Auditing Report: Ethical Concerns and Negligence in MYH's Morgan Audit

This report presents a comprehensive analysis of the Miller Yates Howarth (MYH) audit of Morgan Fertilizers. It examines ethical issues, particularly concerning inventory valuation and the firm's potential negligence in overlooking obsolescence and the waste management contractor's environmental issues. The report applies the American Accounting Association ethical decision model to evaluate these concerns. It also addresses the potential negligence case that could be brought by Oasis Ltd, the firm that took over Morgan Fertilizers, highlighting the auditor's responsibilities in verifying inventory and adhering to auditing standards. The conclusion emphasizes the potential for a negligence charge against MYH due to the failure to consider inventory obsolescence and the pressure exerted by Morgan Fertilizers to complete the audit quickly. The report underscores the importance of ethical conduct and adherence to auditing standards in maintaining public trust and avoiding legal liabilities.

Running head: AUDITING
Auditing
Name of the University
Name of the student
Authors note

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Executive summary:
The report is prepared to deal with the case of Miler Yates Howarth regarding their audit with
client Morgan fertilizers. Observed ethical issues in the given case is explained using
American Accounting association ethical model and recommending the course of action.
Later part of report demonstrates report to managing partners on strength of negligence case
brought by the takeover firm Oasis limited.

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Part A:........................................................................................................................................3
Explanation of ethical issues using American Accounting association ethical decision model:
....................................................................................................................................................3
Part B:.........................................................................................................................................6
Report for managing partners of MYZ considering negligence case strength that might be
brought by Oasis Ltd:.................................................................................................................6
Conclusion:................................................................................................................................7
References:.................................................................................................................................8

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Introduction:
The case study is about accounting firm in Australia that is Miller Yates Howarth
having office throughout regional centres of NSW and Queensland. Various audit clients of
organisation includes mining, agriculture, property and manufacturing industries. One of the
most long-standing and significant client of accounting firm is Morgan Fertilizers Pty limited
having their operations in Toowoomba, Tamworth and Bathurst in Queensland and NSW.
Manager in the audit division that is Jaqui of Miller Yates Howarth is concerned about waste
management contractor with Dumparound limited that is investigated by local council
regarding their toxic waste. However, the manager is mainly concerned about the contract
between waste management company and Morgan Fertilizers Pty. Some of the other issues
that Jacqui is concerned about is valuation of inventories. Miller Yates verified stock of
Morgan and valuation done by management was accepted by auditing company that did not
take into account of substantial obsolescence (Acito et al., 2013).
Discussion:
Part A:
Explanation of ethical issues using American Accounting association ethical decision
model:
The major issue identified with valuation of inventories is that cost should be
recognized as assets and forwarded until revenue recognition. As per the Australian
accounting standard board, inventories are required to be measured at cost or net realizable
value, whichever is lower. Inventories cost involves conversion cost, asset cost and any other
costs that is incurred on making the asset ready for use. If the part of inventories are damaged

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then it is not possible to recover the cost of inventories. On other hand, if there is expansion
of estimated expenses to make sales, it is not possible to recover cost of inventories.
A logical seven step process is suggested by American Association model that takes
into account all the ethical issues
Step 1: What are the facts of given case?
Model is initiated with step 1 that helps inn establishing the facts of case. Under this
step, there is initiation of decision-making process that does not leads to any ambiguity under
the case scenario. The fact of case scenario is that engagement of its audit client that is
Morgan Fertilizers with waste management contractor, Dumparound limited does not takes
into account the specification of damagers that is not signed by later henceforth. Dumparound
has been inspected for its toxic disposal of waste that would be damaging environment. This
particular aspect regarding contract with waste management organization is inspected and
they are concern whether they should interfere and give suggestions relating to their client’s
business management.
Step 2: What are ethical issues in case?
In second step, identification of the ethical issues of the given case is done. . Ethical
issue in the given case is that whether the audit firm should interfere with the business
management of Morgan fertilizers and raise concern for environmental issues hampering
communities resulting from waste disposal. If the audit firm does not raises the concern
regarding waste disposal and their client contract with Dumparound Limited, then they would
be negligent of their professional duties. This is of fact that other entities dealing with
Morgan fertilizer would be completely dependant upon the opinion formed by the auditing
firm. In the given case, takeover of Morgan fertilizers by oasis Ltd

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Step 3: What are the principles, values and norms concerning the case?
In third step, principles, norms and values related to case is identified. It incorporates
decision placement in context of ethical, professional and social behaviour. Values, principles
and norms regards that auditors are assumed to have impeccable integrity and assurance that
MHY is providing true and fair view of financial situation of Morgan fertilizers while
conducting audit. Auditor fails to oblige with their duties concerning stakeholders when they
are involved in act of something that interferes with their objectivity.
Step 4: What are alternative course of actions?
Alternative course of action is identified in fourth step. First option is that auditing
firm should not interfere with business management and continues to carry out audit whether
they are being professional on their part and maintains integrity. Second option is to interfere
with the business management that their contract with Dumparound limited is not feasible
and taking steps accordingly.
Step 5: What are the best course of actions that is consistent with values, norms and
principles that are identified in step 4?
In next step, it is possible for analyst to depict options that are in accordance with
norms or not. Course of action that would be consistent with principles, norms and values is
to raise concern about Morgan fertilizer contract with Dumparound limited, as going against
environment community work would be unethical on their part (Louwers et al., 2016).
Step 6: What are each possible course of actions consequence?
Sixth step deals with consequences of outcomes and finally decision is taken in last
step. Under option one, auditor would not raise concern about environmental issues and

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thereby exposing MHY to risk of being in legal and professional trouble (William et al.,
2016). This would happen when take over firm that is Oasis ltd would discover the matter.
When auditing firm would go for selecting other option, they would present true and
fair view of Morgan fertilizes activities along with their financial declaration. However, this
would result in creating number of unfortunate consequences on part of their clients and
might hamper the operations of business. It would also affect the relationship between
auditing firm and clients (DeFond & Zhang, 2014). Nonetheless, choosing second option
would help in maintaining the confidence of public in audit, enhancing the reputation and
social standing of auditors and serving the stakeholders’ interest.
Step 7: What is the final decision?
The ethical decision concerning the case is choosing second option. Therefore,
auditing firm should raise concern about business management.
Part B:
Report for managing partners of MYZ considering negligence case strength that might
be brought by Oasis Ltd:
Oasis Limited successfully overtook Morgan Fertilizers and at that very time they
were reported of carrying high inventory value in their audited balance sheet. It was
discovered after two months of takeover of Morgan business that there was overvaluation of
inventories and there was no claim made by auditor regarding inventory quality. It was
mentioned that 50% of inventories was held at Bathurst facility of Morgan fertilizers and
there were no existence of inventories. Furthermore, there has been over valuation of

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inventories by 35% at Tamworth facility (Beasley, 2015). Quantity of stocks held at
Tamworth facility was not reported by auditor.
It is the duty of management of organization to take into account inventories physical
confirmation. Basis of preparation of financial statements needs to be established by
developing strategies for checking inventories. In order to tally the stock of physical
inventories reported to auditor’s knowledge, it is required by them to review complete
techniques for getting suitable and adequate confirmation. Auditors are required to carry out
investigation of inventories and inspecting them by being physically present. They are
required to evaluate tool that is set by management for controlling and recording inventories
and identifying the dependability and reliability of procedures adopted. Furthermore, for
evaluating the adjustments concerning inventories between date of physical count and year,
auditors are required to adopt an additional measure and they need to be physically available
on optional date. It is essential on part of inspection by auditors that they evaluate inward and
outward movement of stocks of Morgan fertilizers from cut-off date until inventories are
counted physically (Yuan & Yu, 2015).
Auditors should evaluate instruction of management and reviewing on internal control
with regard to counting and recounting of stocks, stock sheets, tagging, damage items in
inventories and their impact on recoding items in financial statements. Valuation of work in
progress, procedures of inventories cut-off and inventories movement. Auditors are obliged
to refer to audit reports if they faces difficulties in obtaining sufficient and proper evidence
regarding to existence and physical count of inventories. While auditing, auditors are
evaluated against the standard that obliges them to have professional judgement and maintain
integrity while carrying out audit (Hayes et al., 2014). Oasis ltd can bring out negligence
charge for not conducting audit as per auditing standards. Auditors are liable to third parties if
following points are proved:

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 Any act of negligence of part of employees of audit firm
 Action taken by third party based on audited financial statement
 Recklessly ignorance of the facts
 Intentional preparation of financial statements for enabling action by third party.
Conclusion:
As per the given case, despite correct verification of stock of Morgan fertilizers by
MYH, they would be claimed of conducting audit without considering integrity. The reason
is attributable to the fact that obsolescence of stock was not considered and auditing firm
accepted valuation done by management. It is also evident from the given case study that
Morgan fertilizers on MHY to complete audit within one-month period exercised
considerable pressure. Furthermore, Oasis Ltd decisions to overtake Morgan fertilizers was
based on audited financial statements and opinion of auditors. Hence, after reviewing all the
facts, it is certainly possible on part of Oasis to bring negligence charge against audit firm,
MYH. Holding MYH for negligence charge is the sole discretion of court.

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References:
Acito, A. A., Hogan, C. E., & Imdieke, A. J. (2014). Auditing Standard No. 2 versus
Auditing Standard No. 5: Implications for integrated audits and financial reporting
quality. Working paper, Michigan State University.
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services. Pearson.
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DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of
Accounting and Economics, 58(2), 275-326.
Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015).
Auditing & assurance services. McGraw-Hill Education.
Stojanovic, T., & Andric, M. (2016). Internal Auditing and Risk Management in
Corporations. STRATEGIC MANAGEMENT, 21(3), 31-42.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A
systematic approach. McGraw-Hill Education.
Yuan, J., & Yu, S. (2015). Public integrity auditing for dynamic data sharing with multiuser
modification. IEEE Transactions on Information Forensics and Security, 10(8), 1717-
1726.