Auditing Theory and Practice

This study material discusses the ethical decision-making model of American Accounting Association and evaluates the strength of negligence case on the part of GGL. It also provides alternative courses of action and consequences of each course of action. The subject is Auditing Theory and Practice and the course code is not mentioned. The content is relevant to college and university students.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student:
Name of the University:
Author’s Note:
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1AUDITING THEORY AND PRACTICE
Table of Contents
Answer to Question 1:.....................................................................................................................2
Answer to Question 2:.....................................................................................................................5
References:......................................................................................................................................7

2AUDITING THEORY AND PRACTICE
Answer to Question 1:
American Accounting Association (AAA) is an ethical decision-making model, which
consists of seven different steps for undertaking a decision depending on a scaffold of systematic
evaluation and this leads to activities with greater justifications (Brennan & Kirwan, 2015).
There are certain bases and ethical principles for this model, which constitute of honesty,
integrity, accountability, truthfulness, fairness, care and loyalty for the family. The steps in this
model in relation to the provided case are enumerated briefly as follows:
Facts of the case:
From the case study, it has been identified that Mr. Brent Allen is a senior director of
Great Gold Limited (GGL), which is involved in mining and extracting gold. In addition, the
individual is a director of Big Machine Limited (BML) as well. The case study highlights that
GGL is involved in leasing a considerable amount of machinery from BML. Janelle Davis is
observed to be one of the senior audit partners at Miller Yates Howarth (MYH), which is
adjudged as the second biggest Australian accounting organisation. Janelle thinks that GGL is
forced to lease machinery from BML due to Mr. Brent Allen, as the person is the director of both
the organisations.
Ethical issues in the case:
From the provided case, the ethical issue that could be identified is the obligation of CGL
to lease from BML due to the pressure from Mr. Brent Allen, although the machinery on lease is
available from other sources. Thus, it could be stated Mr. Brent Allen might be utilising his
power in encouraging GGL to lease from BML.

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Norms, values and principles related to the case:
In this case, the norm is that if it is a business decision, in which GGL leases machinery
from BML and the decision is not undertaken due to the pressure of Mr. Allen. The leased
machinery from BML is highly effective in relation to the requirements of GGL as well as the
leading cost (Chan, Chiu & Vasarhelyi, 2018). If Mr. Allen pressurises and enforces the sources,
for enhancing the sales margin of BML, question arises in his fairness and integrity. Thus, the
norms, values and principles associated with this case could be summarised as under:
 The third party allocation to render services to an organisation needs to be either bid-
based or value-based (Knechel & Salterio, 2016).
 It is necessary for the director to reveal information regarding all the directorships held to
the board of the organisation.
 In case, the board of the organisation raises objection against an individual for holding
the director position in two interrelated businesses, the person needs to resign from one of
the directorships (Leung et al., 2014).
Alternative courses of action:
The first option available to Janelle Davis is that she needs to accumulate evidence that
despite of the availability of better options from other organisations and variations in cost
implications, GGL is leasing machinery from BML. Another option is that Janelle could be
engaged in open discussion by carrying all the evidence with Mr. Allen regarding the matter. In
case, Mr Allen provides sound justification for such action that would help both BML and GGL,
the issue would be over. Finally, if accuracy is found in judgement and discrepancy of Janelle,

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the notional loss in leasing from BML could be addressed and it could be considered as a
violation of the ethical code of integrity and fairness on the part of Mr. Allen.
Best course of action:
Based on the critical evaluation of the above two options, the most effective alternative
for Janelle is to move ahead for accumulating evidence along with obtaining adequate
information on the contractual terms between BML and GGL. Secondly, Janelle is needed to
verify the market rates of other firms having similar machinery before Mr. Allen is accused with
the violation of ethical codes of integrity and fairness (Lodhia, 2015).
Consequences of each course of action:
If it is found that Mr. Allen favours BML and pressurises GGL for leasing from BML
despite the availability of better alternatives, unfair trade practices could be reported against the
individual. For the second option, in which Mr. Allen provides justification depending on a win-
win contract and agreement for both the parties, the individual has the rights to provide
recommendations to GGL regarding leasing from BML.
Decision:
In order to undertake the decision, Janelle needs to obtain additional information, which
is elucidated briefly as follows:
 Data of other rivals having similar machinery such as BML along with their implications
of cost (Yee et al., 2017)
 Assessment of the skill sets of machinery for BML in contrast to those of the rivals

5AUDITING THEORY AND PRACTICE
 The significance of leasing from BML over other rivals (Messier, Glover & Prawitt,
2015)
The above information would help in highlighting the ethical principles to source from BML
along with identifying whether Mr. Allen is providing undue favour to BML for raising its
profits.
Answer to Question 2:
To,
The Managing Partner,
Miller Yates Howarth,
Date: 01/04/2018
Subject: Strength of negligence case on the part of GGL
The report is prepared to draw the attention regarding the dissatisfaction level of the
shareholders of GGL due to falling share price. As a result, GGL might charge MYH against any
case of negligence and thus, the detailed evaluation of the case is described as follows:
Facts of the case:
The legal liability that the shareholders have issued occurs because of the fall in the share
price of GGL. The share price of GGL has declined due in the fall in the gold price and damages
against GGL.
AASB 137:

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According to this section, a contingent liability could be described as a current obligation,
which arises due to past events; however, recognition is made (Simnett, Carson & Vanstraelen,
2016). The recognition is not made due to the fact it is that it is not likely that an outflow of
resources related to economic benefits would be needed in settling the obligation and the amount
of obligation could not be gauged with considerable reliability. If the conditions are not
achieved, the disclosure of the liability might be made in the form of a footnote to the financial
statements or it would not be reported at all in the financial statements (William Jr, Glover &
Prawitt, 2016).
In this provided case study, the realisation of contingent liability is made in the past
financial year. The reason is that the amount of obligation could be gauged and it is certain as
well (Stewart, Kent & Routledge, 2015). However, the liability could be represented in the form
of claim for damages, which occurred in the past. Such liability has caused GGL to cease its
mining operations in the current financial year. Even though the claim has been made in the past,
the shareholders have issued significant claims of damages in the accounts of the previous year
at the previous yearly general meeting.
Conclusion:
After critically assessing the above discussion, it could be found out that the shareholders
have expressed concerns regarding the fall share price of CGL. This is because the return on
investment of the shareholders is declining due to such falling share price. The fall in share price
is due to the fall in the price of gold and damages claimed against MYH. It has been found out
that the contingent liability is recognised in the previous financial year. However, the liability

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could be represented in the form of claim for damages, which occurred in the past. As a result,
GGL might sue MYH for such negligence in order to ensure the trust of the shareholders.

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References:
Brennan, N. M., & Kirwan, C. E. (2015). Audit committees: practices, practitioners and praxis of
governance. Accounting, Auditing & Accountability Journal, 28(4), 466-493.
Chan, D. Y., Chiu, V., & Vasarhelyi, M. A. (Eds.). (2018). Continuous Auditing: Theory and
Application.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Leung, P., Coram, P., Cooper, B. J., & Richardson, P. (2014). Modern Auditing and Assurance
Services 6e. Wiley.
Lodhia, S. (2015). Exploring the transition to integrated reporting through a practice lens: an
Australian customer owned bank perspective. Journal of Business Ethics, 129(3), 585-
598.
Messier, W. F., Glover, S. M., & Prawitt, D. F. (2015). Auditing & Assurance Services: A
Systematic Approach. Qing hua da xue chu ban she.
Simnett, R., Carson, E., & Vanstraelen, A. (2016). International archival auditing and assurance
research: Trends, methodological issues, and opportunities. Auditing: A Journal of
Practice & Theory, 35(3), 1-32.
Stewart, J., Kent, P., & Routledge, J. (2015). The association between audit partner rotation and
audit fees: Empirical evidence from the Australian market. Auditing: A Journal of
Practice & Theory, 35(1), 181-197.

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William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic
approach. McGraw-Hill Education.
Yee, C. S., Sujan, A., James, K., & Leung, J. K. (2017). Perceptions of Singaporean internal
audit customers regarding the role and effectiveness of internal audit. Asian Journal of
Business and Accounting, 1(2), 147-174.