AUDIT 2018 Assignment: Ethical Principles and Auditor Independence

This assignment, completed in 2018, addresses ethical principles and auditor independence within the context of auditing, referencing APES 110. Question 1 analyzes various scenarios involving potential ethical violations, such as accepting gifts, maintaining confidentiality, outsourcing work without proper oversight, sharing audit information inappropriately, and using one's position for personal gain. Each scenario is evaluated based on its adherence to ethical guidelines, identifying specific principles violated and providing justifications. Question 2 focuses on the concept of auditor independence, highlighting its importance for unbiased financial reporting and discussing potential threats to independence, including self-interest, relationship, and intimidation threats, with examples. The assignment emphasizes the auditor's responsibility to maintain objectivity and report any non-compliance with accounting standards or regulations, and the consequences of failing to do so.

AUDIT
2018

1
By student name
Professor
Date: 17th Sep, 2018.
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CONTENTS:
Question 1……….............…………………………………………………......................…...3
Question 2…………......................……………….....................................................................5
References......................……………….....................................................................................7
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Answer to Question 1:
As per APES 110, there are a set of ethical principles that must be adhered to by an auditor
during performing his duties for his client. During discharging their duties, the auditors are
expected to uphold the highest standards of professional judgement and should inculcate
principles of integrity and professional conduct all throughout the audit (Abdullah & Said, 2017).
The below mentioned instances highlight a few scenarios that involved ethical dilemmas or
issues that the auditor may have faced during performing the audit:
a) In the given case, the client in recognition of Peter’s audit services to the company over a
period of six years has offered to gift him a discount voucher of 25 percent on the
purchase price of the tickets. If Peter goes on to accept the gift, this would tantamount to
professional miss-conduct as it violates the laid down principles of code of ethics and
could hamper the level of independence and alter his professional judgement. Therefore,
such perks are to be avoided by the auditor to maintain the sanctity of the profession.
Hence discounted priced tickets should not be accepted by the auditor (Boghossian,
2017).
b) Gerona Company has appointed Jana to render his audit services and he has continued to
be the auditor for the same industry for the past three continuous years. By no means
there is any violation of ethical principles as there are no restrictions on taking up an
audit engagement in a company which is a part of an industry where the auditor has
served previously for several years. All that the auditor needs to do is to ensure that the
confidential information of the previous clients of the same industry that he has earlier
worked on is maintained and the integrity principles are not violated.
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c) Circumstances of the given case states that Jack Deck did not possess any experience in
relation to installation technicalities of a computerized machinery and hence took the
services of a consultant of computer inventory. However due to time constraints and
stringent deadlines faced by him, he could not allocate time to monitor the work of the
consultant and carry out his own due diligence of the work done by the consultant. This
seems to be a prima facie case of violation of the principles relating to ethics of APES
110 on multiple grounds. He did not take permission from the client to outsource his part
of the work to a third party and thus violated the principles of confidentiality by
disclosing the information related to the client (Bouret, 2017). There is also failure on the
test of integrity related to his professional conduct as the work done by the consultant
was blindly relied on by Jack and there was no due diligence done on his part to ensure
that quality work gets delivered to the client. In the event of the company incurring losses
by his acts of negligence, Jack would have to be held accountable and liable (Delone &
Mclean, 2004).
d) The circumstances of the given case show that as many as four partners of a firm are
conducting a quality assurance review and while doing it they are also indulging in
sharing the weakness and strong points of the audit with other auditors of a different firm.
Primarily, this seems to be nothing less than unethical on part of the reviewers do share
information about one audit with another (Durtschi, 2004). Discussing about audit in
general, its concepts and statutes is not wrong since no client specific information gets
divulged in doing it. But when discussions are about the functioning or mechanism of a
client relating to its financial reporting and the control environment or its framework,
then it is becoming unethical as sensitive company specific information is revealed to
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people who are not supposed to know about it. In such scenarios, violation of the ethical
principles of APES 110 will take place.
e) Facts of the case Johan Goldens who is a practicing chartered accountant by profession is
also engaged in the business of insurance. He owns the business but does not operate that
in his name. The business is taken care by a manager appointed by him. The things that
Johan has asked his manager to do amounts to an unethical behavior purely because of
the reason that as an auditor, it is not expected of him share information about his client
to derive personal benefit (Iggers, 2018). This grossly violated the ethical principles of
the statute and the under the given circumstance the auditor will be held accountable. It
can be concluded that the auditor has used his position to gain an unfair advantage by
sharing sensitive client information.
f) Facts of the case show a situation where a town has only two audit firms having only two
partners. Audit of all the companies in the area are shared among them as there are no
other alternatives. A congeniality issue has arisen in this case which is basically a
violation of the ethical principles contained in the statute. The auditors have not shown
the level of integrity expected from them by sharing sensitive client specific information.
Likely they must be held accountable for the violation. Congeniality issue break the
sanctity of the trust level between the auditor and the client and brings disrepute to the
profession. This is in general will have a very negative impact on the relationship clients
share with their auditors and hamper the ethical standards of the profession. Client privy
information when leaked, could spell trouble for them as that could be used by
competitive in the similar industry to gain advantage over them.
Answer to Question 2
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Independence becomes a key area of interest when it comes to audit. It is basically the freedom
of opinion that an auditor (both internal and external) must possess from all any person who is
having any kind of interest which is financial in nature in relation to the company being audited.
For an audit report to be objective and unbiased, it becomes necessary that the independence of
the auditor is not compromised (Shimamoto, 2018). The users of the financial statements, i.e.
both the current shareholders and other stakeholders such as creditors as well as any potential
investor or a person willing to do business with the company will base their decision on the audit
report furnished by the auditors. Hence, it is of utmost importance that to preserve the trust level,
the independence of the auditor is ensured. However, there exists several avenues of threats to
that which are mentioned below:
Situation 1:
In this situation Keith Barnes who works as an auditor of a chartered accounting Firm Andrew
Capizzi has been instructed by the partner of the firm to only express opinion of the financial
position of the company. He should report if there is any misstatement and nothing apart from
that. In other words, he has been instructed to omit reporting on any possible violations of
environmental regulations (Wang, et al., 2018). If rules related to waste management have been
flouted, that need to be mentioned in the report. Maitland Coal Company has engaged the
services of the audit firm for a period of eight years. They have entered into an agreement with
the auditors to share 2 percent of the company’s total revenue.
The above-mentioned situation could be possible case of dilution of independence of auditor. It
is explained as under:
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 Threat of Self-Interest: It is evident that the auditor has vested interest in the affairs of the
company. Since it gets a good chunk of the firm’s revenue as its earnings, it would
compromise on the audit opinion as he may think that an adverse opinion on the client
might directly hit its interest and it may end up losing the client.
 Relationship Threat: The auditor in this case is merely an employee of the firm and he is
under the undue pressure to obey his boss who has enormous amount of interest in the
client’s business. He might feel that if he diligently performs his duties as the auditor and
reports on the aspects which the client may not like, he may ultimately end up losing his
job in the firm. This is the relationship threat he faces (Webster, 2017).
The vested interest of the audit firm has severely dented the independence of his opinion and
whenever the enforcement authorities get to know about the miss-deeds of the company, the
company would be held liable. Also, as it is the responsibility of the auditor to report the true,
not reporting gross environmental violation is against the professional ethics. Since the
auditor has compromised with his integrity, he will also be held liable. Penalties can be
imposed on the auditors in addition to a threat of cancellation of their license to practice.
Situations 2:
Under the given case Ken Smith who has been an auditor to the company for the last six
years has not been paid his entire audit fee and still 20 percent of the dues remain unpaid to
him. The auditor has utilized the services of one of the accountants working for the company
to fulfill some of his own requirements. Dave Dunne is auditing alongside Ken and has
carries an experience of nine years auditing the company. Teena Dean also works for the
audit firm of Ken and she will be assisting Ken in the audit (Wellmer, 2018). She happens to
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be the daughter of the managing director of the company and is fresh out of college with no
work experience. During the audit it has been discovered that methods for valuation of
inventory are not appropriate. The treatment is not being given as per the applicable
accounting standards. Also, the research expenditure has not been accounted for in the
correct and appropriate manner.
As per the facts of the case, following are the threat perceptions to the independence of the
auditor:
 Threat of Self Interest: The company owes certain amounts to the auditor, which the
auditor might want to have back soon. Also since the auditor has been engaged in
providing audit services to the company for a very long time, there is probability that
auditor might not want to discuss about the ongoing discrepancies in the financial
reporting functioning of the company to save his own interest in the company.
 Advising Threat: As per the facts of the case, an auditor employed in the audit firm
has previously been an employee of the company being audited. Since he is now a
part of the audit team, there are possibilities of advising threats that the audit firm
might face under the given circumstances (Bouret, 2017).
 Relationship Threat: The daughter of the managing director has been employed by the
audit firm even though the she does not possess any practical experience of an audit
environment. This could lead to a relationship threat. Since the daughter of the
managing director is member of the audit engagement team, she might play a role in
influencing the professional judgements made by the audit firm which might in turn
affect the audit opinion being expressed.
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It is known to the auditor that the company has failed to comply with the accounting
standards and has faltered in many aspects like inventory valuation norms and research
expense accounting. The ideal thing to do in such cases is to report the deficiencies and
publish an audit report that is free from any bias and is more objective in its approach. It
shouldn’t be influenced by anyone interested. To judge if a financial statement is free
from any material misstatement is the primary duty of the auditor. Any possible dangers
that are posed to independence also needs to be reported. The user of the financial
statements including the shareholders and other stakeholders have a great degree on
reliance on the report of the auditors. Any breach of trust in this case would call for
actions from law enforcement authorities for the auditor both in the form of penalties and
imprisonment. The auditors could end up losing their license to practice as accountants.
Regardless of the ethical dilemmas that come in the way of the auditor, he is expected to
stay firm and discharge his duties and obligations in the best possible manner upholding
the level of integrity, objectivity and independence.
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References
Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), pp. 244-253.
Bouret, I., 2017. Benefits of higher education in mid-life: A life course agency perspective. Journal of
Adult and Continuing Education, 23(1), pp. 15-31.
Delone, W. & Mclean, E., 2004. Measuring e-Commerce Success: Applying the DeLone & McLean
Information Systems Success Model. International Journal of Electronic Commerce, 9(1).
Durtschi, C. H. W. C., 2004. The Effective Use of Benford’s Law to Assist in Detecting Fraud in Accounting
Data. Journal of Forensic Accounting, pp. 17-34.
Iggers, J., 2018. Good News, Bad News: Journalism Ethics And The Public Interest. s.l.:s.n.
Shimamoto, D., 2018. Why Accountants Must Embrace Machine Learning. [Online]
Available at: https://www.ifac.org/global-knowledge-gateway/technology/discussion/why-accountants-
must-embrace-machine-learning
Wang, Z., Chiu, Y., li, Y. & Hsiao, L., 2018. Performance appraisal for the operation and management of
listed and OTC Taiwanese companies with DEA benchmarking models.
Webster, T., 2017. Successful Ethical Decision-Making Practices from the Professional Accountants'
Perspective. ProQuest Dissertations Publishing.
Wellmer, A., 2018. The Persistence of Modernity: Aesthetics, Ethics and Postmodernism. fourth ed. UK:
Polity Press.
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