Auditing and Assurance: Application of AAA Model and Due Diligence

This article discusses the application of AAA model and due diligence in auditing and assurance. It covers the identification of ethical issues, norms, principles, and values, determination of alternative courses of action, and consequences of courses of action. It also discusses compensatory damage and the responsibility of auditors in evaluating accounting policies.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................5
References........................................................................................................................................9

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Answer to Question 1
During the year 1990, Langenderfer and Rockness developed the different concepts of
the American Accounting Association (AAA) model. AAA model provides the auditors with
seven logical steps in order to deal with different ethical situation in auditing (Hope, Thomas &
Vyas, 2013). It needs to be mentioned that the application of the seven-step model of AAA is
required in the provided case of Great Gold Limited (GGL) to provide logical course of actions.
The main area of concern of this case is related with the leasing of apportion of their machinery
from Big Machine Limited (BML) in spite of the fact that there is availability of other machinery
suppliers in the region supplying small portion of the machineries. Apart from this, another
major ethical issue can be seen due to the increase in profit under the directorship of Brent Allen
related with the leasing of significant part of the machinery. In this situation, it is required for the
auditor to apply the seven step model of AAA to get recommended course of action (Yetman &
Yetman, 2012).
Step 1: Facts Identification: This step involves in the identification of major facts with te
concerned cases. In this particular situation, the major unethical case is related with the lease of
large proportion of machinery to GGL by the director of the company in the presence of other
small suppliers of machinery in that region (Kassem & Higson, 2012).
Step 2: Ethical Issues in the Case: In this AAA model, the second step involves in the
identification of major ethical issues related with the provided case. Thus, based on the analysis
of the provided case, an assertion can be presented that shows the motive of the director of GGL
to increase the profit of BML that leads to the creation of an unethical situation (Craft, 2013).

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Step 3: Identification of Norms, Principles and Values Related with the Case: In the provided
case, the norms, values and principles related with the directors of the company indicates
towards the principle of integrity. It is the responsibility of the companies to make sure that there
is compliance between corporate governance principles and ethical code of conducts while
performing the business operations of these two companies. In the provided case study, the main
ethical issue is related with professional integrity at the workplace. There has been major
violation in the principle of integrity due to the intention of the director to increase the profit of
BML with the help of significant lease of machinery. The inability of the auditors to demonstrate
ethical principle and sound moral can also been seen. Thus, the director of the company has
failed to act in fair, honest and ethical manner (Michels,2012).
Another major ethical principle involved in this case is Due Care and Professionalism of
the auditors while executing the audit procedures. It is the requirement of the director of the
company to act in the most ethical manner and discharge legal duties professionally as per the
ethical principle and code of conducts. Hence, the director of the company has shown an
incorrect moral and ethical behavior (Michels, 2012).
Step 4: Determination of Alternative Course of Action: There can be two situation in this case.
In the first situation, one can simply ignore the ethical issues for director and let the profitability
be increased. However, the second option demands the director not to lease the large portion of
machinery to GGL (Ball, 2013).
Step 5: Determination of the Best Course of Action: In this case, the best course of action
according to the norms, principles and values is not to lease the significant part of the machinery
to GGL. In addition, the company is required to lease the small portion of machinery as it will be

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majorly helpful in avoiding the occurrence of unethical situations related with profitability. This
aspect will be helpful in the true and fair value of the financial statements. It needs to be
mentioned that this course of action will be supported by the norms and ethical principles that
will lead to the true and fair presentation of financial statements. Moreover, the auditors will be
majorly accountable for making it sure that they address all the aspects that lead to the breach of
ethical principles. Otherwise, it will be considered as the audit failures (Blankespoor et al.,
2013).
Step 6: Consequences of Courses of Action: Under the first option, the director will be
continuing to lease the large portion of the machinery from BML. It will increase the profitability
of the company along with the wealth of the directors. However, at the same time, the director
will expose himself to the risk of the breach of ethical principle and legal risks (Michels, 2012).
Under the second option, the directors will refuse to increase the profit of the company.
This particular aspect will affect the relation between the auditor and the director. This particular
situation will ensure that there is a violation of the ethical norms and principles. This aspect will
be majorly helpful in maintaining the reputation and social standing of the auditors that will
increase the confidence of the public and the stakeholders. Most importantly, the second option
will be highly beneficial for the application of ethical perspectives in different aspects like the
independence of the board, the protection of investor interest and many others (Michels, 2012).
Step 7: The Decision: Under the model of director, it is the responsibility of the decision makers
to consider the major aspects of ethical norms, principles and values while making the decisions.
All these aspects will make the decision makers to make effective decisions. In this particular
case, the application of the steps of AAA states that the intention of the director to increase the

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profit of the company with leasing is highly unethical from the part of the directors. For this
reason, the director is required to be questionable in order to provide justification on the parts of
accountability, transparency and appropriate governance in the business organizations. This is an
important part in this model (Blankley, Hurtt & MacGregor, 2012).
Answer to Question 2
Introduction
The provided case study deals with the issue of GGL related with the decrease in the
prices of the shares. Moreover, there are many instances suggesting the situation that a large
amount of contingent liability was included in the account of the previous year. This particular
aspect contributed towards the raise of several damage claims from the part of the shareholders
in the last annual meeting. At the same time, there were many opinion related to the inclusion of
the large amount of contingent liability in the financial statements of the previous year for the
negligence of the auditors (Vijayakumar & Nagaraja, 2012).
Application of Due Diligence
While addressing MYH, it needs to be mentioned that the directors of the companies
have the obligating to act with loyalty and professional due care. It implies that the directors are
required t act in the most ethical men net for the betterment of the companies. This aspect will be
largely helpful from the part of the shareholders, as it will help in increasing value of the
shareholders (Munsif, Raghunandan & Rama, 2012).
In the provided situation of MYH, it can be said that the action of GGL is a wrong thing
that can damage the wealth of the shareholders to suffer huge loss, the development of legal

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liability for the individual shareholders and all these aspects can lead to torturous acts. It needs to
be mentioned that crimes fall under the tort law. However, there will be not be any restriction on
the course of actions on the crime due to the negligence of the harm of the shareholders by the
company (Munsif, Raghunandan & Rama, 2012).
There are some major identical duties of the directors that can also be found in other
jurisdictions; more specifically, they are subject to loyalty and duty of care. Thus, it is the
responsibility of the directors to act in the best ethical manner for the interest of the company and
the shareholders. This can be considered as a major benefit for the shareholders in the presence
of the obligation of creating value for the shareholders. In this process, the directors are required
to avoid any conflict of interest (Newton et al., 2015).
The violation of the standards of corporate governance can be seen from the company
while deterring the duties of the auditors and the directors. In the case “Australian Securities
and Investments Commission v Rich”, the failure of director in meeting the liability can be seen
along with the failure in meeting the duty of care; and all these aspects led to the collapse of the
whole organization. In this perspective, GGL has the authority to take action of tort law against
MYH as the director of the companies has real intention in omitting the large contingent liability
from being included in the correct accounts. This action may lead to the non-reflection of the
true and fair value of the financial condition of the company (Varzaly, 2012).
Compensatory Damage
These negligent factors can have the ability to encourage the shareholders of GGL due to
the burden to meet the debts falls on the shareholders. In case of MYH, GGL has the authority to
make the claim for damage for the incurred losses. According to the laws, the damages can be

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compensated with the award of money to the persons who bear the loss or injury. The
classification of damage can be done in punitive damage or compensatory damage. In case of
GGL, the specific negligence action can lead to compensatory damage for the shareholders due
to their economic losses like reduction in earning and others. For this reason, GGL can take
actions against MYH due to blatant negligence actions that result in compensatory damage
(Daniela & Attila, 2013).
In the case of ‘Lee v Chou Wen Hsein (1948)’, the judgment of the Privy Council
allowed the private company to have the provision of the directors for the removal of the other
directors. In this situation, the removal of the directors from the office does not have any impact
on the directors for claiming the breach of contract (Van Dam, 2013).
On the other hand, it is the requirement of the directors for the determination of the
overall response for addressing the risks by assigning and supervising the employees to take
significant responsibilities of engagement. The current situation shows the failure of the auditors
in considering the contingent liability in the company’s book for expressing the true and fair
value of the company to its shareholders and investors. Moreover, the failure of the auditors can
be seen in the evaluation of accounting policies for financial reporting (Hermanson, Smith &
Stephens, 2012).
In the provided case of GGL, the analytical process states that the unrecognized amount
of contingent liability leads to the development of material missstements. For this reason, the
financial statements of the company may not convey the true financial position of the company.
Thus, it is the responsibility of the auditors to assess these material misstatements in order to find
out that whether have been created from financial fraud. In case of GGL, there was a greater

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need to address omission of contingent liability for reevaluating the responses of risk assessment
(Daniela & Attila, 2013).
For this reason, there is a need to make significant decision in respect to susceptibility of
material misstatements in the financial statements due to the omission of contingent liability.
Thus, based on the above discussion, GGL has the full authority to take action against MYH for
tort of negligence. Negative action can lead to compensatory damage for the shareholders that
can lead to major economic losses to the shareholders (Munsif, Raghunandan & Rama, 2012).
Conclusion
Based on the whole discussion, it can be said that there is a need for the determination of
the overall response for addressing the assed risks with the help of assigning and supervising
necessary individuals to take significant engagement responsibilities. The responsibility of the
auditors is the evaluation of various accounting policies related with the omission of contingent
liability. Moreover, the involvement of the director can increase the profit of the company due to
the lease of machinery. For this reason, there is a need for the application of appropriate steps of
AAA with the organization.

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References
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Blankespoor, E., Linsmeier, T. J., Petroni, K. R., & Shakespeare, C. (2013). Fair value
accounting for financial instruments: Does it improve the association between bank
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