SBF Audit Report on Far Faraway Pastoral Limited (FFA) for 2019

This report details the audit of Far Faraway Pastoral Limited (FFA), an agricultural company listed on the Australian Stock Exchange (ASX), conducted by Samway Baker Fitzgerald (SBF). The report addresses three key issues raised during the audit: compliance with ASX corporate governance principles, ethical breaches by audit staff based on the American Accounting Association model, and the audit firm's failure to exercise due care, including contributory negligence. The analysis examines the composition of FFA's board, identifies ethical violations by an audit team member, and assesses SBF's responsibilities regarding a subsidiary sale and its impact on the acquirer. The report provides recommendations for board reconstitution, ethical conduct, and improvements in audit practices, emphasizing the importance of professional standards and the auditor's duty to various stakeholders. The report highlights the importance of due diligence in auditing and the potential consequences of negligence.

Audit Assignment
Submitted By
Professor:
University:
Date:
Page | 1

Executive Summary
This assignment is intended to deal with the three major issues as raised by the two different
Audit seniors before the Audit manager during audit of an agricultural company naming Far
Faraway Pastoral Limited listed with the Australian Stock Exchange. The major issues are to
give a check on ASX corporate Governance Principles and suggested recommendation if any
breach is made in this regard, necessary actions to be taken in the context of code of ethics for
professional Accountants based on the model provided by American Accounting Association and
finally based on the case study done, a report has been submitted before the managing partner of
the Audit firm detailing the failure of the firm in exercising due care in its professional
engagement along with the fact of simultaneous guilt of contributory negligence and finally
whether the Audit firm is responsible in exercising the due care towards the party who took over
one of subsidiaries of the client.
Page | 2

Table of Contents
Answer to Question No.1.................................................................................................................3
Answer to Question No.2.................................................................................................................5
Answer to Question No. 3................................................................................................................6
Conclusion........................................................................................................................................8
Page | 3

Answer to Question No.1
As per the recommendation of ASX Corporate governance principle, the Board should have a
composition ensuring the exercise of independent judgment to be exercised with majority of
independent directors. Further, the definition of the independent director may be given as a
person not being a member of management and free from any business or other relationship that
could materially interfere with or could reasonably be perceived to materially interfere with- the
independent exercise of his or her judgment.
It further as per this principle, the key components for determining the independent status of A
DIRECTOR ARE:
1. An independent director cannot be a substantial shareholder of the company or an officer of
the company or otherwise cannot be associated directly with, a substantial shareholder of the
company. OR
2. He or she cannot be employed or has not previously been employed in an executive
capacity by the company or another group member and there has not been a period of at least
three years between ceasing such employment and servicing on Board. OR
3. He or she has not within the last three years been a principal of a material professional
advisor or a material consultant to the company or another group member or an employee
materially associated with the services provided. OR
4. The person cannot be a material supplier or the customer of the company or he or she can
not be a other group company’s member or an officer of or otherwise associated directly or
indirectly with a material supplier or customer. OR
5. He or she cannot share a material contractual relationship with the company or another
group member other than as a director (Webster, 2017).
Again, the chair of the Board should be an independent director.
Hence applying the above checks in case of FFA Board it is well depicted that making the CEO
and the CFO the part of its Board it has contravened the point no. 2 of the above check.
Similarly, the membership of Mr. Kevin Oliver violates the point no 1 and 2 of the above checks
along with the fact that he is not competent to hold the chair of the Board as not being an
independent director. Similarly, the inclusion of Mr. Matthew James as a board member violates
the provision as a given point no. 4 in the above checks(Vieira, O’Dwyer, & Schneider, 2017).
Page | 4

Further, as per this principle, a proper understanding of and competence to deal with the current
and emerging issues of the Business is a prerequisite for the member of the Board. If we
evaluate the membership of Mr. Jacqueline Grace based on this criterion then also it fails to meet
this requirement(Wendt, 2018).
Hence the entire composition of the Board of FFA seems to be defective and it is being
recommended to immediately reconstitute the Board by dissolving the present Board.
Answer to Question No.2
With reference to the information provided by Steve Barker, the contravention of the code of
professional ethics by the staff member of the Audit Firm has been clearly depicted. Hence to
deal with the issue in the context of the code of ethics for professional accountants based on the
American Association Accounting Model, the following course of action is being recommended
Decision-making process based on American Accounting Association Model
1. Determine the facts the facts of the case are that one of the members of the Audit team
naming Steve Barker who was entrusted with the responsibility of reviewing the revenue cycle
has noticed that the FFA’s method of recognizing the revenue generated from cattle sales
consisting of the substantial part of total revenue of FFA was highly questionable. Then he
further reported the matter to one of the senior partners of the firm naming Skye Martin, who
suggested that there was no requirement as such to the Financial statement for the year ending
30h June 2019. Following the suggestion of his senior Steve agreed with her advice, but he
wanted to incorporate a dissenting statement in his audit paper in this regard. But his senior
refused to permit him to do so rather suggested that he should write a letter to the FFA Audit
manager taking full responsibility for this audit and threatened to affect his future promotion
prospect negatively(Ruth, 2018).
2. Define the ethical issues the major ethical issue involved in this case is that it is highly
affecting the independent judgment of the Audit personnel by means of indirect inducement of
future promotion of the said member in his working firm.
Page | 5

3. Identification of the major principles, rules, and values the fundamental principles, rules and
values to be impacted in this case are integrity and objectivity along with professional behavior.
4. Specification of the alternatives In the given case, he should inform the board of directors or
the audit committee of the organization of the current reason for conflict. If it not be resolved
easily then he may also seek the professional advice from other legal bodies or legal advisors, so
that he may obtain necessary guidance on this ethical issue without compromising the client’s
confidentiality. Then also if it is not resolved then he should refuse to remain associated with this
professional engagement.
5. Compare values and alternatives If the first option is adopted then the principle of integrity,
objectivity and the professional behavior all shall be maintained. If the second option is availed
then his objectivity may be impacted and again in the third option, it can be helpful to maintain
all the above principles(Norberg, 2018).
6. Assess the consequences If he adopts the first one then it might so happen that he may have
to lose a job. In the second option, there is a high prospect that his audit firm shall have to be
agreed with his view. If the third option is adopted, then it shall be quite impactful for the firm
and for him too
7. Make your decision, in this case, the best course of action shall be to inform the Board of
Directors and the Audit Committee of the FFA.
Answer to Question No. 3
Our report is intended to draw the kind attention of the managing partner of the Audit Firm ( i.e.
SBF) that it had failed to exercise the due care in discharging its professional duty in addition to
the fact that FFA is guilty of the contributory negligence and the Audit form is responsible or it
owes a duty to the acquirer that is McCarran Pastoral. These matters are further elaborated
through the following points:
1. It was known to the Audit firm SBF that the Target firm that is TRC, a subsidiary of their
client used to be the market leader, but still was incurring losses for the last two years.
2. When the acquisition firm clearly stated the fact that the sale has been finalized on 15 the
April, though the half of the purchase price was to be discharged after the audit of FFA being
completed on 30th June 2019, then in such case it imposes significant duty to give a check to the
financial affairs of the TRC, which it failed to exercise(Kusolpalalert, 2018).
3. During the financial year 2018 to 2019, TRC undertook the project of upgrading its
accounting system for improving its inventory sales by engaging an IT consultant. As TRC was
Page | 6

one of the subsidiaries of FFA, hence it became the duty of SBF to give a check on this practice
and its subsequent consequences.
4. The Audit firm did not take due care when an independent expert group concluded that the
new system was operating effectively as on 30th June 2018. It simply meant that it relied on the
independent expert’s view fully without making any separate investigation in this regard.
5. Though the actual error of the significant changeover of the accounting system came out in
July 2019, the process was working for more than one year. In such a case, the firm should have
exercised the due diligence in assessing the true impact of the changeover.
6. The contributory negligence by the audit firm is further reflected from the erroneous value
of the inventory of TRC. It is because a subsidiary that is going to be sold to the third party
should accurately value its assets and the liabilities. It was the duty of the Auditor to check the
accuracy of such valuation. But unfortunately, such exercise was not practiced by the member of
the Audit firm.
7. Again there is no doubt that the audit firm SBF owes a duty to the acquirer too to ensure that
the target company is accurately valued, but though SBF did not show any interest in evaluating
the fact whether the review made by the independent expert in relation to the accounting system
upgradation was correct or not(Kaufmann, 2017).
8. In terms of professional conduct, it is expected that all the subsidiaries of the client should
be properly checked too before forming an overall view of the Client. But such practice was
found totally missing in case of SBF.
9. The loss that was caused to the client FFA is simply the result of the contributory negligence
of the Audit firm.
10. Again it was the intention of the client FFA because of which the TRC sold its entire
business. Hence it became the duty of the Firm SBF to give a check on this financial decision or
else collect sufficient appropriate evidence of the fact that such sale is justified.
11. Again one of the members of the Audit firm was responsible for the review of the operation
of the TRC, hence such a loophole in operation that is in the accounting system is simply the
result of the negligent attitude adopted by the SBF(Boghossian, 2017).
12. Hence from the above, it is quite clear that the Audit firm did not do justice with McCarran
Pastoral. As an audit firm is mainly accountable to the public at large, hence it is responsible
towards the acquirer too(Kaufmann, 2017).
Page | 7

Conclusion
From the above, it is quite evident that the ASX corporate governance principles are quite
helpful in ensuring better governance by the entity. The composition of the ASX listed company
Board can only decide about how to perform its services in the most effective way. It is again a
common practice that the Auditor often must face the conflicting situation due to which the
problems that occur seem much difficult than it was. Hence the major attempt should be to
follow the set of strict code of professional standard and always follow the necessary guidance as
prescribed often.
Further, it is to be kept in mind that the subsidiaries are the major part of the client group and it
becomes quite important that the audit firm is accountable not only towards its client firm but
also to its various associates too. As a matter of ensuring higher professional standard it is
required that under any circumstances the basic principles, values should not be influenced by
the wrong intention.
Page | 8

References
Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), 244-253.
Kaufmann, W. (2017). The Problem of Regulatory Unreasonableness (First ed.). New York: Routledge.
Kusolpalalert, A. (2018). The relationships of financial assets in financial markets during recovery period
and financial crisis. AU Journal of Management, 11(1).
Norberg, P. (2018). Bankers Bashing Back: Amoral CSR Justifications. Journal of Business Ethics, 147(2),
401-418.
Ruth, W. (2018, September 20). 'Worrying': Companies' reporting of climate risks goes 'backwards'. The
Sydney Morning hearld, pp. 123-128.
Vieira, R., O’Dwyer, B., & Schneider, R. (2017). Aligning Strategy and Performance Management Systems.
SAGE Journals, 30(1), 23-48.
Webster, T. (2017). Successful Ethical Decision-Making Practices from the Professional Accountants'
Perspective. ProQuest Dissertations Publishing, 3(1), 142-156.
Wendt, K. (2018). Positive Impact Investing: A Sustainable Bridge between Strategy, Innovation, Change
and Learning (first ed.). Switzerland: Springer.
Page | 9