Auditor’s Responsibility to Review Governance of Audit Client

This article discusses the auditor’s responsibility to review governance of an audit client and its impact on raising audit risk. It also covers the American Accounting Association Model and the Corporation Act’s allowance for auditors to limit their liability.

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Auditing

Audit
Question 1 (7%)
Justification of the auditor’s responsibility to review the governance of an audit client
In relation to ASA 300, the auditor ensures that the audit process is undertaken based on the
same. This auditing standard assists an auditor to plan the audit of financials and sets out how
it will be performed. Therefore, it is crucial that the audit planning is properly documented
and their level will range based on the audit’s complications and size. Moreover, small and
simple involvements may play a key role in covering the audit phase but complicated or
larger audits can have significant audit plans. Nevertheless, in determining whether
documentation of audit is effective or not, the experience of auditors is very vital so that the
planning decisions are appropriate in achieving overall effectiveness. The primary outcome
from the planning scenario of an audit is the proposed or expected audit plan that is compiled
through the usage of several sources of information and which can be easily accessible to the
auditors. Furthermore, the planning must be regular and often throughout the plan of
engagement. In addition, such audit plan must be properly updated during the entire audit
course as and when required. Nevertheless, the audit plan must be dependent on the auditor’s
knowledge of the entire company and its businesses that includes a deeper understanding of
all auditing, accounting, and legislative requirements. Further, the audit must also understand
the procedure for preparing deadlines and financials. With the assistance of ASA 315,
auditors can assess and identify risks of material misstatements through an organization’s
environment (Hoffelder, 2012). This standard emphasizes the significance of such knowledge
in recognizing wherein such risks are more likely to incur. Nonetheless, ASA 300 can assist
in performing preliminary engagement affairs that includes assessment of auditors’ own
compliance with significant lawful necessities to document and establish an aggregate audit
plan that can set the timing, scope, and direction of audit processes.
Impact on raising
audit risk
Recommendation Reduction in audit risk
because of the
recommendation
Non financial
risk
The non financial risks
lead to alteration of the
Stronger board and
executive level
When the board and the
executive level performs
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Audit
nature of the audit.
There can be failure in
compliance,
operations, etc. Audit
risk will lead to signal
the fact that the
financial statements are
free from error but in
the true sense it
contains some
deficiencies.
governance in n effective manner then
the governance is of high
standard. This leads to
effective planning and
ultimately the risks are
curbed, as well as
minimized (Apra, 2017).
Unclear
accountabilities
This implies lack of
ownership of major
risks at the Executive
Committee level. In
short the risks are left
unanswered and hence
might create a major
issue for the
functioning of the
company.
Accounting
practices influenced
by the
remunerations
practices
Implementation of
accountability standards.
Such standard are
reinforced by the
remuneration practices.
When the standards are
properly placed it leads to
minimize the risk and
brings in more
transparency.
Complex
decision making
process
Complex and orthodox
manner of decision
making skills makes
the system slow in the
detection of the risks
and uncertainties.
Infusing of the CBA
DNA
All the dealings should be
supported by the dealings
and decisions on
customers. This will
ensure a smooth decision
making process and
thereby will curtail the
risk level (Apra, 2017).
Immature
compliance
function
Operational risk
management that is
followed by the
Cultural changes to
enhance the process
Challenging and striving
for the best is the best
remedy. It helps in
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Audit
compliance function
that is under resourced
identification of the risk
and leads to removal of
the risk (Apra, 2017)
Question 2 (3%)
American
Accounting
Association
Model
Decision making process
1. Determine the
facts
The facts are :
David is working with three other partners at MYH
Client’s loan application needs to be filled and submitted
 The ream members will be acknowledged and provided
recognition for the job
 Strong incentive will be provided for the team
 John fails to join and provided the reason of being
 Team members are working in full swing to get the loan
application done
 On return, David was prompted by the flatmate that John was not
sick rather was outing with girlfriend
 This calls for disciplinary action as other team members worked
and John gave a false reason.
2. Define the
ethical issues
The non presence of John is a violation of the duty and should not be
considered for the incentives along with other team. As seen from the
ethical point of view it can be said that the team members needs to work
in hand in hand for the accomplishment of the task. The ethical issue
that is coming in front of David is that John is a good friend of him.
However, the act of John signifies that he should not be eligible for the
kudos. Considering the personal relation David is in a dilemma and is
unable to take a call whether or not to consider John for the incentives. In
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Audit
American
Accounting
Association
Model
Decision making process
the light of such situation, it is advisable for David to consult with the
other team members so as to get some additional options because David
is in an ethical dilemma.
3. Identify the
major principles,
rules and values
The major principle that comes to the forefront is that the team work
should be taken in a serious manner. In this scenario, it is of utmost
importance that the team members should adhere to the decision making
process of the team. If the team calls for a meeting then the same must
be abided as it is a team work. Further, it can be linked with the ethics
because when the team members decide on a course of activity it must be
dealt by the team jointly and should not escape the decision. The major
principle of any routine course of action or routine work is that there
should be proper coordination (Niemi & Sundgren, 2012).
4. Specify the
alternatives
The alternatives that can be taken into consideration is to
 Ask John for the unethical behaviour
 Remove John from the particular project
 Show apprehension to John from removing the project
 Keep John in the project but should not provide any credits if the
project gets selected.
5. Compare values
and alternatives
When it comes to the alternatives, it can be stated that John has shown
indecent behaviour. This calls for a disciplinary action and therefore the
alternatives needs to be taken into consideration. John should be
questioned about the leave which he took. This will provide a clear cut
opinion on his exclusion and for the absence he should be questioned in
an ethical manner (Niemi & Sundgren, 2012).
However, the project was very critical and therefore, the need to work on
Sunnday was vital. In this scenario, it needs to be noted that John should
be excluded. However, this will be a harsh decision instead John must be
kept in the project but should not be provided any credits owing to the
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Audit
American
Accounting
Association
Model
Decision making process
absence of him on Sunday when the entire team was working.
6. Assess the
consequences
It is evident that John needs to bear the consequences because he was
guilty. On an important day he failed to mark his absence when the entire
team was working on the loan application. John will bear the
consequence and in most certainty the exclusion of him from the credits
and the incentives. As John provided a false reason he is not eligible for
any incentives and reward.
7. Make your
decision
In all probability it is important that John should be provided strict lesson
because it is a case of ethics and its violation. When other team members
are working then it is proper for a member to remain absent citing a false
sick reason. Hence, the decision to exclude John name from the
incentives part will be a strong lesson and will helps in showing
appropriate ethical standards (Wright & Charles, 2012).
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Audit
Question 3 (3%)
It has been clearly stated under the corporation's act that the company can't be registered by
an auditor. If the permission is given to the auditors in relation to the incorporation of these
factors, the professional ability of the auditors may get adjusted with concerns:
It has been generally observed that the liabilities and use forms having structure partnership
and based on the law of joint, consists of several liabilities. Incorporation of auditors and a
cap on auditors will have a limitation on the liability of the auditors. In this type of
organizations, the action of one partner is said to affect each and every partner of the
organization which main subsequently become a negative aspect for the firm and may arise
several financial problems within the organization (Tadros, 2017). The use of auditors in
order to determine the financial statements of the organization will not only help to overcome
difficulties of the financial statements but will also help to solve problems of the organization
in relation to the management of large accounting partnerships. It has been observed in the
past, that a number of significant changes have been made in the accounting profession so as
to provide special auditing services to the organization for economic benefits. The changes
consisted of:
- The improvisation of business using the natural growth and also by merging with
other firms.
- Establishment of relationship with the International accounting partnership and
creating a link with accounting firms in order to deal with the capital markets and
financing decisions of the organization.
- Making changes in the decision-making structure of the organization so that
expansion can be made in the field of Management and advising consultancy.
Another essential factor that is influencing the size of an accounting firm is the satisfaction of
its major clients. It is of general knowledge that an accounting firm will prosper if the clients
business grows and becomes more profitable with the help of the professional services
provided by the financers and their decisions (Elder et. al, 2010).
It has been observed that MINCO has allowed its prescribed accounting bodies to take help
of auditors in order to assess the financial statements of the organization so that new
administration schemes can be taken into consideration. The prescribed accounting bodies
will be having the right to assign the authorized auditing companies for the task of
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Audit
assessment of financial statements of the organization (Baldwin, 2010). The data which will
be provided by the counting bodies to the organization can be used in order to compare the
company with its industry competitors which will help them to no their position and also the
conduct that is being followed by them. A lot of SIM cards have been issued in order to
protect the rights of clients with respect to the corporate culture that is being judged by the
auditors. The major safeguards are:
 The audit companies will be working under the authorization and regulation of the
counting bodies for the purpose of which they have been approved.
 Any function in relation to the audit work will be undertaken by the authorized
auditing companies who are authorized by the accounting body.
 All the members and directors of the authorized auditing company should be regular
and natural persons. The leader of the authorized auditing company should be a
qualified and reputed person. There should be no restrictions present for the auditing
company as the work is undertaken by reputed and professional auditors. All the
terms and conditions of the company should be accepted with the terms and
conditions of the authorized auditing company so that maintenance or specified levels
of asset capitalization can be kept while performing the task of auditing (Geoffrey,
Joleen & David, 2016).
The Corporation Act does allow the auditor to give a limit to their liability by contract that
can be approved by the client’s shareholder. The section 534 (1) of the corporation's act gives
the auditor the allowance to Limit their liability if any kind of negligence or breach of duty or
trust has been noticed by him while auditing the financial accounts of the organization. This
limitation is not only covered for only one or more financial year because of which a
resolution should be passed and approved by the shareholders (Gay & Simnet, 2015). Also,
under section 537, it has been clearly stated that the liability limitations only effective is fair
and reasonable data is being provided for the particular circumstances.
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Audit
References
Apra. (2017). Apra releases CBA prudential inquiry final report and accepts enforceable
undertaking from CBA. Retrieved from:
https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-
inquiry-final-report-accepts-eu
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.
Elder, J. R., Beasley S. M., & Arens A. A. (2010). Auditing and Assurance Services. Person
Education, New Jersey: USA
Gay, G & Simnet, R. (2015). Auditing and Assurance Services. McGraw Hill
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-
House and Outsourced Internal Audit Positions: Views from External Auditors.
Accounting Horizons, 30(1), 143-156. https://doi.org/10.2308/acch-51309
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Niemi, L., and Sundgren, S. (2012). Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review, 21(4), 767-796.
https://doi.org/10.1080/09638180.2012.671465
Tadros, E. (2017). Appalling' audit quality could lead to next Enron: ASIC's Greg Medcraft
[online]. Retrieved from: http://www.afr.com/business/accounting/appalling-audit-
quality-could-lead-to-next-enron-asics-greg-medcraft-20171030-
gzb5q2#ixzz5BrDh3Ckohttps://www.ifac.org/global-knowledge-gateway/
technology/discussion/why-accountants-must-embrace-machine-learning
Wright, M.K., & Charles, J. (2012). Auditor independence and internal information systems
audit quality. Business Studies Journal. 4(2), 63-84. Retrieved from:
http://scitecresearch.com/journals/index.php/jrbem/article/viewFile/284/230
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