Auditing Assignment: Ethical and Independence Issues in Finance

This auditing assignment addresses several scenarios related to ethical considerations and independence in auditing practices. The assignment examines situations involving the transfer of audit practices, professional indemnity insurance, misleading advertisements, conflicts of interest, and the influence of client payments on audit reports. It also explores issues of auditor independence when staff from the client's team join the audit team and when auditors encounter pressure to be flexible in their approach. The assignment also delves into reporting requirements for public companies, including the types of audit opinions, compliance with accounting standards, and the disclosure of material matters within audit reports. The assignment emphasizes adherence to ethical principles, professional conduct, and the importance of maintaining independence in financial auditing.

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By student name
Professor
University
Date: 16 Spetember 2017.
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Contents
Question No. 1...…………………………………………………………………………………………….......3
Question No. 2...…………………………………………………………………………………………….......5
Question No. 3...…………………………………………………………………………………………….......7
Refrences.....………………………………………………………………...........................................8
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Question No. 1
(a) Here, Jayne is taking over the practice from James Bromley, the old auditor, this is not only the
taking over of the practice but the taking over of the client as well that James used to handle.
This is not against the ethical practice as the old person or firm can give the information and tax
details about the clients but the prior permission is needed to be taken from the client, which
James is already taking. Hence, it is in line with the General Ethical principle and hence, not a
violation. This was also required for James to understand the client business, the nature of the
products and services being given by the client, the past period performance in order to give the
better service to him going forward. (Boccia & Leonardi, 2016)
(b) Professional indemnity insurance is a form of general liability insurance policy taken by the
professionals like doctors, engineers, accountants and auditors to protect the professional
advice providing firms and individuals from bearing the entire cost of defending against
negligence filed by the client. Here, since Fred Hingarra is starting the professional advice and
audit after a long time of 6 years, she would be needing an insurance against it. Even though
this will be her first audit, still it is legal and not against the General Ethical Principles. This is
very prevelant in US states and is in compliance with the law. (Downes, et al., 2017)
(c) The assurance being provided by the Asquith Accountants through advertisement in the
newspaper that they would be getting the clients with the tax refund within 10 days is
completely against the General Ethical Policy as it forbids the accountants to make an
advertisement in the newspaper to do so. Moreover, tax refund involves government
intervention and several other regulatory issues which may take time and giving false
commitment to the client that within 10 days, tax refund would be there is against the
professional code of conduct and the given firm may be accused or held guilty and be penalised
for this. (Capaldi, et al., 2017)
(d) In the given case, Amy Harriss is one the practising chartered accountants who might have been
approached by the local athletic club to be the treasurer whom she is not auditing. Even though
it is a not for profit organization, this is well under the General Ethical Principles and is not a non
compliance against the law. She can be the treasurer of the club besides being practicing in her
profession as those do not clash with each other and she is also not involved in any of the
promotional tricks of her firm by being the treasurer of the NPO club. (Fay & Negangard, 2017)
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(e) Gordan Accountants have audited the files of Simtec LTd for more than a month and would be
releasing the audit report in some time but the statement by Simtec that the payment is
dependent upon the “appropriate” audit report is against the ethics being practiced by the
auditors and hence is a violation of the General Ethical Principles. This is not to be accepted by
the auditors and they can’t release the biased an unfair report for the want of the payment as
many decisions of the external and internal stakeholders are dependent on the audit report.
Moreover, in case of being influenced and releasing a wrong audit repport, the auditor would be
held liable and be guilty for punishment.
(f) In the given question both the parties David Dale the accountant as well as Cheap Insuarance
Company would be at default considering the workplace ethics. As per the General Ethical
Principles, the auditors cannot share the data of the clients with any other party without their
permission. Moreover, it is against the principle of confidentiality and this the breach of the law
for which the accountant may be penalised and the practicing may be revoked on these
grounds. This commission cannot be taken by the accountant. Further, it is the responsibility of
David to decline it immediately and bring any such issue to the notice of the relevant accounting
board of the state for necessary punitive actions. (Heminway, 2017)
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Question No. 2
(a) In the given case, Katrina Ng, a senior accountant of the client team is being replaced by one of
the members of Thornleigh Accountants for 4 months on a secondment basis. Later on this
accounting firm is also using the services of Ellen Davis who was on client side for the last 4
months and will now be a part of the audit team. This is serious matter of non complaiance of
independence of the auditor as required by the accounting boards and will affect the quality of
the audit services as Ellen may be baised on both the sides and true and fair view of the audit
will be a challenge. (Anon., 2016)
(b) Here as per the accounts received, a very optimistic approach has been taken while valuation of
the development expenditure which was capitalised in the value of the intangible assets.
Development expenditures are capitalised only when they have future economic benefit and
those that the related to the intangibles, but the senior staffs bonuses cannot be attributed to
the intangible and is just a sharing of the firm’s profit. Even though extracts of accounting
standards have been provided, but taking a sympathetic approach is against the independence
of auditor as the standard asks for “substance over form” and not the emotional or sympathetic
ground for capitalization of expenses. This needs to be reported in the annual reportof the
company as a non compliance and deviation from the accounting standards.
(c) The Chocolate firmfor which the audit is being done by my company is selling the defective
chocolates to the customers at a considerable discount. This is one of the part of the physical
checking processes during the audit and is a critical “qualitative information” which should be
reported in the audit report. This may have the bearing on the company’s sales and profits in
the coming future and thus the stakeholders needs to be aware of the same. In case the auditor
foregoes the reporting of this qualititative information, even though it relates to the 2nd firm of
the client, this will lead to the independence issue. (Turban, et al., 2017)
(d) In the given case, even though the auditor is doing the audit of Expert travels for the last 2 years
and has been requested by the Managing Director of the client to be “flexible” in approach
during the next audit which would include others entities as well is not acceptable. This past
relationship of auditor with the client cannot be taken as precedence to go away with the
independence and professional ethics and give a wrong opinion or being involved in the frauds
and adjustments in the financial statements. (FindLaw, 2016)
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(e) Here the concept of related party is being touched upon as the senior member of the audit team
has been engaged to the senior accountant of the client which will not only impact the
independence of the auditor but can impact of the reporting and other critical and crucial
information which may be hidden from the stakeholders in the wake of related parties being
involved. This is forbidden by the Professional Ethics where the related party cannot do the
audit of the client. The solution to it can be the change in the audit team who is going to audit
the client’s financial statements. (Félix, 2017)
(f) Here again in the given case the senior auditor of the audit team is involved or palays for the
same team as the accountants of the clients team play for. There is no where business or audit
being involved in the given issue, since neither they are professionally related nor personally
and so the question of independence is not being overridden. But it may depend on case to case
basis and independence may be hampered in case the business related matters are being shared
in between the auditor and the client’s accountants. (Wang, et al., 2017)
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Question No. 3
A public company is under a lot of regulatory requirement and has to disclose a lot of key matters in the
Audit report of the financial statements. The first and foremost thing to be reported is the type of
opinion on the financials which can be unqualified opinion i.e., clean report and which is giving a true,
unbiased and fair view of affairs without aany material misstatements or it can be qualified opinion
where the reason for qualification has to be mentioned alongwith all the material matters and whether
the company has complied with the Generally Accepted Accounting Principles and respective accounting
board. (Fay & Negangard, 2017) It has to also report whether it is in agreement with the statutory
obligations and requirements, whetherteh financial statements have been prepared using relevant IFRS
standards, whether all the disclosures and notes on accounts which should have been mentioned have
been properly disclosed alongwith the deviations and reasons of deviations and whether there is any
change in the accounting policy, principles or change in the accounting estimates and the reason and
effect of the same. There can be other report types like adverse audit report or even disclaimer of
opinion in case the auditor are not being able to establish any opinion on financial statements in the
absence of information.
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References
Anon., 2016. When is a Heads of Agreement legally enforceable?. [Online]
Available at: https://legalvision.com.au/heads-agreement-legally-enforceable/
[Accessed 8th August 2016].
Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and
Appropriate Economic Models, pp. 1-16.
Capaldi, N., Idowu, S. & Schmidpeter, R., 2017. Dimensional Corporate Governance. CSR, Sustainability,
Ethics & Governance, pp. 175-187.
Downes, M., Mervin, M., Byrnes, J. & Scuffham, P., 2017. Telephone consultations for general practice: a
systematic review. Systematic Reviews, July.pp. 1-10.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of
insurance companies. MASTER THESIS, pp. 1-69.
FindLaw, 2016. Is a verbal agreement legally binding. [Online]
Available at: http://www.findlaw.com.au/articles/5626/is-a-verbal-agreement-legally-binding.aspx
[Accessed 8th August 2016].
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Turban, E., Whiteside, J., King, D. & Outland, J., 2017. Implementation Issues: From Globalization to
Justification, Privacy, and Regulation. Introduction to Electronic Commerce and Social Commerc, pp. 383-
413.
Wang, L., Cai, G., Tsay, A. & Vakharia, A., 2017. Design of the Reverse Channel for Remanufacturing:
Must Profit-Maximization Harm the Environment?. Production and Operations Management, pp. 1585-
1603.
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