Audit Assignment 1: University Audit of Far Faraway Pastoral Limited

This audit assignment report analyzes the 2019 audit of Far Faraway Pastoral Limited (FFA), an agricultural company listed on the ASX, by the accounting firm Samway Baker Fitzgerald (SBF). The report addresses several key issues raised by the audit team. Firstly, it identifies breaches of ASX Corporate Governance Principles related to the composition of the board of directors, particularly concerning the independence of the chairman and other non-executive directors due to their shareholdings and supplier relationships. Secondly, it examines ethical issues arising from discrepancies in revenue recognition policies, highlighting conflicts of interest and threats to integrity and objectivity, as well as violations of the Code of Ethics for Professional Accountants. The report also includes a report to the managing partner of SBF regarding a subsidiary's operational issues and potential negligence claims. The report explores the implications of these issues, including contributory negligence, and provides recommendations for corrective actions. The assignment provides a comprehensive analysis of auditing practices, corporate governance, and ethical considerations within a real-world context.

AUDIT ASSIGNMENT

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By student name
Professor
University
Date: 25 April 2018.
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Contents
Introduction.................................................................................................................................................3
Discussion and Analysis...............................................................................................................................3
Question 1: Breach of ASX Corporate Governance Principles.................................................................3
Question 2: Issue w.r.t. Code of Ethics for Professional Accountants......................................................4
Question 3: Report to the managing partner of SBF................................................................................5
Introduction.........................................................................................................................................5
Discussion and Analysis.......................................................................................................................6
Conclusion...........................................................................................................................................6
Conclusion...................................................................................................................................................6
References...................................................................................................................................................8
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Introduction
In the given scenario, the audit manager of the accounting firm Samway Baker Fitzgerald (SBF), is
carrying out the annual audit of Far Faraway Pastoral Limited (FFA) for the year ended 30th June 2019
with the team of audit seniors and it is found that the company there are certain accounting and
auditing issues as highlighted by the audit seniors in the team. SBF main clientele includes companies
from mining manufacturing and agriculture industries but for some of the reasons, all of them are under
severe pressure either due to downtown in commodity market (mining), overseas competition
(manufacturing) or devastating draught in Eastern Australia (agriculture). FFA is an agricultural company
which is based out of Orange city and is one of the largest clients of SBF in terms of revenue. FFA is listed
on the ASX. The course of action that should be undertaken by SBF has also been suggested in each
scenario (Bumgarner & Vasarhelyi, 2018).
Discussion and Analysis
Question 1: Breach of ASX Corporate Governance Principles
In the given case, one of the audit seniors Samantha Gabrielle observed that the corporate governance
arrangements of the company as on 30th June 2019 are not as per the standards. The Board of the
company comprises the CEO and CFO of the company namely Bruce Blanch and Alexandra Rose
respectively and three non-executive directors. Kevin Oliver, former executive at Macquarie Bank who is
holding 11% of the share capital of FFA, Matthew James, one of the retired farmers of the supplier who
used to supply to FFA and Jacqueline Grace, an orthopaedic surgeon based out of Orange form the
group of non-executive directors. Kevin Oliver is the Chairman of the Board (Arnott, Lizama, & Song,
2017).
As per the Principles laid down in the Charter of Corporate Governance and Recommendation 2.1, the
board should have independent directors and the chairman of the board should also be an independent
director (Recommendation 2.2). The role of the Chairman as well as the CEO of the company should not
be exercised by the same individual (Recommendation 2.3), the board should also have a Nomination
Committee (Recommendation 2.4), there should always be a process for evaluation of the performance
of the board, the committee and the individual directors (Recommendation 2.5) and finally the company
should report the information above in the disclosure section of the annual report of the company
(Recommendation 2.6). An independent director is the one who is not a member of the management
and who is free from any material relationship or business with the company and which could materially
interfere or reasonably seen to be partially interfering with the independent exercise of judgement by
directors (Boccia & Leonardi, 2016). Furthermore, as per the definition of the independent directors,
he/she should not be a substantial shareholder of the company or an officer or otherwise directly
associated with the substantial shareholder of the company. He should also not be a material customer
or supplier of the company or any other group member or an officer or otherwise directly or indirectly
associated with the material supplier or customer of the company as it affects and hinders the concept
of independence (Dopuch & Sunder, 1980).
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Here in case of FFA, Kevin Oliver who is the chairman of the board is holding substantial shares in the
company as he is holding 5% or more than 5% of the voting power in the company (Section 9 of the
Corporation Act – definition on substantial shareholder) therefore he should not be eligible for non-
executive independent director of the company. Similarly, Matthew James has been a material supplier
to the company and hence he again is not eligible to be elected as independent director on the board.
This is a non-compliance on the part of FFA and the ideal response would be to highlight the same to the
auditors and reframe the Board of the company as per corporate governance rules. They may also be
required to disclose the non-compliance to the regulatory authority as well as ASX and also report the
same in annual report of company (Lessambo, 2018).
Question 2: Issue w.r.t. Code of Ethics for Professional Accountants
Steve Barker, one of the audit seniors reviewing the revenue cycle of the company, has found some
discrepancies in the procedure and has reported the same to the audit manager. The details of the same
have been captured in the below shown template as per American Accounting Association (AAA) Model:
American Accounting
Association Model Decision-making process
1. Determine the facts
In the case of FFA, the audit senior Steve Barker observed that the
company’s revenue recognition policies from the sale of cattle is
questionable and not meeting the requirements of the standard. Since
the revenue from the sale of cattle constitutes nearly 50% of the
revenue of the company, she reported the fact to the senior partner
on FFA audit, Skye Martin, who replied that the same process has been
used for the last 10 years and that no adjustments were to be made to
the financial accounts ending on 30th June 2019 (Kuhn & Morris, 2016).
Furthermore when Steve accepted her decision but wanted to record
the dissenting statement in the audit working paper, the senior
partner refused to permit on the same and said that she is
acknowledging the full responsibility of the audit for 2019. She even
left some negative remarks for Steve w.r.t. chances of promotion as
partner in the coming years (Defond & Lennox, 2017).
2. Define the ethical issues
The ethical issues involved here are integrity and objectivity, which are
being compromised by the audit partner even when she is aware of
the wrong accounting procedures being used by the company (Section
100.4, a and b). Furthermore, when the audit senior Steve tried to
record that in the audit working papers, she threatened him with the
future prospects on promotion which qualifies as self-interest threat
for Skye Martin (as significant amount of audit fees comes from this
client) and intimidation threat for Steve Barker (as he is deterred from
working objectively). These 2 situations qualifies as threats as per
definition under Section 210.3 in Code of Ethics for Professional
Accountants (Vieira, O’Dwyer, & Schneider, 2017).
3. Identify the major principles,
rules, and values
The major rules, principles and values as laid down in Code of Ethics
for Professional Accountants mentions that the auditor should have
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American Accounting
Association Model Decision-making process
integrity and objectivity in his approach, should possess professional
competence and practice due care while working. He should have
professional behaviour and must maintain confidentiality.
Furthermore, it is also mentioned that while working, he may
encounter a number of threats which may have a direct or indirect
bearing on his work and therefore there should be adequate
safeguards in those regards (Knechel & Salterio, 2016). Here in given
case, the revenue recognition principle and the value of the auditors
while reviewing and preparing the audit report of client is in question.
Reporting the issue in Key Audit Matters and forbidding to threaten
the audit senior should be the ideal scenario as per the rules
(Bromwich & Scapens, 2016).
4. Specify the alternatives
Ideally, the senior audit partner should give a recommendation to the
client on the correct revenue accounting and revenue recognition
practices and report the current practices as “Key audit matters” in the
audit report and should report this issue as a deficiency and revise the
working in the current period of audit and thereby report the correct
number (Hepp, 2018). Secondly the audit partner is not supposed to
undermine the objectivity, integrity and independence of audit senior
or to threaten or intimidate him on grounds of promotion to do
unethical work. The other alternative could be to wait for next year for
the audit partner to be changed or to report the issue to another
senior partner of the firm on the issue (Fukukawa & Mock, 2011).
5. Compare values and
alternatives
Out of all the given values and alternatives, the one which is most
viable is to report the issue as KMA and ask the client to change the
revenue recognition accounting policies and revising the work in the
current year itself.
6. Assess the consequences
IN case the corrections are not reported, it will account to window
dressing of the financials and giving wrong information to the
stakeholders and shareholders, which might further lead to wrong
investment and other decisions (Kew & Stredwick, 2017).
7. Make your decision The final decision should be to report the issue as KMA and ask the
client to change the revenue recognition accounting policies.
Question 3: Report to the managing partner of SBF
Introduction
In the given case, Kate Hammond, one of the audit seniors, was responsible for reviewing the operations
of the FFA subsidiary in Western Australia called TRC. Though the company has been a market leader in
WA and possesses a strong balance sheet, still it has been suffering losses from the past 2 years and
therefore the company decided to upgrade the accounting information system for effectively managing
the inventory sales and this was done through hiring one of the well regarded IT consultant and it was
completed on 31st March 2018 (Hines, 1989).
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Discussion and Analysis
SBF employed one of the independent experts in Perth to check and review the system as SBF did not
have offices in WA. The expert mentioned that the system was reliable and the changeover was made
correctly and the TRC was also happy with the operations of accounting system. However due to
draught pressures on core business, TRC received an offer from another WA based agricultural
company, “McCarran Pastoral” (MP) for buying another 85% stake in TRC at agreed sale price was
$45.8m. The rest 15% was also being held by MP with half the price being paid on 15 April 2019 and
another half on 15 August 2019 after completion of audit (Guragai, Hunt, Neri, & Taylor, 2017).
However, Kate observed that there were significant errors during the changeover phase and that the
same has been discovered 15 months post implementation. The same has resulted in the inventory
mismatch of $16.6 Mn and therefore MP is planning to withhold its remaining payments due to FFA and
in turn FFA is planning to sue SBF for negligence in payment (DeZoort & Harrison, 2016).
As per the auditing standards, it cannot be said that SBF failed to exercise due care in the audit of TRC
because of the fact that SBF got the professional advice from one of the independent experts based in
Perth for checking the newly laid accounting information system. Therefore, SBF is supposed to rely on
the report given by independent expert, which was positive. However, as per the standards SBF should
have checked and reviewed the work and professional expertise of the expert who was hired. Therefore,
SBF cannot be said to have not applied “due care” in this case (Goldmann, 2016).
As per jurisdictions, contributory negligence means failure of the party to act prudently and therefore
the defence completely bars plaintiff from any kind of recovery since they themselves are contributors
towards their own injury. Therefore, in the given case, FFA qualifies to be guilty of contributory
negligence as they failed to exercise due care and put a check and review mechanism on the newly
implemented accounting information system. They just relied on the IT consultant and the report of the
auditor but instead they should have had adequate internal detective control to identify this (Timothy,
2004).
SBF does owes a duty of care to MP considering that MP relied on the audit report published by SBF on
the clean implementation of the accounting information system at FFA subsidiary TRC. It is due to this
audit report that the company later came to realise that there were significant errors in inventory
valuation and thereby net assets and so the purchase negotiation has been done incorrectly (Alexander,
2016).
Conclusion
It can be clearly said as per the principles and rules of auditing, SBF cannot be said to have failed to
exercise due care in the audit. Furthermore, FFA is guilty of contributory negligence and yes, SBF does
owes duty of care to MP (Kangarluie & Aalizadeh, 2017).
Conclusion
A report was prepared on the audit of Far Faraway Pastoral Limited (FFA), one of the major agricultural
company listed on Australian stock exchange, the audit of which was done by one of the medium sized
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accounting and auditing firm Samway Baker Fitzgerald (SBF), but during the course of audit, several
potential and ethical issues are being pointed out by the audit seniors who are on job. The same has
been explained and analysed for its validity and to check if there is any breach of the laws and
regulations by the company. The company is facing several ethical issues in terms of board composition,
revenue accounting and laying of accounting information system and suggestion, recommendation and
ideal course of scenario has been given for all the respective scenarios.
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