HI6026 Audit, Assurance and Compliance: Baumgartner Case Analysis

This report examines the audit case of Ryan Wealth Holdings Pty Ltd vs Baumgartner, where the audit firm, Baumgartner Partners, was found liable for losses related to a Self Managed Superannuation Fund (SMSF). The report details the facts of the case, highlighting irregularities in investments and the auditor's failure to detect them, leading to significant financial damages. It explores the root causes of the audit failure, emphasizing the auditor's lack of due care and professional judgment. The report further discusses the reporting requirements of auditing standards, the auditor's professional, legal, and ethical responsibilities, and the importance of proper audit planning procedures. It also analyzes specific audit procedures for transactions and balances, including the confirmation of investments. The report concludes by emphasizing the importance of ethical conduct, risk assessment, and adherence to auditing standards to prevent audit negligence and protect the reputation of the auditing profession. The report also provides recommendations to mitigate the risk of litigation and ensure professional integrity. The report fulfills the requirements of the Holmes Institute HI6026 Audit, Assurance and Compliance unit.

Audit, Assurance and Compliance

Ryan Wealth Holdings Pty Ltd vs Baumgartner
Executive Summary
In light of the technological advancements, auditing has become an art and skill more than a
subject of knowledge and expertise. With the advancement towards a fast money mindset, it is
impossible to believe that businesses are being run without any malpractices. It is the duty of the
directors to prepare and present the financial information in a meaningful manner. The auditor is
responsible to audit the financial statements and issue an opinion whether the financial
statements projects an authentic view of the current situation. Ethics are moral principles guiding
the behavior of the person, whether it is the director of the company or the auditor. A lot of cases
have been reported on these areas and hence the auditing profession has faced the media
criticism several times. Such audit failures tarnish the credibility of the auditing profession. This
assignment discusses one such case and possible implication of the same. A few measures to
mitigate such audit risks have also been discussed.
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
Contents
Introduction.................................................................................................................................................4
Facts of the case..........................................................................................................................................4
Root causes and pertinent issues of the case..............................................................................................5
Understanding the reporting requirements of the auditing standards.......................................................5
Understanding auditor’s professional, legal and ethical responsibilities.....................................................6
Understanding audit planning procedures..................................................................................................7
Audit procedures for transactions and balances.........................................................................................9
Confirmation of investments has to be obtained at the year-end...............................................................9
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
Introduction
Audit negligence is becoming a growing issue today. It arises due to the failure to perform the
audit according to the standards and principles set out by the applicable governing bodies. The
Sarbanes Oxley Act was enacted in 2002 for overseeing and regulation of accounting firms and
detection of the internal weakness that result in audit malpractice. The case selected for analysis
here is Ryan Wealth Holdings Pty Ltd vs Baumgartner. It is a case of audit of a Self Managed
Superannuation Fund (SMSF) where the auditor is found liable for the losses. The audit firm is
Baumgartner Partners. The audit of the SMSF was undertaken for the years 2007 to 2009. The
irregularities in reporting were failed o be detected for all these years and eventually when the
same was detected, the audit firm was held liable for monetary compensation against the losses
(Moroney & Trotman, 2016).
Facts of the case
• The trustees of Ryan Holdings Retirement Fund made investments in the form of Loans to
several entities and in unit trusts, in which the adviser had a personal interest.
• These investments were classified under the head ‘Mortgage Loans’ in the financial
statements. In reality, this was not a mortgage loan.
• The auditor was not provided with sufficient appropriate evidence to conclude the existence
of the mortgage loans.
• The auditor also failed to obtain reliable evidence to substantiate the existence of the
mortgage loans.
• Despite this, every year the audit was carried out and the auditor had issued an unqualified
report.
By the time these irregularities were discovered, the facility to redeem these investments was
almost lost and nonexistent.
Hence the client clearly laid the burden on the auditor’s failure which had resulted in huge
losses for the fund.
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
• The Court quantified the damages involved as $2,260,140. These losses had to be borne by
the auditor and the client with an apportionment of 90% to the auditor and 10% to the fund
trustees (Brownlee, 2018).
Root causes and pertinent issues of the case
It is the duty of the auditor to receive proper evidence with respect to the existence,
measurement, and reporting of the Investments on the Statement of the Financial position. In this
case, the auditor had not exercised reasonable care and diligence to ensure that the investments
reported were at the lower of cost or market value (Nicolaescu, 2013). Professional judgment
was not also exercised in assessing the reasonableness of the figures of Investments disclosed on
the financial statements (Mock et. al, 2013). Further, it is upon the auditor to inform the trustees
about the existence of conflict while making any investment as the level of risk involved in this
case is pretty high. Loans and Investments should be subject to scrutiny by the management and
the auditor. As the management has failed in this case, the auditor has a clear responsibility to
bring the same to the limelight (Leisyte & Westerheijden, 2014).
As years passed by, the investments lost its market value and the recoverability become a
question. The damages were assessed by the court with reference to a commercial possibility and
the degree of likelihood of the chances it would yield success. The financial audit failed to
include a valuation report to verify the valuation of all investments, and the verification of
ownership of the fund assets by title deeds. Thus the gross impact of these issues has resulted in
huge monetary losses (Livne, 2015).
Understanding the reporting requirements of the auditing standards
The trustees of the SMSF are required to appoint an auditor to conduct an annual financial audit
and also a compliance audit. The findings of the auditor have to be presented to the trustees in an
audit report. The audit report includes two parts – Part A and Part B.
Part A of the audit report requires the auditor to perform the financial audit and form an opinion
regarding the fair representation of the financial position of the fund and its operations. To form
such an opinion, the auditor needs to have proper evidence on the assets and liabilities of the
fund. Such assets and liabilities should be owned by the fund, valued appropriately in accordance
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
with the requirements of the Australian Tax Office and the relevant accounting standards and
classified according to the applicable accounting and reporting standards (Goodstein, 2011). The
audit should also ensure that no material assets or liabilities have been excluded from reporting.
The auditor’s qualification in Part A could be due to the fact that the investments reported might
not fetch the reported market value. In such cases, auditors protect themselves from future
litigation by qualifying the audit report.
Part B is an audit of the Compliance part by the trustees of the SMSF whether the fund has
complied with the relevant regulations laid down by the Superannuation Industry (Supervision)
Act and Regulations. If the auditor has reasons to believe that the trustees have violated or
breached the provisions, then a qualified audit report follows. Such failure can lead to the fund’s
losing its concessional tax treatment facility. The qualification must be reported to the ATO on
the Annual Tax Return. The Trustees can be fined or imprisoned based on the decision of the
Commissioner (Rezaee & Kedia, 2012).
Understanding auditor’s professional, legal and ethical responsibilities
The concept of audit comes to the forefront when the auditor provides an unqualified opinion
even considering the fact that the statements are not authentic. Financial statements could be
misstated either by producing information that is untrue or omission of material facts and failure
to include such material information (Geoffrey, Joleen & David, 2016). Over the years, in almost
every country, there have been high profile audit failure cases reported. The nature of fraud
might be different in every case, but the onus of the failure lies clearly in the hands of the
auditor. The Code of Ethics is set out in the Professional Standards. It imposes the principle of
integrity on all the professional accountants. It involves indulging in fair business and honesty
(Shah, 2013). The auditor should also be objective in his approach and not allow any interest,
conflict or bias to interfere in audit decisions. Relationships or audits that might pose a threat to
his independence should be avoided. Professional competence and due care is another
prerequisite of an auditor. In addition to the knowledge, skills and competence should also be
regularly updated with the latest technological trends (Ghandar & Tsahuridu, 2013). There
should be strict adherence to the relevant legislative, technical and professional standards while
providing the audit services. Professional competence should be applied appropriately on the
case to case basis. The auditor should refrain from such acts that will bring disrepute or discredit
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to the profession (Wood, 2011). Confidentiality is also a significant requirement in the code of
ethics. Thus the professional responsibilities of the auditor are laid down by the Institute, legal
responsibilities are laid down by the governing and regulatory authorities and the ethical
responsibilities are laid down by the Code of Ethics (English, Guthrie, Broadbent & Laughlin,
2010). A lapse in any one area also invites negligence on the part of the auditors.
Understanding audit planning procedures
The auditors in their auditing capacity are needed to adhere to the following:
• Obtaining knowledge of the business, understanding of the organization and how it operates
(Subramanyam & Wild, 2014),
• Analysis of financial transactions and account balances and
• Assessment of Internal controls.
In case of SMSF, the auditor needs to obtain an understanding of the structure of trust, nature of
its administration and management, trustees linked to the management and the related parties to
the trustees and the members of the superannuation fund. As SMSF is a small and closed entity,
there might not be clear segregation of duties.
The auditor has to commence the audit by reviewing the trust deed whether it was properly
executed, it has complied with the SISA and SISR and the changes thereto and whether it has
individual trustees or corporate trustees and the payment of pensions to the trustees (Elder,
Beasley.& Arens, 2010).
To determine the solution to the conflict, the auditor examines the below components of the
process either separately, or together:
• Relevant facts
• Fundamental principles involved in the respective matter
• Established Internal controls
• Flaws in the internal controls
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
• Ethical and process related issues
• Alternative measures
The minimum audit documentation would include a letter of audit engagement, a representation
letter, working papers, timing, and level of audit procedures performed, audit planning papers,
results and conclusions drawn from the evidence, management letter and audit finalization
report, a copy of the audit report and final, signed SMSF financial report and a copy of the
written advice provided to the ATO (Brownlee, 2018).
Evaluate the business risk and assess the internal controls
The auditor needs to evaluate whether the SMSF has previously breached any of the regulations
of the SISA or SISR and also whether there are any outstanding or matter that needs evaluation
with the ATO (Wright & Charles, 2012). This gives an idea about the compliance framework of
the SMSF and will also impact the risk assessment.
During the audit of SMSF, the major risk areas are:
• Investments
• Contributions and benefits
• Revenue
With reference to Investment, the existence, ownership, valuation, and timing has to be audited.
The auditor has to determine for what purpose the investments are made whether it is for the
retirement, death or disability and whether the investment procedure gives adequate exposure to
risk and diversification (Edward & Alexander, 2013).
Contributions have to be correctly calculated and allocated in a proper manner to the members in
the appropriate period to ensure the correct tax treatment. The preservation status is also be
worked out appropriately. The calculation of benefits has to be verified to ensure that no
unrecorded benefits are paid and also whether it is in accordance with the trust deed or not. It is
important that the revenue needs to be accounted with the correct accounting policies. The
auditors consider the internal controls that are relevant to the SMSF in the projection of financial
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
statements. Any shortfall in the system of accounting and internal control of SMSF are expected
to be reported during the financial audit.
Audit procedures for transactions and balances
The nature, timing, and extent of audit procedures depend on the factors listed below:
• The complying status of the SMSF in the prior years
• The current status of the SMSF – accumulation stage or defined benefits stage
• The stature and complexity of the transactions of the SMSF
• The involvement level of the trustees in the operations and transactions of the fund
• The nature of investments
• The investment range and whether it is internally managed or managed by a service
organization
• The potential impact of any previously known compliance issues
• In the case of employer-sponsored SMSF, the accounting and auditor of the same
• The availability of the service reports from the service organizations
• Due date of lodgment of the SMSF annual return
An annual review of the audit plan and procedures is also mandatory.
The nature of the constitution of the SMSF and the roles and responsibilities of the trustees help
in the evaluation of business risks and assessment of internal controls. The segregation of duties
might not be correct and in such situation, the auditor might have to rely on the internal control
effectiveness that will lessen the substantive testing (Dauber, 2009).
The auditor might design and implement such procedures that are either primary or entirely
substantive.
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
Confirmation of investments has to be obtained at the year-end.
Financial audit procedures are designed to receive evidence regarding the amounts disclosed on
the financial statements. These procedures solely depend upon the judgment of the auditor and
include a fair risk evaluation of material misstatements on the financial statements (Connelley,
2012). The appropriateness of the financial reporting framework is also assessed, the accounting
policies selected and the reasonableness of the accounting estimates done by the trustees.
Recommendations to audit strategy and procedures
SMSFs could be either managing entirely by themselves or use the services of an expert in the
below areas:
• Registry and Custody
• Assets and Property management and Investment advisory
• SMSF accounting and administration
• SMSF member administration
In such cases, it will have an impact on the audit procedures and for the identification of risks,
the auditor should look into the controls prevailing between the SMSF and such third parties.
The auditor needs to communicate with such third parties to obtain sufficient appropriate audit
information and the same can be incorporated in the audit procedures (Cappelleto, 2010).
The audit of SMSF is divided into two areas namely financial audit and compliance audit.
The audit strategy could incorporate the following areas:
• Have the trustees formulated an investment strategy and are they complying with the
investment restrictions?
• Are the trustees adhering to the contribution and benefits payment standards?
• Are the trustees carrying out the administrative obligations?
In case a breach if the SIS regulation goes undetected by the auditor, it can lead to audit risk.
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
Hence the audit strategy has to incorporate the full period and all the transactions. The scope of
the audit procedures can be extended based on the professional judgment of the auditor. Based
on the audit risk and other factors, the audit procedures can be discussed with the trustees. The
same should be agreed by the trustees before the commencement of the audit (Arens, Best,
Shailer & Loebbecke, 2013). Audit strategy should be designed in such a way that the minutest
details are also captured and the risk prone areas are taken care of.
Mitigation against professional and reputational damage
Every audit is exposed to a few risky areas that could land the auditor in potentially harmful
situations. Hence the auditor has to chart out a plan to mitigate the same. Auditing provides such
credibility and faith to the capital markets. It is believed to provide reasonable assurance to the
representations of the management in the form of financial statements (Cappelleto, 2010).
There are a few ways the auditor can militate against such losses and damages:
When the material misstatement ranks high, then in such a case, the detection risk needs to be set
at a lower level so that it lessens the audit risk to a level that is appropriate. As the level of
detection risk reduces, the auditor has to perform more substantive procedures to ensure that no
misstatement is missed out. It is almost impossible to rule out detection risk as the auditor will
not be able to have a look at every transaction. Hence inherent risk and control risks have to be
tackled appropriately. Inherent risk occurs when the auditor assumes the nonexistence of
internal controls. This risk can be reduced when the auditor gathers sufficient appropriate
evidence that allows them to make sufficient assertions about the existence and level of the
inherent risk.
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Ryan Wealth Holdings Pty Ltd vs Baumgartner
Conclusion
Audit risk estimation and application is specifically important for the auditor as it is more likely
that these specific errors in the balances and the transactions could lead to material misstatements
on the financial statements This risk mitigation can help in the protection of assets, like in this
current case; it could have saved the losses from the fudged mortgage loans. In addition to
compliance, it could help in improving the efficiency and increase the financial reliability and
integrity. In many cases of audit failures, it has been noticed that the auditors have been
dishonest. In some cases, there could also be management pressure to commit and indulge in the
fraud in return for exorbitant audit fees. Irrespective of the driving force behind the fraud, it
becomes the moral, professional and social responsibility of the auditor to adhere to the
principles and ensure justice to the stakeholders by presenting a true picture of the financial
statements. It can be achieved only by a change in the mindset and ensuring an independent
audit.
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