Auditing and Assurance Services: Case Study of Scarfe Cafe

This report discusses the case of Scarfe Cafe, a company that collapsed due to negligence of auditors. It explores the role of auditors in corporate failures and examines the audit procedures that contributed to the collapse. The report also discusses the ethical issues in auditing and the amendments made in auditing standards after the case. In addition, it analyzes a case of unethical behavior by auditors and compares it with the principles of professional ethics.

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AUDITING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION................................................................................................................................1
REFERENCES................................................................................................................................2

EXECUTIVE SUMMARY
Auditing refers to the process of the evaluating accounting entries present in financial
statements of company. Auditing helps the business in checking the accuracy of financial
transactions and reports. Assessment refers to the process used in analysing the accuracy of
financial records and accounting entries. Report has explained the concepts of auditing and
assurance services in the business. task 1 reports about the case of Starfe that suffered loss due to
negligence of auditors. Task 2 of the report provides about the duty of the auditor to act ethically
and professional while carrying out its work.
TASK 1
Introduction
Corporate collapses in early 2000 have showed that accounting and auditing
professionals in Australia are not as good as they are supposed to be. Due to the corporate
downfalls auditors get the most attention. Implications of corporate collapses on the accounting
and auditing profession are explained by focusing the case of Harris Scarfe that collapsed with
265 million dollars of debt in 2001. There is a strong relationship between the role of auditors
and the corporate failures.
There was a systematic fraud held by the management of cafe and non of the auditors of
the company identified the fraud going in the company. if the auditors had performed their
responsibilities and duties with care this would have not let the company in receivership of the
banks. Inability or the negligence of the auditors in the performance of their duties has led the
company to collapse. Auditors were not able to identify the inflated annual profits of the
company during the performance of their duties. The case is related to the inefficiency of the
accounting and auditing professionals that can cause company to collapse.
Auditor of the company collapsed
The most important effective mechanism under the corporate are the independent & well
performing directors and the auditors. The main auditors of the company were Ernst & Young
and Pricewaterhouse Coopers (Pwc). Both the audit firms are known for their auditing services
are having big name in the global auditing and accounting sector. Under the case litigations of
220 million were imposed against both the auditors in damages (Hay, Stewart, and Botica
Redmayne, 2017). In the case EY negotiated a out of court settlement with the Carter and left
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the claim of 180 million over the PwC under the trials of Supreme court. Auditors have the
professional liability of performing the audit of company with due care.
Audit procedure contributing to the collapse of Scarfe Cafe
Audit procedures refers to the procedures that are used by the auditors for determining
the reliability of the financial information provided by the financial statements of the clients that
results in auditor’s opinion. Auditing procedures used by the auditing firm vary from company to
company depending on the nature and size of business and auditing assertions that auditors are
required to prove. Auditors are required to conduct audit procedures for ensuring that financial
statements prepared by the company give a true and fair view of the financial position of
company.
In the case of Scarfe Cafe there are several procedures that have contributed to the
collapse of the company. Auditors are required to conduct classification testing for ensuring that
the transaction classified are correctly recorded under their respective headings. All the
transactions were not recorded under their respective heading management showed the balances
under different heads for manipulating the accounts.
Auditors are required to inspect the areas such as financial statements, business
operations and the compliance procedures. Auditors of the auditing firms PwC and EY did not
carried out teh revenues audit effectively and with due care. The negligence of the company to
assess the misstatements of the profit figures caused the company to collapse. Main procedures
under revenues audit include testing the revenue accounts of business under the income
statement and the inspection of accounts receivables in balance sheet. Auditing provides for the
substantive procedures to be carried out for auditing the revenues of for detecting frauds and the
financial misstatements (Prasad, 2017). The procedures conducted by the auditors were not
undertaken with proper care and due diligence, due to which they were not able to identify the
frauds and misstatements of the profit figures of the company. Auditing procedures are carried
out different stages of the audit.
External confirmations of the transactions for ensuring the accuracy and authenticity of
the transactions to ensure the accounting reflects the records of transactions that have actually
taken place. External confirmation confirmations provide the reliability to the accounting figures.
Profits are inflated by showing the entries about the transaction that have not taken place or not
removing the cancelled orders. This enables the company to show higher sales than actually
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occurred in the financial year. if the auditing procedures were carried out with care and due
diligence the fraud regarding the revenues and concealments of the expenses could have been
identified by auditors. In the case where it appears to the auditors that errors or frauds are being
committed they could also have surprise checks of the accounting transactions. On identifying
suspicious frauds they could undertake more in depth inspection for identifying the fraud. It was
revealed that fraud was undergoing in the company from last five years and the auditors were not
able to identify the inflated profits were due to fraud being committed in the company.
Auditor’s Independence and the professional & ethical behaviour in the case.
In accounting ethics have great importance for the accounting professionals and the users
of financial statements. Numbers of decisions are taken on the basis of the information provided
by the financial statements. Independence of the auditors is essential for carrying out is duties
and responsibilities with due care and responsibilities (Byrne, Anda and Ho, 2019). Audit
committee is set up by the entities that the auditors are independent for inspecting the working
and financial records of company. They have the power of inspecting and ask for all the required
information that is essential for identifying the reliability of the financial statements of the
company. This reflects the corporate governance. In the case of Scarfe Cafe were given full
independence for carrying out their work and identify the errors and misstatements of the
financial figures. Independence of the auditor
Despite of the independence given to auditors for performing their duties the auditors
proved out to be incompetent and negligent. They were unable to uncover the systematic and
widespread fraud being committed in the company from last few years. Professional behaviour
required the auditors their duties ethically and with due care. Financial statements are trusted by
its users on the basis of the opinion framed by the auditors that the financial statements give true
and fair presentation of the financial statements of the company. Like in the present case
management continued with the operations relying on the financial figures represented after
inspection of the auditors. It is the liability of the auditors to authenticate the reliability of the
financial statements of the company that they are free from material misstatements.
Amendments take place in auditing standards and principles after the case.
Since the case was related to the negligence in performance of the duties by the auditors.
Major concerns were shown for increasing the responsibility and duty of the auditors in carrying
out their professional work. Specific amendments regarding the case were not made as some of
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the conducts of the management were reported by the auditors to which the management did not
agreed. Amendments were made in the standard for quality control and assurance engagement
were made that led the auditor to clear understand the internal control structures and also to
suggest the ways by which frauds or errors could have been controlled. Responsibilities
regarding the fraud in Audit of financial reports were increased by the business.
The auditing board may have established the liabilities regarding the fraud conducted in
the financial statements. The procedures regarding the revenues audit could have been
established that help the auditors in conducting the in depth analysis if the revenues and
receivables.
ASSESSMENT TASK 2
Facts of the case
Andrew and Mike both are senior auditors few more transactions. The employment of
both the auditors started at the same time. Both the auditors were highly competitive from the
time they commenced the work. They are senior auditors from the last 2 years. The auditors were
required to be promoted to the position of supervisor. Mike was replaced by Andrew on audit of
Kent ltd. Audit manager was called by client for stating that the work of Mike was not good and
has not identify the related accounting issues in the audit and is also arriving late at work. The
issues were not discussed either with the Mike or Andrew. On review of the work of Mike, it was
found by the Andrew that he has performed his work with utmost care and diligence and has
identified all the issues which Andrew might have missed. Andrew is of the view that the audit
could be completed by him for obtaining the good reviews from the work that will help in
promoting the sales of company. It is also certain the unsupported allegations will be no brought
to the attention of Mike.
Ethical issues
Code of ethics state the principles & expectations that govern the behaviour of the
professionals and individuals in conduct of the internal auditing. This requires minimum
requirements for the conduct and the behavioural expectations instead of specific activities.
Business and the auditing professionals are required to follow ethical approach in conducting the
business and to provide the auditors with complete information and access regarding the
financial information that are essential for framing the opinion on the reliability of the financial
statements (Miri, Vial and Greer, 2019).
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In the present case Mike and Andrew are senior auditors who are performing their work
with excellence. The allegations framed on the Mike by the client that the working performed by
him was not satisfactory and issues related to the accounting were not identified by Mike. All the
allegations put by the client were not supported by evidence. The fact of the case that Mike was
not coming to work on time is the practice is an unethical practice. Professionals are required to
perform their duties along with keeping the professional behaviours they are expected to have.
Mike as professional was required to be on time for doing work. However to frame allegation
due to the personality and behavioural conflicts is against the ethics. This is the unethical
behaviour due to which Mike is replaced with Andrew by the audit manager. On the other audit
manager was also required to discuss the issues, auditor was replaced without discussion the case
for which he was replaced.
On the side of Andrew, it was reviewed that the work conducted by Mike was proper and
more efficient. Andrew without reporting the facts of the case with the seniors of the audit firm
decided to use the work of Mike for his personal benefit. As an ethical behaviour Andrew should
not use of Mike for his personal benefits of promotion (Liu And et.al., 2016). Though coming
late to office is against professional behaviour but because of this undue allegation should not be
imposed as this has affected the professional career of Mike. Professional behaviours have not
affected the work of Mike in discharging the duties as auditor.
Major principles, rules and values
Section 110 of the APES provides for the principles of integrity imposing the obligations
over all the members for being straightforward as well as honest in the business and professional
relationship. Integrity provides for the dealing fairly and providing true position of the company.
it provides that the member should be related with the false or misleading statements of the
business.
Section 120 Objectivity of the professional behaviours provides that it should not
compromise the business or professional judgements due to the conflicts of interests or because
of undue influence. It also states that there are situation that may lead the auditors to impair their
objectivity. Members are not required to prescribe the definitions and prescribe the situations.
The professional services says that the circumstances which biases the professional judgement
shall not perform the services.
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Section 130 provides the business with professional competence and due care. this
requires the professional to carry out their duties with due care and diligence. This requires the
professionals for having competent professional skill and knowledge that are essential for
carrying out the audit. They are required to ensure that clients receive the professional services
by acting diligently as per professional and technical standards in providing professional
services.
Section 150 of professional behaviour imposes obligations over member for complying
with the relevant laws & regulations avoiding actions or omissions that could discredit
profession. The act of members should not disrepute the profession (Code of ethics, 2019).
Mike and Andrew both are performing their duties with due care and complying with all
the rules of ethical professional behaviours. Under the professional behaviours they are required
to discharge their duties ethically ensuring that they are making reasonable judgements based on
the technical and business facts.
Comparison of values and the alternatives
In the given case audit manager could have discussed the case with Mike first before
asking to change the auditor. Changing the auditors without discussion did not let the Mike to
know the real cause of replacement. Also the client instead of removing Mike due to personality
conflicts as he was arriving late should have discussed the issue with audit manager. This would
have let the Mike to arrive on time without causing the promotion on stake.
On the other Andrew should have discussed the finding of the Mike with the audit
manager and asking for the reasons of replacement. Instead of using the work performed by
Mike, Andrew should have acted professionally and ethically in carrying out the further audit.
Assessing the consequences
The allegations framed by the client may be due to the fact that Mike may have identified
some of the issues of non compliance with the accounting and auditing standards. It was essential
for auditors for ask for reasons behind the replacement (Dumay And et.al., 2018). Using the
work of Mike is against the ethical professional behaviour. If in future it is revealed by the audit
manager that Mike was replaced due to personality conflicts and not because of his work. It can
affect the reputation and honesty of Andrew
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Making decisions
In the give case it could be identified that the client is not acting ethically by replacing
the auditors due to the personality conflicts that has affected the promotion of Mike. On the other
Andrew should behave professionally and not use the work of Mike for his own promotion.
CONCLUSION
From the above report it could be concluded that the auditors are required to perform
their duties with due care and diligence. Negligence and incompetency of the auditors in
performing the duty affects the reputation of the profession. Auditors are required to ensure that
the organisation and they are following ethical approach in discharging their duties. They are
required to act act ethically and professionally while carrying out the audits of the companies.
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REFERENCES
Books and Journals
Hay, D., Stewart, J. and Botica Redmayne, N., 2017. The role of auditing in corporate
governance in Australia and New Zealand: A research synthesis. Australian Accounting
Review.27(4). pp.457-479.
Prasad, A., 2017. Environmental performance auditing in Australia, Canada and
India. International Journal of Government Auditing.44(2).p.24.
Byrne, J.J., Anda, M. and Ho, G.E., 2019. Water sustainable house: water auditing of 3 case
studies in Perth, Western Australia. Water Practice and Technology.14(2). pp.435-443.
Miri, N., Vial, P. and Greer, P.B., 2019. Remote dosimetric auditing of clinical trials: The need
for vendor specific models to convert images to dose. Journal of applied clinical medical
physics.20(1).pp.175-183.
Liu, C. And et.al., 2016. HKE‐BC: hierarchical key exchange for secure scheduling and auditing
of big data in cloud computing. Concurrency and Computation: Practice and
Experience. 28(3). pp.646-660.
Dumay, J. And et.al., 2018. Thirty years of accounting, auditing and accountability
journal. Accounting, Auditing & Accountability Journal.
Online
Code of ethics. 2019. [Online] Available through :
<https://www.cpaaustralia.com.au/professional-resources/accounting-professional-and-ethical-
standards/apes-110-code-of-ethics-for-professional-accountants>
[Online] Available through:
<https://www.wgtn.ac.nz/sacl/centres-and-institutes/cagtr/businesslinks/documents/
stephentaylor_081008.pdf>
[Online] Available through: <https://www.adelaidenow.com.au/business/m-action-for-audit-
negligence/news-story/121918bfb62760e3b6c37768c77d6e0b>
[Online] Available through: <http://www.joebm.com/vol5/477-EM0013.pdf>
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