Auditing Theory and Practice: MYH Audit Decisions and Legal Liability

This report provides an analysis of ethical and legal issues in auditing, focusing on the responsibilities and potential liabilities of auditors. The report begins by examining a case study involving Miller Yates Howarth (MYH), addressing ethical dilemmas using the American Accounting Association (AAA) model to evaluate decision-making processes in the context of an audit client, Morgan Fertilisers Pty Limited. The report then shifts to legal liability, supported by the Royal Bank of Scotland (RBS) case study, to illustrate the consequences of auditor negligence, particularly in relation to the loss suffered by Oasis due to the overvaluation of inventory. The report highlights the importance of adhering to Australian Auditing Standards, the implications of failing to consider relevant financial matters, and the legal obligations of auditors to ensure audit quality and provide transparent, reliable audit reports. The conclusion emphasizes the auditors' duty to critically evaluate transactions and disclose potential misstatements, ensuring stakeholder interests are protected and legal responsibilities are met.

Auditing theory and
practice

EXECUTIVE SUMMARY
Present study is based on assisting Miller Yates Howarth (MYH) in making audit decisions.
Study is focused on ethical and negligence issues faced by MYH. First part of study is solved
by making use of American Accounting Association (AAA) model which consists seven step
logical process for making decisions by considering ethical aspects. By considering this
model, MYH is required to consider the issue raised by Jacqui Leak in their audit process.
Further, second case is supported by case study of Royal Bank of Scotland (RBS) to describe
legal obligations of auditors supported by provisions of civil law. By considering the current
case, MYH is responsible for the loss of Oasis as due to the negligence of audit firm they
have to suffer from losses.

TABLE OF CONTENTS
Ethical issue...............................................................................................................................4
Facts of the case.....................................................................................................................4
Ethical issues in the case........................................................................................................4
Norms, principles and values related to the case...................................................................4
Alternative courses of action..................................................................................................5
Best course of action consistent with the identified norms, principles and values................5
Consequence of each possible course of action.....................................................................5
Decision..................................................................................................................................6
Legal liability issue....................................................................................................................6
References..................................................................................................................................8

INTRODUCTION
Provided report has been developed for managing partner of Miller Yates Howarth (MYH)
by considering the ethical and legal liability issues faced by auditor. This report contains two
parts, first parts deals with ethical dilemma of consideration of other facts which are not
covered in audit scope but are significant and second part deals with the negligence case in
favour of Oasis. First part will be supported by American Accounting Association (AAA)
model and second part is supported by case study of Royal Bank of Scotland (RBS).
ETHICAL ISSUE
Concerned case situation has been evaluated by making use of American Accounting
Association (AAA) model which consists seven logical step process for making decisions by
considering ethical aspects (Curtis, Humphrey & Turley, 2016).
Facts of the case
In the given case situation; Morgan Fertilisers Pty Limited is an important and longstanding
audit client of MYH. One of the senior auditor Jacqui Leak of the firm is concerned about
their contract with Dumparound Ltd. She is concerned because this contract is not signed
despite having involvement of substantial amount, period and consequences. However,
another employee Barry does not agree with her concern as according to him they are only
responsible for the correctness of financial report.
Ethical issues in the case
In the present case situation; the main issue is related to consideration of other financial
matters in the audit. According to Barry, they are only responsible for the correctness of
financial report not for their contracts with other firms. Henceforth; they should focus on
assessment and evaluation of financial matter due to which concern of Jacqui Leak is not
relevant. However; in accordance with Australian Auditing Standards; the auditor is
responsible for planning and performing the audit to attain reasonable assurance to determine
whether financial statements are free from material misstatement, error or fraud or not
(Simunic & Zhang, 2017). As a consequence; matters that can affect the financial status of
business are required to be considered in the audit. In the present case; contract with
Dumparound Ltd is not signed despite having involvement of substantial amount, period and
probable adverse consequences. This issue can affect the future prospect of business.

However, the considered aspect is not covered in audit scope due to which it is creating an
ethical dilemma for an audit firm.
Norms, principles and values related to the case
Audits refer to the evaluation of financial and accounting information to determine its
reliability. The information may be both financial and non-financial and is proposed to be
used by internal and external users (Sutherland, 2017). The main propose of external auditing
is to provide financial assurance to stakeholders in relation to the reliability of the financial
information generated by the organization. The capital market’ globalization created a big
impact on morals of auditing; it is because intellectual diversity shows vast issues about the
suitable global ethical standards.
Under ASA 200, the auditor has to keep up professional scepticism all over the audit process
with identifying the probability that due to fraud financial information will contain material
misstatement, in spite of the experience of auditor, honesty and reliability of management and
the ones charged with governance (Moroney & Trotman, 2016). Until the auditor believed in
the dissimilarity, then they must agree to documents and records as authentic. During
auditing, the conditions determined can make the auditor to accept that a document might not
be genuine or has contained altered terms but have not disclosed to the auditor, then auditor
has obligation for further investigation (Knechel & Salterio 2016). Further; where there is
lack of stability in the response of management enquiries or entity management, the auditor
must scrutinize the discrepancies. The Same factor has been promoted by Proposed Auditing
Standard ASA 250 which deals with Consideration of Laws and Regulations in an Audit of a
Financial Report (Earley and et.al, 2016). As per this standard auditor have an obligation to
ensure all regulatory aspects are satisfied in preparation of the financial report.
Alternative courses of action
Focusing merely on financial statements
If the approach of Barry is considered then; MYH will merely consider financial aspects
given in statement as per the concerned audit scope. It is because; they are not allocated to the
job to determine that whether the company is a good corporate citizen or not.
Raising query for waste management contract between Dumparound and Morgan
Fertilisers

If the approach of Jacqui is considered then; auditors are required to make queried related to a
contractual agreement such as why the signature is not taken, why contractual terms related
to impact is missing and who will be responsible in case of loss. Same has to be reported in
audit report with additional descriptive attachment.
Best course of action consistent with the identified norms, principles and values
By considering audit provisions and obligations of auditors in Australia; MYH is required to
consider the query raised by Jacqui Leak. It is because; this contract has misleading factors
which are probable indicators of fraud and non-compliance with regulations. Despite having
substantial amount contract is not signed, and there is no description regarding probable
damages. On the basis of this fact; auditors are required to make an appropriate evaluation of
this transaction and to ask management regarding the justification of the contract.
Consequence of each possible course of action
Focusing merely on financial statements
In this case audior will be providing an opinion on the basis of financial statements of the
company without considering the impact of the contractual agreement. In this fact auditors,
responsibilities will not be satisfied as their action is not justified because they are ignoring
the interest of stakeholders.
Raising query for waste management contract between Dumparound and Morgan
Fertilisers
Appropriate evaluation of concerned contract to determine whether management is engaged
in fraud or not. By considering this approach; they will discharge their responsibility as per
ethical aspects cited by Australian Auditing Standards.
Decision
In accordance with the Australian Auditing Standards; auditors are required to critically
evaluate the transactions which have a probability of material misstatements (Ye & Simunic,
2013). Further same should be disclosed in their auditor report with the descriptive content.
In the present case; auditors are required to highlight non-compliance of regulations by
Dumparound Ltd such as making contractual relationship without a signature and justified
terms of adverse consequences of contract. Despite fact that management had provided
justification of this contract, auditors are required to disclose the fact in the audit report to
stakeholders can raise further query if this fact affects their interest (Rathke and et.al, 2016).

LEGAL LIABILITY ISSUE
According to Australian Auditing Standards auditor has legal obligations to ensure audit
quality by complying with recognised standards. Further, they must publish transparent audit
report as it is used by various stakeholders for making decisions in the context of business.
Users of financial information rely on auditors report in terms of accuracy and reliability
(Carson, Simnett & Vanstraelen, 2013). Due to this factor; Auditors are mainly responsible
for their acts concerned with offences under criminal as well as civil law. Criminal law
oversees affairs among entities and states; it takes place when an individual (auditor) or entity
(audit firm) contravenes a law imposed by the government (Abernathy and et.al, 2015). On
the other side, civil law addresses arguments among organizations and individuals. There are
two parts of the civil law of specific importance to the profession of auditing, tort law and the
contract law (Quadackers, Groot & Wright, 2014). These set up principles for the
responsibility of auditor to customer and parties. According to the contract law, parties may
search for a solution to contravene of contractual compulsion. Thus shareholders can search
for a solution from the auditor, in case they cannot meet the terms of a commitment letter
(Lennox & Li, 2014). According to the tort law, an auditor can be charged for their in case
they contravene a duty of care to a party who as a result is bearing losses.
The present case situation is supported by the negligence of auditors due to which Oasis have
to suffer from significant losses. It is because; inventory held by Morgan Fertilizers was
overvalued and company do not possess the quantity of inventory claimed at the time of the
audit. This issue has been arising because auditor had not attended all the stock takes and rely
on the provided facts by the company. Further, 50% of the stock of the company was held by
Bathurst facility, but auditors neither had taken external confirmation nor requested company
for further evidence. It was also revealed that entire audit was conducted in pressure by
Morgan Fertilizers due to which provided an opinion is biased, and same make financial
information less reliable.
Case facts clearly show that auditors have breached their obligations and they had not
assessed company affairs in a proper manner. Further, they cannot take benefit of the fact that
auditor was not aware of the intended use of accounts because their negligence is the primary
factor that caused the losses of Oasis as they had taken the decision of takeover on the basis
of the audit report.

A similar issue has been raised in the case of Royal Bank of Scotland (RBS). As per this
case; in APC Ltd, BJM were the auditors of the entity and RBS was the principal lender. RBS
too covers interest of equity in APC. RBS requested APC to provide their financial statement
to them in the time period of six months, not during the end of financial year (Harding and
et.al, 2016). APC passed the copies of audited accounts to RBS for the purpose of helping
RBS in their decisions of lending. However; there were material misstatements in financial
accounts due to which RBS has to face losses. Afterwards, RBS charged BJM for the loss
occurred because the loss was due to dependency on the auditing accounts of APC and same
comprised material misstatements.
BJM made application in court to strike out the claim by considering the fact that they did not
owe RBS a duty of care. The court made a decision that the information appealed by RBS
was enough in law to cause duty of care (Siriwardane, Kin Hoi Hu & Low 2014).
Considerably, found that there was no direct relationship between RBS and BJM, the auditor
can reject liability toward RBI when they observed that RBI was permitted to check the
accounts for the aim of helping in the decisions of lending. Lack of disclaimer was a
considerable issue supporting the finding of a duty of care (Payne and et.al, 2017).
Similarly, in the present case, there is no disclaimer regarding exclusion of
obligation and significant breach of auditor obligations. There is a clear case
of breach of duty on the part of MYH due to which they are responsible for
the losses of Oasis.
CONCLUSION
In accordance with the present study conclusion can be drawn that auditors are required to
consider their ethical and legal obligations while performing audit procedures. Opinion
provided by them must be unbiased and supported by interest of stakeholders to prevent legal
claim and discharge their responsibility in an appropriate manner. Non-compliance of cited
aspects can lead to severe penalties and legal claims thus auditors are required to operate in
fair manner by considering ethical and legal aspects.

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