Auditing and Assurance: Case Study and Ethical Issues Report

This report comprehensively examines various aspects of auditing and assurance, focusing on ethical considerations and professional conduct. It analyzes scenarios involving auditor independence, gifts, information security, and potential conflicts of interest. The report explores situations where auditors provide both audit and non-audit services, the implications of accepting gifts, and the importance of segregating duties. Furthermore, it discusses the auditor's right to a lien when clients fail to pay and the ethical implications of setting up separate entities. The analysis covers the responsibilities of auditors as watchdogs for shareholders, the importance of professional skepticism, and the need for transparency in financial reporting. It draws on relevant literature to support its arguments and provides a detailed understanding of the ethical challenges faced by auditors in practice.

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a) Auditing services are provided for determining whether the company performance is
in accordance with the law and company policies. An auditor in a company can be a
customer in the same company since being a client is a non-audit service (Arens,
Elder, and Mark, 2012).Jenny Wang, the senior auditor is also entitled to the 20%
discount from the Panania Cars Pty Ltd since he has been a customer for more than
six years. The auditor is treated as any other customers if there are no special
privileges that the auditor will receive from the company. The 20% discount is a non-
audit service and has been given to all the customers. On the other hand, if the 20%
discount will result to inappropriate accounting treatments the auditor must speak up,
failure to do so; the independence of the auditor would have been compromised
(Salem, 2012). The comprise might due to the familiarity threat or a challenge in their
objectivity, in which case they not supposed to provide any audit services to the
company.
b) The ethical provisions on gifts are rather vague and differ from country to country.
However, it is wise to consider that auditors are independent and should remain
independent. This means those auditors should be careful while accepting gifts. The
acceptance of gifts should not be in monetary form, voucher or a gift that might
compromise the auditor’s independence to avoid trouble. The general rule of the
thumb is that the auditor can only be given a gift at the end of the working
relationship and the auditor no longer represents the client (Woodland, 2011). The gift
should be modest and not of great value. Entertainment gift such a ticket to a football
match is also acceptable. Katrina Warne’s gift can be classified as a bribe and thus it
has violated the general ethical principle. The professional conduct principle has been
violated since the auditor has not mentioned whether the relationship has ended.

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However, the violation depends on which country the gift has been issued. In China,
such a gesture is not a violation, but, in Singapore that qualifies to be an offense.
c) Information security and privacy are paramount in every business. Clients want safe
and secure electronic data storage. In the case where the auditor D. Marron engaged a
computer consultant for installing the computer system, there was a need for auditing
the level of information security expected from the system. The auditor’s confidence
on the computer consultant is not enough to ensure that the ethical concerns are
observed. Therefore the auditor should go ahead to seek the assistance of another
auditor who is more experienced in a computer system (Louwers, et. al., 2015). The
auditor should audit the system and provide a report regarding the system before it
can be put into operation. Failure to that the auditor will have portrayed negligence,
which is unethical.
d) Just like how a client’s working papers cannot be given to his/her competitors, so is
the same with the auditing firms. Working papers contain crucial information that aids
the performance of a company. Moreover, the information on the working papers is
dismantled and therefore shows the detailed aspects of the strategies used by a
company. Therefore, in as much as the audit firms need to be audited, there is a need
for privacy and secrecy so that a conflict of interest does not arise which would
undermine the ethical conduct of the firms (Gray, et.al. 2011). For this reason, the
licensor and the regulator who ensures that the audit firms have complied with various
regulations set out to govern audit firms. In other countries, audit firms are a formed
partnership of lawyers, accountants and tax advisors among others. In such a case

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auditing firms do not require auditing as the partners are liable for their advice to the
client
e) Setting up a separate entity that is not related to the field of expertise is legal and
ethical. This is as long as the owner of the entity employs a team that is competent in
rendering the required services of the company. In such a case, the entity or agency
needs to be a limited liability company to allow auditing of its affairs. The resolution
by Bill Holland to set up a casualty and a fire insurance agency is both ethical and
legal. Moreover, the directive of not to include his own name on the matters relating
to the agency ensures minimal conflict of interest (Krishna, Seetharaman, and
Saravanan, 2010). The management has also been urged to review the adequacy of the
client’s insurance to avoid non-performance due to negligence. Therefore, Bill
Holland is within ethical confines and within the law to establish such an agency.
f) In accounting practices, one of the most common principles is the segregation of
duties. Performing the bookkeeping services, management advisory services, and tax
services is unethical since it violates the auditor’s discretion. For instance, if the same
accountant is tasked with the duty of auditing the same accounting records that he/she
prepared, then in case of a mistake it is likely it will not be noted as it might question
the accountant/auditor’s competency (Whittington, and Pany 2010). Emma Lawrence
has violated the general ethical principles in both accounting as well as auditing. In
the accounting, the segregation of duties has been violated while in auditing the
discretion principle has been violated. The Auditor is likely to provide wrong
management advice, prepare wrong accounts and violate the bookkeeping principles
as long as she is the auditor and no one will examine her actions.

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g) Situation 1
Auditors act as watchdogs for the shareholders and are required to bring to light any
malpractices that could be going on in the company. An auditor auditing any firm
provides both audit and non-audit services. This means that apart from auditing the
financial records, the auditor can provide a management advice so long as he/she is
competent and knowledgeable in such a field. However, some cases might threaten
the independence of an auditor such as the threat of familiarity and losing a job. Enid
Blyton has the obligation of taking the contractor issue to the management. However,
how the issue will be handled will depend on the level of familiarity of the
management with the auditor. On the other hand, he risks losing his job as the audit
manager Peter Don instructed Enid to stick on determining whether the financial
statements were true and fair as well as the availability of any material statement.
h) Situation 2
Auditors have a right when it comes to clients who do not pay them for their services.
In a case where a client refuses to pay for the services, the auditor can exercise his/her
right to lien. This means that since John Dooley has failed to pay Jean Douglas and
his firm. Jean can perform the audit and refrain from submitting the report to John in
accordance with the law.
The CEO has announced that the company will be providing a free trip to Europe for
the auditor. The trip should not be taken as a bribe but rather as parting a gift since the
CEO has announced plans of bringing on board another auditor.

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Jean should be concerned about the material financial statement and should disclose
the misconduct and advise the management accordingly (Olsen, 2017). Moreover, he
should pass the information to the incoming auditor.

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Reference
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Olsen, C., 2017. Auditors’ Professional Skepticism. In A Study of Professional
Skepticism (pp. 1-12). Springer, Cham.
Salem, M.S., 2012. An overview of research on auditor's responsibility to detect fraud on
financial statements. Journal of Global Business Management, 8(2), p.218.
Krishna Moorthy, M., Seetharaman, A. and Saravanan, A.S., 2010. The Realities of Auditor's
Independence and Objectivity. Journal of Accounting, Business & Management, 17(1).
Gray, G.L., Turner, J.L., Coram, P.J. and Mock, T.J., 2011. Perceptions and misperceptions
regarding the unqualified auditor's report by financial statement preparers, users, and
auditors. Accounting Horizons, 25(4), pp.659-684.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C.,
2015. Auditing & assurance services. McGraw-Hill Education.
Woodland, A.M., 2011. Auditing and Assurance Services. Issues in Accounting
Education, 26(2), p.457.
Whittington, R. and Pany, K., 2010. Principles of auditing and other assurance services.