Commentary on Ethical Principles in Auditing

This report provides commentary on several case studies related to potential violations of ethical principles in auditing. It discusses which ethical principles were compromised and why or why not it is a violation. Additionally, it covers threats to auditor independence and their implications on the auditing firm. The report also includes references for further reading.

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
In the given assignment, several case studies have been given which needs to be commented
upon as to whether or not they are potential violation to the general ethical principles as
mentioned in APES 110. Furthermore, the report also mentions which ethical primciple has been
compromised and why or not it is a violation. Furthermore, there are 2 mnore case studies which
deals with the auditor’s independence where it has been discussed as to whether the conditions
are threat to their independence and what are its implications on the auditor as well as the
auditing firm.
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Contents
Question No. 1.............................................................................................................................................4
Question No. 2.............................................................................................................................................6
References...................................................................................................................................................8
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Question No. 1
a. In the given case, Jenny Wang is the senior auditor of the given company Panania Car
Pty Ltd. which is in the business of selling old and new cars. The sales manager of the
company mentions to the auditors that is sale is coming up for the long established
dealers and since Jenny has been auditing the firm for last 6 years, she would be eligible
for purchasing the cars at 20 percent discount (Alexander, 2016). Ideally, this is a kind of
compromise with the independence of the auditor as this may lead to biasness in the
report that will be published. Independence is one of the most important criterion to be
fulfilled by the auditors as the audit report prepared by them forms the basis of decision
making by many stakeholders and this 20 percent discount may act as an incentive for
persuading auditor to give biased report.
b. In the 2nd case, Katrina Wearne is auditing the client Lancom Cosmetics. She has been
doing the audit since November and December and has been given the Christmas gift of
cosmetics worth $ 350 by the company. As per the rules of the professional ethics and the
regulations mentioned in APES 110, the auditors should not accept any monetary
consideration or any other gift, etc other than the audit fees which may have an effect of
compromising with the auditor’s independence. The standards and the general ethical
principles restrict the auditors to accept such gifts in order to avoid any biasnesss and
sympathetic attitude towards the report preparation (Bromwich & Scapens, 2016).
c. Here, the given client is seeking for assistance with regards to the installation of the
computer system for maintaining the inventory and production reports from the chartered
accountant, D. Marron. As he is not having nay professional skill and expertise with
respect to the given work, he hires a computer consultant who assures to take the given
work and fix it. Now since this is outside the scope of the expertise of the chartered
accountant and his work skills, he is not being able to review the same and just accept to
give a go ahead to the technician for installation of computer machine once client does
agree for the same. This is somewhat a professional non compliance and against the
General Ethical Principles as the chartered accountant should not have accepted the
enegagement as it does not deals with the kind of work in which he deals in and now he
will be responsible and accountable for the same (Bizfluent, 2017).
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d. The given case is one describing the peer review where six chartered accounting firms are
taking part amongst themselves to do a quality assurance check. Under this review
mechanism, each of the firms will be checking the working papers of the other firms and
will discuss the significant strength and weaknesses amongst them to improve the quality
of audit. In the given case, what happens is the auditor doing the audit of one firm
discusses the strengths and weaknesses of the firm with the auditor of another firm. There
can be two aspects to it (Chron, 2017). If it is general discussion then the same does not
results in professional non compalinace as the agreement would have been signed by the
parties to the audit to discuss the findings to improve the quality of audit but in case it is
regarding the specific points, then it results in the breach of confidentiality clause which
should be adhered to by the auditor in this case. The auditor may be penalised for
breaching confidentiality of this type. In this case, the strengths and the weaknesses
should have been discussed with the auditor of the respective firm (Visinescu, et al.,
2017).
e. In the given case, Bill Holland, a chartered accountant has also set up a casuality and fire
insurance agency to assists his auditing and taxation services. He does not uses his own
name in any of the insurance papers but but the name of his manager, Simone Taylor.
Holland often asks Simon to discuss and review the adequacy of the insurance of the
client with the respective management in case the client seems to be underinsured. In this
particular case, the auditor does not possess the professional skill and expertise to
determine what is the insurance which will be required by the client and so he is right to
not use his name in the insurance documents but since the services are being provided in
his firm’s name, so he would be responsible for the same. This falls under the other
assurance engagements under Section 290 which needs to be checked (Linden &
Freeman, 2017).
f. In the given case, Emma Lawrence, one of the public accountants in a small country
provides a variety of services to its clients like the taxation services, the amangement
advisory services, book keeping services and also conducts the audit for the same client.
This is one of the serious non complainaces of the General Ethical Principles as this
poses the risk of independence on the work being performed by the auditor. A person
who is managing and is involved in the preparation of the books of accounts cannot be
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perfoming the audit of the same client (Dichev, 2017). This has been clearly stated in
Section 290.172. It can only be done by the same audit provided the same personnel who
will be in the audit team is not a part of the accounting team and also the accounting
entity in which the services will be provided is immaterial to the Financial statements of
the overall company on which the opinion will be expressed (Kuhn & Morris, 2016).
Question No. 2
1. In the given case Enid Blyton has been associated with Anthony Don Chartered
Accounting firm for last 4 years and has recently started with the audit of the newly
publicly listed client Green Thumbs environmental company having been listed just 1
month ago. However, The company has started using the services of contractor to dispose
the toxic waste. The issue is this contractor is widely known and has won several
contracts in the past but there have been several unfavourable articles regarding it. Here
the audit manager Peter Don is right in mentioning that Endi must go forward and
disclose material misstatements, if any, which could be foreseen and also it is the
responsibility of the auditor express the true opinion and highlight the risks which the
contractor may pose for the company in the future (Raiborn, et al., 2016). It might be that
the financial statemnets may not be providing a true and fair view now and therefore,
since it is a new listed company, it may pose a threat on auditor’s independence and
might also result in expression an incorrect opinion in the absence of detailed information
regarding the contractor. The company in the course of producing the toxic waste should
also be responsible for disposing it off in a socially and environmentally ethical manner
so that the society is not being impacted as a result of the same (Saeidi, 2012).
2. Jean Douglas has just started the audit of the financial statements of Dooleys and made
an observation and notes of the interview with the CEO who apologised for not making
the final auditor payment of 30% for the previous years on the grounds that he will
release the cheque once he is “happy” with the progress of the audit. Dooley has also
made clear to Douglas that the company is starting to search for the auditors for next year
and that Dooley’s audit comprises 40% of the total audit receipts of the firm’s income.
The CEO has also promised that the company will be providing a free trip to Europe to
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its auditors once the audit is completed. Jean is concerned on several aspects of the
company as it has not been following the appropriate accounting standards in valuation of
inventory and has also not been taking the impact of reduction in the inventory fair values
in financial statements which is material (Sithole, et al., 2017). This is completely against
the General Ethical Principle and the auditor should report this material mistatament in
the financial statements. Also since 40% of ist total income comprises of Dooley’s audit
fees and the CEO of the company is also not clearing the old payments, this might have
an impact on the independence of the auditor and he might be influenced to report as per
the needs and wishes of the management, thereby hiding the true and fair picture of the
books of accounts (Félix, 2017). This is against the complainace and should be reported
in the audit report and the annual accounts of the company that the relevant standards are
not being followed and it poses substantial risk to the value of the company.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of
insurance companies. MASTER THESIS, pp. 1-69.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of
Enterprise Information Management, 30(6).
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran. African
Journal of Business Management, 6(23), pp. 7031-41.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
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