Auditing Theory and Practice: Ethical and Legal Issues in MYH Audit

This report examines ethical and legal issues within the context of an audit conducted by Miller Yates Howarth (MYH). It utilizes the American Accounting Association (AAA) ethical decision model to analyze the case, focusing on conflicts of interest, inventory valuation, and compliance with accounting standards like AASB 102 and APES 110. The report identifies ethical concerns related to a client's waste management contractor and potential inventory overvaluation. It also addresses legal issues, including the potential for audit negligence. Recommendations are provided for MYH's managing partners, and relevant case law, such as Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997), is considered. The report highlights the pressure faced by the auditors and concludes with a discussion of the potential for negligence claims, emphasizing the importance of proper inventory valuation and ethical conduct in auditing.

Running head: AUDITING THEORY AND PRACTICE
AUDITING THEORY AND PRACTICE
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The main considerations of the study have addressed on the various types the ethical and legal
issues which need to be considered at the audit divisiosn at Miller Yates Howarth (MYH). The
study will include the application of “American Accounting Association (AAA)” ethical decision
model explains the ethical issues involved in the given case study. The various types of the
recommendation for the study have been also considered on the use of model. The latter part of
the report has applied the relevant case law and prepared recommendations for the managing
partners of MYH. The main findings has evidenced that Oasis Ltd. got under significant pressure
by the client for the completion of the audit with the limited time period, for completion of audit
within one month from the date in the balance sheet. It has been further seen that the Oasis Ltd
bring forward the negligence charged in terms of the audit of MYH. However, this needs to be
based on the sole decision of court to deal with the case on its way where MYH may or may not
be held for the negligence.

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Table of Contents
Introduction......................................................................................................................................3
Answer to Question1.......................................................................................................................3
Answer to Question 2......................................................................................................................6
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

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Introduction
“American Accounting Association (AAA)” founded in 1916 is seen to have a rich and
reputable history for holding a premier community of accountants in academia. The diversity of
the membership has been able to create an environment with collaboration and innovation
(Aaahq.orgm, 2017).
The report is intended to address the various types the ethical and legal issues which need
to be considered at the audit divisiosn at Miller Yates Howarth (MYH). The study will include
the application of “American Accounting Association (AAA)” ethical decision model explains
the ethical issues involved in the given case study. The various types of the recommendation for
the study have been also considered on the use of model. The latter part of the report has applied
the relevant case law and prepared recommendations for the managing partners of MYH.
Answer to Question1
AAA Model
Determination of Facts
The give case is based on MYH accounting firm, which majorly operates in NSW and
Queensland. Morgan Fertilisers Pty is recognized as one of the long standing client of the
company, with its operations located across Tamworth and Toowoomba. Morgan Fertilisers had
recently changed its contractor for waste management to Dumparound Ltd. Jacqui, one of the
senor audits has knowledge about the community activities and she also knows that local council
are investigating Dumparound Ltd. for level of toxic waste at one of its sites.

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Identification of ethical issues
The considerations of the ethical issues have been mainly seen to be based on Morgan
Fertilisers Pty who has changed its contractor to Dumparound Ltd. for waste management. The
main form of the ethical concerned has been raised by Jacqui Leak, who is acquainted with the
fact that Dumparound is being investigated by the local council for the level of toxic waste at one
of its sites. The contract between Morgan Fertiliser and Dumparound is not seen to specify for
any damages and it hasnot been signed by Dumparound. The contract is seen to be held
substantially for 3 years and Jacqui is concerned about the implications.
Identification of major principals and rules, values
Apart from the prevailing of ethical issue, the main legal issue has been identified with
AASB 102 on valuation of inventories. The cost of the valuation needs to be identified and
recognized in terms of asset and the same needs to be carried forward for the revenue
recognition. The applicable code under “APES 110 Code of Ethics for Professional
Accountants” has been seen to be applicable with “Section 310 conflicts of interest”. As per the
application of this rule the members are of MYH are expected to support the legitimate and
ethical objectives in terms of the application of the relevant procedure in the organization.
Specification of the alternatives
The main specification of the alternative has been further seen to be based on evaluating
whether the adjustment the adjustments in the inventories between the years end and the dates of
physical count are recorded appropriately. In addition to this, the auditor needs to analyze the

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outward and inward movement of stocks with the date of cutoff date, until count date is
established with the validity of the date based on the closing date of the year.
Comparison of values and alternatives
The comparison of the values is based on the application of “APES 110 Code of Ethics
for Professional Accountants” has been seen to be applicable with “Section 310 conflicts of
interest” vs. “AASB 102 on valuation of inventories”. Based on the application of APES rulings
the member’s responsibility to an employing organization needs to base on professional
obligations to comply with the fundamental principles which are in conflict. It has been further
seen that a member in the business needs to support employer and the rules and procedures
appropriate to an organization (Doxey et al., 2015).
Based on the considerations of the rulings of AASB 102, the main considerations has
been based on the measuring the net realizable value or cost of an asset which needs to be carried
forwarded with the revenue recognition. The cost of the inventories needs to further consider the
various evaluations which have been relied on the factors such as cost involved in making the
assets ready for use (Gaynor et al., 2015).
Identification of the alternatives access the consequences
In case the inventory value is overvalued, the net income needs to be overstated as per the
gross profit of the company. The overvaluation of the retained earnings needs to overvalue as per
the retained earnings. The value of the equity, total assets and the current assets of the company
may be overvalued with the retained earnings (Abernathy et al., 2015).

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Recommended Decision
The main recommendation has been seen with Oasis Ltd bring forward the negligence
charged in terms of the audit of MYH. However, this needs to be based on the sole decision of
court to deal with the case on its way where MYH may or may not be held for the negligence.
Answer to Question 2
Report for the managing partners of MYH
Based on the considerations of AASB 102 on valuation of inventories, the main issue has
been seen with the error in valuation of the inventories at the cost of the asset recognized and the
value carried forward with the revenue recognition. The inventory needs to be measured based
on the realizable cost or value, which is lower. The cost of inventories needs to be considered
based on the conversion cost, purchase cost and the cost which is incurred in making the asset
ready for the specified purpose. It needs to be noted that the inventory cost may not be
recoverable in case the portion of the inventories is damaged or obsolete. The inventory cost is
not expected to be recovered in case the evaluated expenses of the completion or the assessed
expenses to the sales policy have been expanded. The main consideration for the recording of the
inventories below the cost to the net realizable amount is considered to be reliable in nature,
which should not be carried with the excess of the amount expected from the realization of the
sales.

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In case the inventory is overvalued the net income and the gross profit needs to be
overstated. The main impact will also lead to overvaluing of the retained earnings, total assets
and the equity of stockholder. The net income has been also overvalued for the overvaluation of
inventory with fewer number of the cost of goods sold which is charged for the revenue. The
increased amount of the net profit further indicates on the equity of the stakeholders and the
retained earnings. Due to the overvaluation of the inventory, the accounting period has been
changed to the starting of the inventory towards the finishing of the accounting period which
turns into starting inventory with the accompaniment of the time frame. The period of the cost of
goods needs to be considered with the COGS, as this will be too high and will be able to bring
the period of the net income and consider the gross profit to be too low.
As per the per the case of Morgan Fertilisers, it has been identified that they carried high
amount of value of the inventories in the balance sheet and it was taken over by Oasis Ltd.,
successfully. Despite of this, after two months, the inventory of the company was overstated. It
has been further seen that more than 50% of the inventory was obsolete and were not supposed
to include the valuation count as per the inventory. The various types of the considerations of the
other inventories were seen to be based on the actual value. In addition to this, MYH needs to be
valued as per the stock valuation of the management.
The physical confirmation of the inventories is the responsibility of management for the
entity. The duty of the management has been further seen to build on the strategy for checking of
the inventories once in a year in order to establish the financial statement formulation. The
auditor further needs to do a complete review of the technique to get the adequate and suitable
for the audit confirmation and tallying the same with the physical inventory. The auditor needs to
be present physically for the investigation and inspect the inventory and survey to check the

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systems set around the management to record the changes in the dependability of such
procedures. The auditor cannot opt for inventory count which is available as per the alternative
measures and the adjustments in the inventory with the date of count which are seen to be
accurately recorded.
The auditor needs to review the various types of the management information and the
internal control in terms of re-counting, tagging, stock sheets and the identification of the
obsolete and non-moving or the rejected items. He also needs to consider the cut off procedures
for the valuation of the WIP along with the movement of the inventory. As per the general rule
the auditor is not liable towards the third party and liable to their clients. The consideration for
the third party has been shown below as follows:
 The financial statement is not seen to be true
 The auditor has intentionally or recklessly ignored a certain fact which is seen to be
untrue
 Errors has been committed in the final accounts preparation
 Negligence on the part of by auditor’s employee
 Preparation of the financial statement intentionally so that the third party may take proper
action
As per the case Esanda Finance Corporation Ltd v Peat Marwick Hungerfords
(1997), it has been observed that the corporation lent money to a company based on the
audit report. However after the default of the payment, Esanda claimed to the auditors of
providing a loan as per the issued audit report, which breached the mandatory accounting
standard.

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Conclusion
As per the given case the auditor of the MYH verified the stock correctly, they also
accepted the valuation however the management did not consider the obsolescence of the stock.
It has been further seen to be evidenced that Oasis Ltd. got under significant pressure by the
client for the completion of the audit with the limited time period, for completion of audit within
one month from the date in the balance sheet. It has been further seen that the Oasis Ltd bring
forward the negligence charged in terms of the audit of MYH.

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References
Abernathy, J., Hackenbrack, K. E., Joe, J. R., Pevzner, M., & Wu, Y. J. (2015). Comments of the
Auditing Standards Committee of the Auditing Section of the American Accounting
Association on PCAOB Staff Consultation Paper, Auditing Accounting Estimates and Fair
Value Measurements: Participating Committee Members. Current Issues in Auditing, 9(1),
C1-C11.
Doxey, M. M., Geiger, M. A., Hackenbrack, K. E., & Stein, S. E. (2015). Comments by the
Auditing Standards Committee of the Auditing Section of the American Accounting
Association on PCAOB Release No. 2015-004, Supplemental Request for Comment: Rules
to Require Disclosure of Certain Audit Participants on a New PCAOB Form: Participating
Committee Members. Current Issues in Auditing, 10(1), C1-C10.
Gaynor, G., Janvrin, D. J., Pittman, M., Pevzner, M., & White, L. (2015). Comments of the
Standards Committee of the Auditing Section of the American Accounting Association on
IESBA Consultation Paper Improving the Structure of the Code of Ethics for Professional
Accountants.
The American Accounting Association . (2017). Aaahq.org. Retrieved 24 August 2017, from
http://aaahq.org/

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