriction on that. The only thing that Jana needs to take care about is that he
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should share any of the information between the competitors in the same industry and
maintain the confidentiality and integrity of the information and his position as a
professional. Else there is no violation of rules from his end.’
c) In the given case Jack Deck has been asked by the company to check the installation of a
new machinery that they want to install and needs his opinion regarding that. Jack had no
knowledge regarding that and therefore he hired an outside consultant who had expertise
in that without informing the management of the company. Thus, he was sharing crucial
information regarding the company to an outsider and this was against the ethical
principle of confidentiality (Belton, 2017). And due to tight deadline, he allowed the
installation of the new machinery without checking it correctly from his end. Thus, that
was an integrity issue as a professional he failed to deliver his duties to the best of his
ability. Now in case the client faces losses due to this step the auditor shall be held liable
and shall be penalized.
d) In the given case there are four partners who are working as quality partners and has been
indulged in quality assurance reviewers of four different firms in the same industry. They
are discussing the strengths and weakness of the audit with each other after every day of
work. This is unethical as per APES110 because in case the auditor failed to maintain the
confidentiality of the information related to the firms and ends up sharing them among
themselves then they are breaching the principles of APES110. But if the auditor does not
do share the information but only discusses the strengths and weakness of audit in general
then that is not an unethical approach (Choy, 2018). He should make sure that the
conversation is a general one and they are not giving out important information
pertaining to the company to other professionals who can misuse that for self-interest.
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e) In the given case Johan Goldens is a chartered accountant and he also has a part-time
business
of insurance which he does not runs in his own name and takes the help of his manager to handle
it completely. He works as an auditor for a company and shares the personal information of the
client with his manager for his insurance business. This is an ethical issue as per APES110, as
the auditor is trying to misuse the personal information of the client for his own personal
motives. This is both an integrity and confidentiality issue (Das, 2017). There is a threat to the
independence of the auditor where he is trying to take advantage of his position and indulge in
activities that would help in his self-growth, for his own personal interest.
f) In the given case there are two accounting firms in the company and there are two
partners and they are conducting the audit of two companies in their areas and are sharing
information among each other. This is a confidentiality issue and the auditor should be
held liable for indulging in such activities as it is against the company and his
professional code of ethics. He cannot take information or share information with other
auditors. The company has shared information based on lot of trust and the auditor should
take care of that fact.
Thus, we see that how important it is to maintain a correct ethical ground while conducting audit
related activities in professional competencies and making sure that there might be many such
situations where the auditor needs to have a firm ground (Erik & Jan, 2017). He cannot let the
company that has trusted on him down, and misuse his position and that is against his
competency has the auditor and professional who is working for the company.
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Question 2
Independence of the auditor is a very crucial thing that affects the audit that is being conducted.
It refers to the freedom of the auditor from all kind of internal and external factors that might
have any kind of financial interest in the company. The auditor has been entrusted with crucial
powers and he should make sure that the audit report is unbiased and there is no mismanagement
in that. It should be free from all kind of errors and should be correct. The stakeholders depend
on it to take important decisions regarding the company (Farmer, 2018). Thus, auditor should
make sure that there is no such thing that might affect his position or can influence his decisions.
There are many kinds of threats like self-interest threats, relationship threats etc. The work of the
auditor is to safeguard his position from all such threats. There can be multiple situations where
the independence of the auditor can be at a crucial position and we will discuss such situations
below:
Situation One
In the given case, Keith Barnes has been working as an auditor of a coal mining company and
that company has been using the cheapest method of waste disposal without switching to more
environment friendly methods and making use of the resources. They have asked the auditors
only to check whether the financial statements are correct and there is no falsification of
information on that. As per them the role of the auditor is only to check whether financials are
correct or not. In the given case we see that the auditing firm has been working with the stated
coal company from past eight years and, they have share of 25 percent in the total revenue of the
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company (Goldmann, 2016). Thus, in this case, there can be multiple threats to the position of
the auditor and his independence as discussed below:
Self-Interest Threat – The auditor has been working with the company from past eight years and
they have been also receiving 25 percent from the total revenue of the company. This means that
the auditor is having some personal relationship with the client and there is also self-interest
involved and they would not like to lose the client at any cost. Thus, they will act as a biased
person for the client and will not report the wrong doings in terms of waste management and
polluting the environment (Grenier, 2017).
Relationship Threat – The auditor has been given direction by the partners of the audit firm, so
he cannot surpass that. So even if he wants to state that the company is not correct in their
approach, as there might be variances he will face at the hands of the company he is working for
(Jefferson, 2017). Thus, there is a relationship threat that is there due to the position of the
auditor in his own audit firm and the fact that the company does not want to lose the client.
So, all these threats affect the independence of the auditor of the company and puts them in a
very bad position where they cannot decide what are the steps that they need to take to make sure
that their approach in audit is correct. In case the authorities come to know that the coal mining
company has indulged in such activities they will be held liable and the auditor will also be held
liable for not disclosing the same in his audit report and giving a wrong impression to the
stakeholders who depends on it to take important decisions. It is also important as per the code of
ethics to maintain integrity and an unbiased approach and make correct opinion in professional
capacity when they are dealing with their clients. Both the audit firm and the auditor would be
held for charges of negligence and providing a biased report that was driven by self-interest and
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self-growth. Their licenses can be cancelled and they can be held liable and might have to pay
heavy penalty (Kim, et al., 2017). The correct thing would have been to let the authorities know
after advising the management that they should not indulge in such methods which hamper the
environment.
Situation 2
In the given situation ken Smith has been working as the auditor of Moonies from past six years
and the company has not paid 20 percent of the audit fees from past year. The company has also
used the services of the accountant of the audit firm for their own company for four months. The
company is thinking of making selection for the auditors for the current period and for this the
auditor has indulged in conversations with the partner of the audit firm (Sithole, et al., 2017). In
the current period Ken Smith have been joined by Dave Dunne who has been working as the
auditor of the company from past 9 years and by Teena Dean who is the daughter of the
managing director of the company and has no prior knowledge about auditing and accounting
and has just completed her degree program. The auditor has also found that the company is using
wrong methods of inventory valuation and has also indulged in non-compliance of accounting
and auditing standards while preparation of the financial statements of the company. Based on
these points the following are the threat to the independence of the auditor-
1. Self-interest Threat – The auditor has been working with the company from past eight
years and in case Kirk discusses these issues with Ken before the board meeting for the
selection of the auditor, there are high chances that his position would get affected and
his opinion would become biased. The audit firm also does not want to lose such a big
company and thus they would be influenced to falsify the information.
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2. Advising Threats – As there are multiple parties involved with the company, there are
chances of advising threats as one accountant is working for both the companies for some
period. Thus, that is a case of advising threats as there are related parties involved.
3. Relationship Threat – The managing director’s daughter has been selected to be part of
the audit just because of his relationship and not because of her talent or competencies. It
is very much possible that when the audit is conducted the daughter will have an upper
hand and can influence decisions largely. There are also cases where in case the other
person who is accompanying in the audit is having nine years of relationship with the
firm and he can also have his biasness and self-interest involved while conducting the
audit and that might affect the overall audit report in general (Trieu, 2017).
The auditor is aware that the company is not abiding with the relevant accounting standards and
thus he should mention the same in his audit report. He should make sure that the financials are
free from all kind of misstatements and anything that affects the position of the auditor and his
independence should be briefly stated and mentioned. The auditor can be held liable in case there
are misstatements and he can be put behind the bars. Thus, he should not falsify the audit report
at any cost (Werner, 2017).
Thus, there are many such thing that might affect the independence of the auditor but he must
always maintain a neutral stand and should see that there are no such things that can make him
give a wrong opinion.
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