Auditor's Public Interest Responsibilities and Audit Quality Name of the University Author's Note
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Running head:AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY Auditor’s Public Interest Responsibilities and Audit Quality Name of the Student Name of the University Author’s Note
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1AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY Executive Summary It can be seen from the findings of the report that Wesfarmers Limited has certain key stakeholders like shareholders, suppliers and others who will be affected in the presence of material misstatements in the financial statements. After that, it is important for the auditors to consider the aspects like independence and whistleblowing in auditing. At the same time, the auditors are needed to consider the lessons of Enron collapse for avoiding this kind of collapse in Australia.
2AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY Table of Contents 1. Introduction............................................................................................................................3 2. Key Stakeholders Analysis of Wesfarmers.............................................................................3 3. Indepdence, Whistleblowing and Public Interest Requirement as per APES 110.................5 3.1 Independence..................................................................................................................5 3.2 Whistleblowing................................................................................................................5 3.3 Public Interest Requirements of APES 110......................................................................6 4. Lessons from Enron Collapse and Arthur Anderson..............................................................6 4.1 Lessons from Enron..........................................................................................................6 4.2 Lessons from the Behaviour of Arthur Andersen............................................................9 5. Audit Quality and Steps Auditors Need to Take to Address the Warning.............................9 6. Conclusion............................................................................................................................12 7. References............................................................................................................................14 8. Appendices...........................................................................................................................17
3AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY 1. Introduction Auditing is considered as such a profession where the main job responsibility of the auditors is to perform various substantive and analytical procedures on the financial statements of the companies with the aim to find any kind of material misstatements in them (Chenet al.2013). There are certain responsibilities on the auditors while performing the audit procedures and one of them is to comply with the public interest requirements (Knechel and Salterio 2016). The public interest requirement states that the auditors are the representatives of the public. In Australia, the presence ofAPES 110can be seen that providesthenecessaryguidelinestotheauditorstoconsiderthepublicinterest requirements (Martinov-Bennie and Mladenovic 2015). The first part of the report discusses about the impact of material misstatements in the financial statements on the key stakeholdersofWesfarmers.Thenextpartsdiscussesaboutthepublicinterest requirementsofauditorconsideringtheaspectslikeauditindependenceand whistleblowing. The next parts sheds light on the major audit lessons from the Enron Scandal and the auditor’s behaviour. The last part discusses about the audit strategies need to be taken to address the warning of Greg Medcraft. 2. Key Stakeholders Analysis of Wesfarmers The below discussion shows the impact of material misstatements on these key stakeholders of Wesfarmers: Shareholders:As per Appendix 1, Wesfarmers considers their shareholders as a key stakeholder group and the shareholders need up-to-date financial information about the companytomakeeffectiveinvestmentdecisionaboutthecompany (sustainability.wesfarmers.com.au2019).Inthisposition,theimproperidentification,
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4AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY disclosure and adjustment of material misstatements can misguide these investors with materially affected information about the financial performance and position of the company (Bridoux and Stoelhorst 2014). Employees:As per Appendix 1, employees are considered as one key stakeholder group of Wesfarmers and the aim of the company is to empower and encourage their employees with career development opportunities (sustainability.wesfarmers.com.au 2019). Hence, in appropriate documentation, disclosure and adjustments of material misstatements can affect Wesfarmers’s ability in providing the career development opportunities to their employees (Gonzalez-Zapata and Heeks 2015). Suppliers:According to Appendix 1, Wesfarmers considers their suppliers as another key stakeholder group and the company is committed towards providing the long-term benefits totheirsuppliers(sustainability.wesfarmers.com.au2019).Forprovidingcredit,the suppliers are needed to assess Wesfarmers’s liquidity position for repaying the credit of the suppliers. Hence, the presence of material misstatements can provide the suppliers with materially misstated information about the company’s liquidity position. Government:As per Appendix 1, Wesfarmers considers the Australian Government as a crucial key stakeholder group and the company has to ensure the payment of tax to the government(sustainability.wesfarmers.com.au2019).Thepresenceofmaterial misstatements in the financial statements of Wesfarmers can affect the company’s ability to make the tax payment in timey basis (Córcoles and Ponce 2013). The above discussion indicates towards the crucial fact that the inappropriate recognition, disclosure and adjustments of material misstatements can create the risk of affecting the processes of decision-making by the key stakeholders. In the presence of this
5AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY risk of material misstatements, Wesfarmers’s shareholders will not be able to assess whether the company is performing well or not. After that, the risk for the employees will be the uncertainty about their futures in the company. For the suppliers, they can face the risk of business loss due to incorrect liquidity decisions. For the government, non-payment of tax will create loss for them (Butleret al.2013). 3. Indepdence, Whistleblowing and Public Interest Requirement as per APES 110 3.1 Independence Auditor indepdence is considered as a major aspect for increasing the audit quality and it refers to the independence of the external auditors from the events or parties that may have financial or non-financial interest in the business of the audit client (Tepalagul and Lin 2015). With the aim to maintain the required independence, it is needed for the auditors to maintain the audit integrity so that the audit processes can be performed in the most objective manner. It is possible for the auditors to avoid any kind of conflict of interest and influence on the development of the audit opinion in the presence of the required compliance with the audit independence (Mostafa Mohamed and Hussien Habib 2013). 3.2 Whistleblowing The process of whistleblowing is considered when a specific supplier, employee, contractor or other from the organisation select the outside management channels with the aim to report any suspected misconduct or wrongdoing within the organization for example speaking out of the confidential manner and others (Zhang, Pany and Reckers 2013). The process of whistleblowing can be done in internal procedures set up by the company or with the assistance of the external body such as regulatory bodies. In addition, public disclosure
6AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY to the media can also be considered as the process of whistleblowing (Soni, Maroun and Padia 2015). 3.3 Public Interest Requirements of APES 110 The presence of specific standards and principles can be seen in the documents of APES 110Code of Ethics for Professional Accountantsthat the auditors are needed to follow for the public interest requirements. The presence of certain regulations can be seen inAPES 110for providing thenecessary safeguardsto the internal whistle-blowers (apesb.org.au 2019). They are discussed below. As perSection AUST210.11.1 of APES 110, when there is an instruction on an auditor to get the audit nomination for the replacement of the current auditors of the client, it is needed for the auditor to request the audit client so that the auditor can get the nomination related information from the existing auditor (apesb.org.au 2019). It is needed for the auditor to request for the nomination related information to the existing auditor in writing if the client accepts the request. However, it is needed to reject the audit nomination in case the client disapprove the request of the auditor (apesb.org.au 2019). This regulation is essential for the whistle-blowers. At the same time, it can be found fromSection 100.1 of APES 110that under the audit profession, the auditors accept the responsibility of acting in the favour of the public as they should not solely act in the favour of the audit client (apesb.org.au 2019). 4. Lessons from Enron Collapse and Arthur Anderson 4.1 Lessons from Enron The collapse of Enron provides the auditors and the audit profession with certain lessons and they are discussed below:
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7AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY Standards of Audit and Accounting:It can be seen from the Enron scandal that there were certain major issues in the accounting as well as auditing standard of the company which contributed hugely towards the collapse of the firm. In order to address this concern, there is a desperate need for the introduction of correct as well as appropriate accounting and auditing standards; and thus, the adherence with the global accounting and auditing standards is needed (Jones and Stanton 2013). Fraudulent Activities in Accounting:As per the information from the Enron scandal, Arthur Andersen, the auditor of Enron provided major assistance to the management of the company for the falsification of the accounting books for both of their own benefits; and this was one major reason for the appointment of Arthur Andersen in Enron. Hence, in order to address this, the government agencies need to be provided with the audit responsibilities of the companies instead of the private accounting firms. After that, there must be restriction on the authority of the auditors to provide non-audit and consultancy services to the audit clients due to the fact that this can lead to the creation of self-interest threat of audit indepdence (Alleyne and Elson 2013). Motivation for the Auditors:The scandal of Enron has helped the whole audit profession in informing the fact that the imposed penalties on the auditors can create dissatisfaction among them when the audit quality can be improved in the presence of proper incentives for the auditors. This can be done in the presence of the compliance of the auditors with the principles of integrity and professional competence and due care. In this purpose, one major way to increase the audit quality is the application of auditor independent insight as it plays a crucial role in the identification of the strengths and weaknesses of audit operations (Bean 2018).
8AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY Role of Auditor Independent Oversight:The collapse of Enron has provided the auditors with a crucial lesson that the quality of audit can be enhanced in the presence of auditor independent oversight and this oversight can be developed by the auditors in gaining the needed skills, experience and knowledge. At the same time, the application of the auditor independent oversight needs the required inspection on the applied audit judgements by the auditors for expressing the audit opinions on the presence of material misstatements (van Rinsum 2017). Auditor and Audit Committee:The audit clients have received one major lesson from the scandal of Enron that it is their utmost priority to ensure the true and fair disclosure of the financial information of their companies as this aspect is needed for the application of the auditor independent oversight. With the aim to achieve this, the companies are needed to ensure the presence of amity between the external auditors and the audit committee as the members of the audit committee can get valuable advises from the external auditors on how to maintain the true and fairness of the financial information disclosure (Okezie 2016). Internal Control:Another major lesson that can be obtained from the collapse of Enron that the audit clients can re-gain the confidence of the shareholders by strengthening the internal control related to financial reporting. The presence of strong internal control assists the companies in the true and fair disclosure of all of their accounting and financial information. For this, the external auditors must gain understanding about the clients’ internal control strengths and weaknesses by discussing with the internal control members (Markham 2015).
9AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY 4.2 Lessons from the Behaviour of Arthur Andersen Arthur Andersen was the auditor of Enron at the time of the company’s collapse. At that time, Arthur Andersen had the reputation of being the second oldest audit firm. As per the audit responsibility in Enron, Arthur Andersen was liable to provide assurance on the fact that whether there was any material misstatements in the company’s financial statements or not as the key stakeholders of the company were supposed to consider that report for making the investment decision (Isaacs 2013). However, major audit failure can be seen from the side of Arthur Andersen in fulfilling this responsibility. The Enron case shows that there were major business relationships between Arthur Andersen and Enron as the company employed jobs to some of the employees of Enron and it implied the presence of self-interest threat for Arthur Andersen in Enron. In the presence of self-interest, Arthur Andersen did not ask for the information related to audit nomination to Enron. At the same time, some of the crucial documents were destroyed by certain audit members of Arthur Andersen before the investigation of the federal government agencies. Based on the above discussion, it can be said that Arthur Andersen was dishonest and did not comply with the audit standards and requirements (Davies 2016). 5. Audit Quality and Steps Auditors Need to Take to Address the Warning There is not any specific definition of Audit Quality as per the global auditing standards, but the Australian Securities and Investment Commission has been able to provide a specific definition of audit quality. It can be seen from the ASIC definition that audit quality can be regarded as the substances or mattes that provide the auditors with major assistance in conducting the audit works in the most objective manner that is to identify the presence of any material misstatements in the financial statements (asic.gov.au
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10AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY 2019). After that, the auditors are needed to commutate the discovered disputes in the financial statements. The insight that can be obtained from the warning of Greg Medcraft is that it is needed for the auditors of the big four audit firms in Australia to enhance their audit quality in order to avoid the occurrence of another Enron scandal (abc.net.au 2019). At the same time, Greg Medcraftalso put major emphasis on the fact that the auditors of Australia are needed to be extra careful and responsible while conducting the audit of large Australian organizations for avoiding the collapses like Enron in the country (abc.net.au 2019). In order to maintain this, the main requirement for the auditors to ensure the fact that they have complied with all required ethical and fundamental principles ofauditprofessionwhilesearchingforthematerialmisstatementsinthefinancial statements of the clients. In this context, it needs to be mentioned thatSection 2 of APES 110puts the obligation on the auditors that they are needed to ensure the truthfulness and fairness of the company’s financial statements (apesb.org.au 2019). Failure in audit can be considered as a major reason for the collapse of Enron and thus, it is needed for the auditors to maintain the above-discussed compliance for make their audit successful. As per the statement of Greg Medcraft, for the period of eighteen months up to 2016 December, ASIC took the initiative to collect the key audit samples of the big four audit firms and the have found the fact that these big four audit firms failed to provide the needed assurance on material misstatements in 23% of the cases (abc.net.au 2019). As per him, one major reason for this failure of the lack of the ability of the auditors to face the challenging audit circumstances and the main reason for this is the lack of professional scepticism (abc.net.au 2019). With the aim to address this, it is needed for the auditors of Australia to develop an attitude that comprises of a questioning mind, being alert to the
11AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY challenging auditing conditions which may indicate that that is material misstatement because of errors and frauds. It implies that critical assessment of the condition is needed from the auditors (Quadackers, Groot and Wright 2014). Greg Medcraft has mentioned the fact that for more than six years, ASIC piloted 7000 high-intensity surveillance and the result contributed towards the confinement of more than 80 people and the restriction of more than 600 and refunded $1.3 billion to the victims (abc.net.au 2019). Both the regulatory authorities and the Australian government decided to impose legal penalties on them as it was evident that civil penalties were not sufficient (abc.net.au 2019). It indicates towards the necessity of the auditors to maintain audit independence so that safeguards can be applied to reduce the risks to the safe level. It is needed for the auditors to comply with the public interest requirement related principles inAPES 110. As per the standard ofAPES 110, Section 290.155, in case the company has only few members with the required knowledge and experience to conduct the audit operations, it may not be possible to apply the safeguard related to the rotation of key audit staffs (apesb.org.au 2019). As per the same section, in case the regulatory authority has relieved the company from the process of key audit members’ rotation, then it is possible for the audit members to continue as a key audit member for more than seven years (apesb.org.au 2019). The auditors are needed to ensure their compliance with this particular standard. At the same time,APES 110, Section 100.1states that an important aspect of the audit profession is that it demands the commitment of the auditors to act in the public interest; and thus, it is not the responsibility of the members to exclusively satisfy the needs of an individual client or employer (apesb.org.au 2019). Thus, it can be seen from
12AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY the above discussion that the auditors are needed to adhere to these principles for the public interest requirement of the profession (apesb.org.au 2019). Thus, in case the Australian auditors want to address the warning of Greg Medcraft related to the reoccurrence of the collapses like Enron in Australia, they must ensure their fullcomplianceandadherencetotheauditingfundamentalandethicalprinciples (abc.net.au 2019). At the same time, the need for the auditors is to develop professional scepticism with the aim to acquire the necessary assurance on the fact that the financial statements are free from material misstatements. While consideringAPES 110, it is one of the major responsibilities of the Australian auditors to adhere to the five ethical principles that are integrity, objectivity, professional compliance and due care, confidentiality and professional behaviour (apesb.org.au 2019). Apart from these, the big four audit firms of Australia are needed to ensure the enhancement of their audit quality by being more responsible as well as accountable for the audit of the large Australian corporations. 6. Conclusion As per the above discussion, the key stakeholders of Wesfarmers can get majorly affected in the presence of improper identification, disclosure and adjustments due to the fact that it can create the major risk of affecting the key decision-making process about the resources of the company. The above discussion also shows that the auditors are needed to put attention to indepdence as it helps them in expressing the conflict free audit opinion. In addition, the process of whistleblowing is crucial for the companies to report the unethical business operations within the companies. Moreover, the auditors are needed to follow certain principles likesAPES 110, Section AUST210.11.1andAPES 110, Section 100.1. After that, the above discussion also discusses about the main lessons that the auditor can get
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13AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY from the collapse of Enron; some of them are the need for new accounting and auditing standards, use of auditors independent insight, importance of internal control and others. Lastly, it can be seen from the above discussion that the big audit firms are needed to improve their audit quality for the large companies and the auditors are needed to comply with all the auditing standards and principles. All these steps are required to stop the occurrence of Enron like collapse in Australia.
14AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY 7. References ABC News. 2017.Poor auditing could be 'canary in the coal mine' for financial crisis: ASIC. [online] Available at: https://www.abc.net.au/news/2017-11-03/asic-boss-concerned-over- poor-auditing/9114490 [Accessed 20 Jan. 2019]. Alleyne, B.J. and Elson, R.J., 2013. The impact of federal regulations on identifying, preventing, and eliminating corporate fraud.Journal of Legal, Ethicaland Regulatory Issues,16(1), p.91. Apesb.org.au.2019.[online]Availableat: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf[Accessed 23 Jan. 2019]. Asic.gov.au. 2019.Audit quality - The role of others | ASIC - Australian Securities and InvestmentsCommission.[online]Availableat: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/audit- quality-the-role-of-others/ [Accessed 20 Jan. 2019]. Bean, E.J., 2018. Taking on Enron and Its Bankers. InFinancial Exposure(pp. 85-122). Palgrave Macmillan, Cham. Bridoux, F. and Stoelhorst, J.W., 2014. Microfoundations for stakeholder theory: Managing stakeholders with heterogeneous motives.Strategic Management Journal,35(1), pp.107- 125. Butler, J.R., Wong, G.Y., Metcalfe, D.J., Honzák, M., Pert, P.L., Rao, N., van Grieken, M.E., Lawson, T., Bruce, C., Kroon, F.J. and Brodie, J.E., 2013. An analysis of trade-offs between multipleecosystemservicesandstakeholderslinkedtolanduseandwaterquality
15AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY managementintheGreatBarrierReef,Australia.Agriculture,ecosystems& environment,180, pp.176-191. Chen, Y.S., Hsu, J., Huang, M.T. and Yang, P.S., 2013. Quality, size, and performance of audit firms. Córcoles, Y.R. and Ponce, Á.T., 2013. Cost–benefit analysis of intellectual capital disclosure: University stakeholders’ view.Revista de Contabilidad,16(2), pp.106-117. Davies, A., 2016.The globalisation of corporate governance: The challenge of clashing cultures. Routledge. Gonzalez-Zapata, F. and Heeks, R., 2015. The multiple meanings of open government data: Understandingdifferentstakeholdersandtheirperspectives.GovernmentInformation Quarterly,32(4), pp.441-452. Isaacs, T., 2013. Corporate agency and corporate wrongdoing.New Criminal Law Review: In International and Interdisciplinary Journal,16(2), pp.241-260. Jones, M.J. and Stanton, P., 2013, July. Enron Cartoons: Accounting in the Spotlight. InSeventh Asia Pacific Interdisciplinary Research in Accounting Conference(p. 136). Kobe: The APIRA Conference Committee. Knechel, W.R. and Salterio, S.E., 2016.Auditing: Assurance and risk. Routledge. Markham, J.W., 2015.A financial history of modern US corporate scandals: From Enron to reform. Routledge.
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16AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY Martinov-Bennie, N. and Mladenovic, R., 2015. Investigation of the impact of an ethical framework and an integrated ethics education on accounting students’ ethical sensitivity and judgment.Journal of Business Ethics,127(1), pp.189-203. Mostafa Mohamed, D. and Hussien Habib, M., 2013. Auditor independence, audit quality andthemandatoryauditorrotationinEgypt.Education,BusinessandSociety: Contemporary Middle Eastern Issues,6(2), pp.116-144. Okezie, S.O., 2016. Auditing and ethical sensitivity: Resolving the dilemma.European Journal of Accounting, Auditing, and Finance Research,4(4), pp.25-36. Quadackers, L., Groot, T. and Wright, A., 2014. Auditors’ professional skepticism: Neutrality versus presumptive doubt.Contemporary accounting research,31(3), pp.639-657. Soni, F., Maroun, W. and Padia, N., 2015. Perceptions of justice as a catalyst for whistle- blowing by trainee auditors in South Africa.Meditari Accountancy Research,23(1), pp.118- 140. Sustainability.wesfarmers.com.au.2019.Stakeholderengagement. [online] Availableat: http://2015.sustainability.wesfarmers.com.au/our-approach/stakeholder-engagement/ [Accessed 23 Jan. 2019]. Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review.Journal of Accounting, Auditing & Finance,30(1), pp.101-121. van Rinsum, M., 2017. How can auditors avoid the perils of aggressive accounting?.RSM Discovery-Management Knowledge,30(2), pp.14-16. Zhang, J., Pany, K. and Reckers, P.M., 2013. Under which conditions are whistleblowing “best practices” best?.Auditing: A Journal of Practice & Theory,32(3), pp.171-181.
17AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY 8. Appendices 1. Key Stakeholders of Wesfarmers