AUDIT 2018 - Analyzing Ethical Issues and Legal Liability in Auditing

This case study examines ethical and legal issues in the context of auditing, focusing on two scenarios. The first scenario involves a director with interests in two companies, raising ethical concerns about potential self-dealing and undue influence. The auditor, Janelle Davis, must navigate this conflict of interest and ensure fair practices. The second scenario involves GGL facing legal liability due to mining operations on unleased land, compounded by the auditor's failure to disclose a significant contingent liability in prior financial statements. This oversight led to a drop in share prices and potential claims of negligence against the auditors, MYH. The analysis considers relevant auditing standards, the code of ethics, and legal precedents, ultimately concluding that GGL has grounds to pursue a claim against MYH for failing to fulfill their duties and provide a true and fair view of the company's financial position. Desklib provides access to this and other solved assignments for students.

AUDIT
2018

1
By student name
Professor
Date: 20th June, 2018.
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CONTENTS:
Ethical Issues Case...........…………………………………………………......................…...3
Legal Liability Issue......................……………….....................................................................5
References......................……………….....................................................................................7
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Ethical Issues
Facts of the Case.
In this case there are two companies that include the same director, Mr. Brent Allen. The two
companies are Great Gold Limited, that extracts and refines gold at mines and Big Machine Limited
that lease large mining machinery and services to companies. GGL is taking most of the equipment
that it needs from BML, thus Janelle Davis who is auditor of both the stated companies feels that the
director is taking undue advantage of its position and is asking GGL to take machinery from BML in
order to increase the overall profitability of the company and his own share of revenue (Abdullah &
Said, 2017).
Ethical issues in the case.
The ethical issues in the case involves the point that whether one person who is involved with
the management of two companies should be influencing their operations in order to generate more
revenue for himself, which is not correct in any ways. In this case we see that GGL and BML are in
business with each other and have same director in common, so there is chances of the decisions
being influenced for self advantages and thus it becomes imperative whether the company is
functioning ethically or not.
The norms principles and values related to the case.
It will involve the audit principles and the code of ethics that the auditor needs to follow to
ensure that the books of the company are free from all kind of errors and true and fair view is
presented and also there should not be any unethical approach on part of management of the
company. The auditor has the responsibility of following the code of ethics and that the auditor of the
company needs to be ethical in its approach (Wang, Chiu, li, & Hsiao, 2018).
Alternative course of action
In this case, both are companies are related to each other in a way that both are having same
director and same auditor. Thus in that case the alternative course of action would be to see is at what
price are the machines being leased to GGL and whether they are more than or less than the market
price at which other companies are leasing the machinery. The auditor needs also needs to check that
the price at which the machines are leased are in lieu with other companies also and whether they can
get the machinery at lower prices from the other local companies. So in case the charges are more
than that then there is unethical approach that the company and the director is following and the
auditor needs to keep a check on that (Boghossian, 2017).
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Best course of action as per the norm
The best course of the actions would be to check that there is no influence on a personal basis
based. Also if two companies are related to each other they should not have the same director or the
same auditor as this is against the law so that should be taken care of. It should also be taken care
that all the local companies that can give the machinery at cheap rates they should reach out to the
company (Bouret, 2017). The main of the auditor should be to remove any possible chances of errors
that might be there in the system of the company so that the third parties that are related to the
company and depends on the auditors report get the best results when they invest in the company.
Outcome of all the options
Option 1 : The auditors does not investigate the matter and are ok with the director influencing the
prices of the commodity for his own personal sake. This would be unethical on part of the auditor and
would be against the code of ethics that requires the auditor to be good in his approach and unbiased
in all that he do. So he must see that the director is not taking undue advantage of his position (Delone
& Mclean, 2004).
Option 2 : The auditors checks the position of the director and sees whether the prices are as per the
market or not and in that case the auditors are ethical in their approach and can save the company
from paying more due to increased prices (Iggers, 2018).
Best Outcome
The decision should be option 2 as per which the auditor of the company should check that the
directors are not influencing the prices of the machinery that are leased and are proper market
research is being done to keep a check on the price inflation that is occurring in the company. The
auditor should be ethical in his approach and this is what the code of ethics asks him to follow, to see
that the books are showing the correct view and no adulteration is there.
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Legal Liability Issue
Introduction
In the given case, it is about GGL and MYH and the case of negligence, that GGL as a
corporation can file against MYH for their overall negligence in performing their duties to the best of
their abilities because of which the management had to suffer huge losses and the shareholders
affected as their returns were reduced. The case includes a decrease in the overall share prices of GGL
and there were many reasons that were responsible for this downfall. The most important reasons
being fall in the overall prices of gold and a mining claim that was put up against the company. As per
this, the company had carried off mining excavation in a Land, which was not meant for mining and
was not leased to the company. The company had to suffer because of that when a claim was initiated
against the company and the mining operations had to be removed from that area. Apart, from this
loss, the auditor in the books of accounts did not include a large contingent liability for this loss that
time and it was reflected only in the current year (Explaining auditors’ propensity to issue going-
concern opinions in Australia after the global financial crisis, 2017). Because of this, the shareholders
found that the books of accounts were not in a good position and the overall share prices had reduced
considerably. The shareholders have raised a concern that the liability should have been reflected in
the prior year’s itself and therefor a claim of negligence needs to be filled against the auditors of the
company. It is the responsibility of the auditors to see that the books of the company are showing the
true and fair view of the operations, and in case they do not include a major contingent liability and
ends up giving a false impression to the share regarding the company.
Analysis
Given the entire situation it can be said that GGL is in a strong position with their share of
points that they are putting forward for their claim against the company. It can be seen that there are
several ways in which the company has suffered and the shareholders are facing a drop in the prices
but even the actions that were taken by the management of GGL was not correct, doing Operation on
a land that was not leased to them for a wrong decision but this does not covers the responsibility of
the auditors of the company to put in their best efforts to showcase the true position of the liabilities
and assets of the company so that in the long run the shareholders have the true picture based on
which they can take their decisions regarding the company (Shimamoto, 2018)
The code of ethics that have been prepared for the auditors requires them to be disciplined
and unbiased in their approach. Many auditing standards have been set up that the auditors need to
follow in their approach and in case the auditors fail then they need to pay heavy penalty also.
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The first case of auditor’s negligence and the effect that it has on the third parties came into
limelight after the Hedley Byrne case in 1964, where the decisions were made against the auditors for
being negligent in their approach and the overall impact and the responsibility that it has towards the
third parties related to such audit reports (Wellmer, 2018).
There have been two other cases also that are related to this topic in the recent times, Scott
Group Ltd vs MacFarlane and the Simpson Group case that emphasizes the overall responsibility of the
auditors towards any certain liability that is related to the adult report and how it is affecting the
overall third parties that are in some ways related to the company. In all these cases the third parties
were dependent on the auditors to take important decisions regarding the company and in what ways
were they not able to function appropriately that led the parties to suffer huge losses. These cases also
put in view the importance of 'due care' that the auditors must put in practice when they are doing
their audit. In case the auditors can prove that they indeed had put in efforts and have maintained due
care and diligence in performing their duties then the liabilities are not bestowed upon them. There are
standards that have been made by the regulatory bodies to govern the overall functioning of the
auditors and how they should be following that (Webster, 2017). In this case of GGL it was a case of
sheer negligence on part of the auditors knowing the fact that the company was illegally carrying out
operations and not ascertaining a contingent liability in lieu of it, the auditors brought the shareholders
in a bad position because of which they had to lose on their revenue as the share prices of the
company dropped down. If the management of the company had asked the auditors to do the same
even though the auditors had practiced effective amount of due diligence it would have been very
wrong. This is because the opinion of the auditor should be totally unbiased and should not be
influenced by any internal or external sources for the company and any personal motives should not
be there (Durtschi, 2004).
Conclusion.
Based on the overall analysis it can be said that the management of GGL can put up a claim
against the auditors of the company of MYH as the auditors failed to perform their duties to the best of
their ability and failed to follow the code of ethics. The point that GGL was unethical in their approach
in taking on mining activities on land that was not outsourced to them on lease has little do with the
overall responsibility of the auditor of the company. The auditors need to show and present the books
as they are, they had no option of leaving the contingent liability given the fact that the company was
ceased from carrying out their operations in the current year on the leased land, the contingent
liability should have been reflected in the past year itself and this is why the management of GGL can
put up a case against MYH for not performing their duties properly.
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References
Abdullah, W., & Said, R. (2017). Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, 129-149.
Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), 244-253.
Bouret, I. (2017). Benefits of higher education in mid-life: A life course agency perspective. Journal of
Adult and Continuing Education, 23(1), 15-31.
Delone, W., & Mclean, E. (2004). Measuring e-Commerce Success: Applying the DeLone & McLean
Information Systems Success Model. International Journal of Electronic Commerce, 9(1).
Durtschi, C. H. (2004). The Effective Use of Benford’s Law to Assist in Detecting Fraud in Accounting
Data. Journal of Forensic Accounting, 17-34.
Explaining auditors’ propensity to issue going-concern opinions in Australia after the global financial
crisis. (2017). Accunting and Finance, Carson,E;Fargher,N;Zhang,Y;.
Iggers, J. (2018). Good News, Bad News: Journalism Ethics And The Public Interest.
Shimamoto, D. (2018, JANUARY 29). Why Accountants Must Embrace Machine Learning. Retrieved from
global-knowledge-gateway:
https://www.ifac.org/global-knowledge-gateway/technology/discussion/why-accountants-
must-embrace-machine-learning
Wang, Z., Chiu, Y., li, Y., & Hsiao, L. (2018). Performance appraisal for the operation and management of
listed and OTC Taiwanese companies with DEA benchmarking models.
Webster, T. (2017). Successful Ethical Decision-Making Practices from the Professional Accountants'
Perspective. ProQuest Dissertations Publishing.
Wellmer, A. (2018). The Persistence of Modernity: Aesthetics, Ethics and Postmodernism (fourth ed.). UK:
Polity Press.
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