Responsibility of an Auditor in Auditing the Financial Statement

This document discusses the responsibility of an auditor in auditing the financial statement. It covers the importance of corporate governance and the role of auditors in ensuring transparency and accuracy in financial reporting. The document also highlights the duties and principles that auditors should adhere to. The case study of TRC and FFA is used to illustrate the consequences of negligence in auditing. Overall, the document emphasizes the importance of honest and diligent auditing practices.

Running head: RESPONSIBILITY OF AN AUDITOR IN AUDITING THE FINANCIAL
STATEMENT
Responsibility of an Auditor in Auditing the Financial Statement
Name of Student
Name of the University
Author Note

1Responsibility of an Auditor in Auditing the Financial Statement
Table of Contents
Answer to Q1.............................................................................................................................2
Answer to Question 2.................................................................................................................4
Answer to question 3..................................................................................................................5

2Responsibility of an Auditor in Auditing the Financial Statement
Answer to Q1.
Corporate governance refers to the set of rules, process and system within which a
corporation need to function (Tricker, 2015). Good corporate governance means increases the
promoter confidence in the business, and thus increases the company chances to raise more
funds from the public to do more business. The adoption of the corporate governance vary
from the enterprise to enterprise depending upon the size, complexity, nature of the business.
The corporate governance of the ASX revolve around the eight central principles, out
of which principle 8: remunerate fairly and responsibly has been discussed below as per the
question.
As per this principles a listed company in order to attract and retain quality director,
must have to provide them sufficient remuneration as a motivation factor to align their
interest in the company goals and objective (Claessens, & Yurtoglu, 2013).
The board of a listed company should have a remuneration committee which should have
a) Has at least three member a majority of them should be an independent director,
b) The remuneration committee should be chaired by an independent director,
c) Disclosure of the committee charter or guidelines,
d) Disclosure of the committee member names,
e) Disclosure of the number of times the committee meeting was held and the name of
the member who have attended the meeting.
It is a mandatory requirement for the listed entity to have a systematic and transparent
process for the designing the remuneration policy and setting the salary of the director
and Non- executive members (McCahery, Sautner & Starks, 2016).

3Responsibility of an Auditor in Auditing the Financial Statement
This is to be noted that the board of the director should not be biased in
bringing the matter before the board, in lieu of the remuneration or incentive. The
non-executive director should be independent in taking any business decision.
The relation between the director remuneration and their performance should be
clearly enunciated to the investor.
If a company is not having any remuneration committee then.it must disclose
the matter in the footnotes of the financial statement, also the company should make a
justification about the calculation of the existing remuneration structure.
In case if a remuneration committee include executive directors, then the salary of
those executive directors should not be decided by them (Khan, Muttakin & Siddiqui
2013).
In case of FFA corporate governance, the company is violating the norms of
the ASX corporate governance. The violation by the company is listed below-
As per the rule the independent directors of the company should not hold more than
the 5 % share of the company. Those executive director should be free from the any
business relationship that materially affects their independence judgment.
In the business of the FFA the Kevin Oliver the Non-Executive directors are
holding a share value of 11 % which is against the law and regulation of the company
and the same person is holding the position of the executive at the Macquarie bank.
On the other hand Jacqueline grace the non-executive director is in the business
relationship apart from the FFA business which is the breach in law of the corporate
governance. The FFA is also not having any remuneration committee to decide the
remuneration of the directors this matters should be disclosed appropriately.

4Responsibility of an Auditor in Auditing the Financial Statement
Answer to Question 2
As per the information provided by the Steve barker on the FFA revenue recognition
policy about the revenue generated from the sale of the cattle. As per the Steve barker
information, the revenue which has been generated constitute about the 50% of the total
revenue from the FFA business (Lawson et al.,2013).
The answer to this question has been given based on the American accounting association
model.
1. Determine the fact.
In the given question Steve barker has presented the information, about the
revenue recognition principle of the FFA, revenue recognised from the sale of the
cattle is not appropriate, revenue earned from the cattle is constitute of about 50% of
total revenue FFA business.
2. Define the ethical issue of the case.
As per the given case, Audit working paper are the property of the auditor and
he should at his discretion provide those working to client. The auditor has the
responsibility to include those working paper.it is advisable to the auditor to record
and demonstrate the working paper from year to year. The management of the
organization cannot refuse an auditor to use the record their finding in the working
paper.
3. Identify the major principle, value and rules.
As per the accounting standard, the revenue from business should be
recognised from it is realized, realizable and earned. If an agriculture product has
been classified for sale then the accounting standard says that the business should use

5Responsibility of an Auditor in Auditing the Financial Statement
fair market value approach, rather than the lower of the cost or market. A market basis
is acceptable if the product meet the following criteria (Casey, & Grenier 2014).
 The product should have an instant marketability at a cited market price that
cannot prejudiced by the producer.
 The product should have the characteristic of unit interchangeability.
 The product have the relatively negligible cost of disposal.
4. Assess the consequences
If the organization follow illegal or unlawful methods of accounting practice
then it will not represent the true position of the company business. This will
result in making the wrong business decision by the investor. Which will impact
the faithful representation of the general public.
5. Make your decision
As per the relevant accounting standard, the organization should appropriately
recognises the revenue from its business operation from the agriculture. For example
the revenue from the agricultural product should be recognised based on the American
accounting standard. Further the auditor should be given independence while auditing
the financial statement of the enterprise. Independence in auditing is the keystone on
which the respect and dignity of a profession is based. Management of the entity
should never act like a hindrance in the auditor professional work.

6Responsibility of an Auditor in Auditing the Financial Statement
Answer to question 3
In the given question, TRC is subsidiary company of FFA located in the Western
Australia that sells rural and agricultural supply (Ye, M., & Simunic, 2013). TRC is a market
giant and is having strong financial position
But the company is suffering huge losses from the past two years, so they decided to
change their accounting information system in order to more judiciously manage the
inventory sale. This upgrade was taken by the company on 31st march 2018. SBF which is the
accounting firm of the FFA, due to some reasons could not able to personally send their
auditor for financial statement , and arrange a third party accounting professional to review
the financial statement of the enterprise.
The third party auditor reviewed and evaluated the financial statement of the company
provide a positive opinion on the entity financial statement and support the change in the
accounting information system of the firm. The parent company named FFA decided to sale
the company stake to a company named M.C. Carron pastoral which is a situated in Western
Australia. The deal to sale the TRC was fixed by the parent company FFA for an amount of
44.8 million dollar.
On the other hand, later on when the financial statement of the TRC is being audited
by auditor of the SBF whose name is Kate Hammod. The auditor reports that the company
has suffered a loss on the change in the accounting information system of the enterprise. The
loss in the value amounted is $16.6 million in the inventory and the net assets by the
equivalent amount.

7Responsibility of an Auditor in Auditing the Financial Statement
As a result of the disclosure of such loss in the value of the net assets and the amount
of the inventory, The buyer company McCarran pastoral has withhold the payment of 44.8
million dollar to the company,
From the above detailed analysis of the company case, it has been evaluated that the
Accounting firm SBF has been in the negligence in their responsibility towards the firm.
SBF has been failed in exercising due care in the audit of TRC
Duties of an Auditors
Professional accountant have a vital responsibility towards the society. Investors,
trade payable, employers, and other sectors of the business community, government and the
public at large, rely on the financial accountant or the Auditor for sound financial accounting
knowledge and opinion on the financial statement of the enterprise. It is in the interest of the
financial auditors to offers an unbiased decision or opinion on the financial statement of the
entity. This will result only when a professional accountant is grounded in value and
principles.
Those principle are important for every professional accountant and auditors which are
mentioned below.
Integrity: A professional accountant should be straightforward and honest in performing
professional services.
Objectivity: A professional accountant should be fair and he should not allowed any
prejudice or bias, conflict of interest to override its objectivity.
Professional competence and due care: a professional accountant must perform
professional services with due care, competence, and diligence. The accountant must respect

8Responsibility of an Auditor in Auditing the Financial Statement
the confidentiality of information acquired during the audit. The auditor or the professional
accountant should not disclose any such information to the third party without any such
specific authority.
In the given case of TRC, SBF has appointed a third party as the auditor of the
company, who has given a wrong opinion on the financial statement of the TRP. This kind of
omission on the part of the auditor is matter of great concern for the whole professional
accountant and auditing society. This is because the auditor opinion is considered as great
matter for the general investor, because they rely on the auditor opinion in making any
investment decision.
The SBF before appointing any such third party auditor for their own client. The
auditor should consider the professional competence and technical knowledge of the auditor
whether he is qualified to give opinion on the financial statement. Therefore it can be said
that SBF has failed to apply professional skepticism and due care while expressing their
opinion on the financial statement.
FFA is guilty of contributory negligence
FFA which is parent company of TRC, has surely been in the negligence on their part in
applying the faithful representation principle. On the financial statement of the TRC, the
company has been overoptimistic in the company financial performance. The auditor before
forming an opinion on the financial statement of the enterprise should do the following task,
a) The auditor should ensure that adequate information has been disclosed with regards
to annual accounts of the company.

9Responsibility of an Auditor in Auditing the Financial Statement
b) Auditor should determine that annual accounts which are prepared by the
management of the organization should convey the real picture of the enterprise assets
and liability i.e. it should not conceal any material misstatement.
c) Auditor should make a scrutiny of the book of account whether those financial
records has been prepared keeping in mind the legal requirement.
SBF owes a duty of care to McCarran Pastoral
The auditor appointed by the SBF has misrepresented the financial position and
financial performance of the TRC, this misrepresentation results in making wrong economic
decision of the McCarran pastoral which is the buyer company. The auditor has not given
true and fair view of the TRC, therefore there is an increase in the chances of manipulation by
the management or the senior position officer.
If sale of the TRC stake get finalized on the basis of the material misrepresentation of
the enterprise then this would result in the loss of revenue to the purchasing company and
loose in the faith of the accountant and auditing professional. But, as it can be seen that only
partial payment has been done by the purchasing company to the SBF for the stake in the
TRC. Therefore since the decision of the McCarran has been made on the wrong data of the
company, therefore the company SBF now owes to return the amount that they have received
partially from the purchasing company.
Conclusion
From the analysis of the above report it can be concluded that financial statement
analysis is very important for any stake holder to make investment decision, these investment

10Responsibility of an Auditor in Auditing the Financial Statement
decision also depends upon the auditor opinion on the financial statement of the entity.
Therefore the role of the auditors and accounting professional cannot be denied for their
contribution in the auditing and analysis. Therefore every accounting professional should be
honest, sincere and must follow due care in their approach of the auditing.

11Responsibility of an Auditor in Auditing the Financial Statement
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