Auditng and Assurance Standards

Question: Discuss about the Auditng and Assurance Standards. Answer: Introduction: APES 110, Code of Ethics for Professional Accountants states that if an auditor accepts or enters into an arrangement wherein he is entitled to receive commission or acts as an agent or such other referral fees then it may create threats to self-objectivity as well as to the professional conduct. Section 240 of APES 110 clearly defines that if an auditor is to receive any such fees then he should inform the audit client about such fees in writing specifying in particular the calculation of such fees and the dealer from whom he has made such an arrangement (ncpa-scribo.com., 2012). The present situation clearly violates the ethical code of conduct by Peter if he keeps quite on such a commission which he is to receive from Computer Services limited. To rectify the said violation he should inform the client in writing about the same. As per the code of ethics, an auditor cannot disclose the contact details or any confidential information of his client to an outsider or a third party but for the requirement of law without prior permission from the client. Therefore in the present scenario the act performed by David Smith is in contradiction to the ethical code of conduct (ifac.org., 2006). He should have informed and taken due permission from his clients before sending referrals to Allied Insurance. Thus to rectify the said violation he should first ask the clients then forward the references. As per the professional standards, an auditor should act independently. Thus the firm of auditors should ensure that the one conducting the audit should not be entitled to do the accounting entries as well as it would affect the independence of the professional conduct. But if the firm takes adequate consent from the client then the same is permissible. But even after so the work done by the auditor should be reviewed by a senior personnel of the audit firm so that integrity and objectivity in performance of the work is maintained (icaew.com., 2011). Therefore as per APES 110, the staff of the audit section can help in inputting the data of the audit clients ad at the same time also be a part of the audit of the clients financials but only after the consent in writing from the client is obtained. Seeking professional work by advertising or marketing may create a conflicting scenario to the basic principles of professionalism. Section 250 of APES 110 states that marketing about ones professional stance should be done in a manner which does not bring disrespect or disrepute to the profession (APESB, 2010). Therefore comparing ones own work with that of the others in the same profession is not acceptable. In the situation mentioned, the conduct of Barry is bringing disrepute to the occupation. He is sending his management services work to the client which is unsolicited just to obtain that work which has been outsourced to somebody else is in contradiction to the code of ethics. Thus only if the client wants him to perform the said task, only then he is entitled to do so. Therefore Barry should immediately stop sending the management services capabilities to the client on a monthly basis. A self interest and a self review threat is created if an auditor of a company also acts as a director or holds any such other position in the company as per Section 290.146 of the APES 110. Threat can be as dangerous as it may put the company to a position wherein he may be unable to safeguard oneself against difficult problems. It does not matter whether the auditor acts as an honorary director or an active one, it would still create threat on the independence with which audit would be conducted. Therefore if Katrina NG is to act as a director then she will have to resign from the audit firm. A chartered accountant has the capability of performing the work of an auditor, tax professional, management services and such other non-audit services as well. But the same professional performing all the activities in a company poses a threat to his or her independence, objectivity and integrity(cimaglobal.com. 2015) Therefore in line with the above, Peter will have to resign from the work of an auditor before he can take up the other non-audit services. However if Peter wishes to perform both the tasks then as per the provisions of the Combines Code of Corporate Governance, the audit committee of the company will have to perform a vigilance over the non-audit services on a regular basis. For that the audit committee has to be sure of the fact that the integrity, objectivity and the independence are not being hampered. The conduct of Hornsby Auditors is not in accordance to the Accountants Code of Ethics. Reason being that an auditor is not permitted to seek work by giving colourful advertisements, detailing about the people employed and comparing the same with other firms. Further to this, they are not allowed to make statements which are in contravention to the laws and by laws set by the income tax of the country. Soliciting clients by mentioning things like help clients gets higher tax deduction than all others in the district is simply misleading in nature. However the code permits them to advertise their professional excellence in the journals and the newspapers of the institutes for obtaining clients. The act performed by Hornsby Auditors has bought disrespect to the profession as well as led to the violation of section 250 of APES 110. The AICPAs Code of Conduct states that an auditor can continue to audit the books of accounts of his client even if the fees of the previous year is yet to be settled. However the act also states that the report cannot be issued to the client until and unless the previous dues are cleared (ethicsboard.org., 2012). Therefore, David Cheadle has performed his work as per the code of ethics by starting the work of audit of current year. But at the same time he should release his audit report only after the previous years fees has been received. As a part of audit, an auditor should always obtain confirmation of balances from the debtors, creditors, financiers etc. The same is done so as to become sure of the correctness of the statement. Also as per the Auditing Standards it is a must to obtain the confirmation of the account balances from the major customers. The same is done simply because the auditor should be sure of the fact that the transactions are true and fair in all respect, the balance is correct and provision for the bad and doubtful debts are done accurately. However if the situation is such that the auditor is unable to obtain a confirmation from the customer directly then he may take recourse in performing alternative methods so as to satisfy himself about the correctness of the account balances. Therefore in this case the auditor should give a positive opinion as even if he could not obtain confirmation from the major customers yet was able to satisfy himself of the balances by adopting other alternatives. Thus he would not give any negative or adverse opinion on the same. ASA 200 states that an auditor should perform his work independently without any prejudice or influences. Expense which are more than 5% of the total expenditure should be checked in detail. Also if they find any thing unusual then they have full rights to check into the same in detail(auasb.gov.au., 2015). An auditor is entitled to give his opinion only after he is sure about the accurateness of the data presented by the audit client. In the present case the auditor is to give a negative opinion as he was not allowed by the client to observe the plant and machinery of the client in physical even though the said asset contributes to 20% of the entire asset base and is a major revenue generating component. The auditor cannot verify the impairment of the asset until and unless the same is checked in physical, the additions, deletions and its accounting all are very important for the correctness oft he balances stated at the balance sheet. Thus the auditor can try other methods to assure himself about the authenticity of the balance of plant and machinery. Even then if he is not satisfied then he should give an adverse opinion so as to protect himself from any litigations in future in case the company goes into liquidation. Contingent Liability and Asset are important elements of the financial statements which should be audited by the auditors. They are to ensure that the recognition, measurement and disclosure of the said element has been done with accuracy and as per the standards. The audit is important as such liabilities or assets (specially the liability) may have a significant impact on the going concern of the company. Therefore the disclosure of the same is important for the investors and other shareholders of the company as it would help them to make their decisions accordingly. An audit report is what the outsiders to the company trust upon, therefore elements of the financial statement which may impact the decision of the users should be checked in detail and contingent liability is one such element (aasb.gov.au., 2011). Thus even though the management would not want to make a disclosure with regards the same the auditor should make it a point to disclose it else give an adverse opinion on the same. Maintenance of the records of the sales and purchases in a retail segment is a necessity even if a major chunk is in cash. If the same is not done then auditing becomes a difficult affair. The auditor will not be able to perform his duties well thus in such a situation he would have to give an adverse opinion as the authenticity of the transactions cannot be verified. Basically the auditor should state clearly that since the records were not maintained appropriately hence no opinion can be stated about the performance of the company. Thus in this case he is to give a neutral opinion. An auditor starts the audit work by verifying the opening balances of the clients financial statement. The same is to be done by an old auditor as well as a new auditor. In case of an old auditor he may check the same from the copy of the audit report he possesses but for a new auditor the same can be checked only from the audit report given by the previous auditor. This is an indispensible part of the audit procedure therefore even if the client does not provide any information about the opening balances and the auditor is satisfied that there is no material misstatement even then the opinion stated by the auditor should be adverse. Simple reason being that if in future any discrepancy arises then he is in a safe position. Australian Accounting Standards (AAS) states that all the companies and the firms registered in Australia should maintain their books of accounts as per AAS but for some deviations and exceptions mentioned in the standard. Thus if the books are not maintained as per the standards then the auditor should ask the client to prepare the financials again as per the Australian Accounting Standards before he can audit the financials. Thus in the present scenario the auditor should ask the client to make the accounts again. If he does not agree to the same then he should give an adverse opinion stating that the accounts are not as per the standards thus there has been a violation of the Australian Accounting Standards. As per AASB 102 Inventories, the inventories should be valued using FIFO or weighted average method. Thus if any firm is valuing its inventory using LIFO method then they should change its method of valuation of inventory. Therefore in the present scenario the auditor should make the client aware of such a violation and ask to make adequate changes (aasb.gov.au., 2015). Even then if the client does not change the method of valuation then he should give an adverse opinion stating the impact on the financials of the company due to wrong valuation method of inventory adopted by the company. If at the time of audit, the auditor is sure that there is no material misstatement and teh financial statements are prepared in accordance with the Australian Accounting standards, yet he should give an adverse opinion since the clients continuation became questionable before the issue of the audit report because of exit of a major customer. Thus the going concern became questionable. Thus the auditor should ask the client to prepare his accounts on cash basis and state an adverse opinion about the continuity of the business (aasb.gov.au., 2012). References: APESB, (2010), APES 110 Code of Ethics for Professional Accountants, Available at https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf (Accessed 17th January 2017) auasb.gov.au., (2015), Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with the Australian Auditing Standards, Available at https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_Compiled_2015.pdf (Accessed 17th January 2017) aasb.gov.au., (2015), AASB 102 - Inventories, Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf (Accessed 17th January 2017) aasb.gov.au., (2011), AASB 137 -Provisions, Contingent Liabilities and Contingent Assets, Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf (Accessed 17th January 2017) aasb.gov.au., (2012), AASB 101- Presentation of Financial Statements, Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB101_09-07_COMPsep11_07-12.pdf (Accessed 17th January 2017) cimaglobal.com., (2015), Ethics code at a glance, Available at https://www.cimaglobal.com/Professionalism/Ethics/CIMAs-code-at-a-glance/ (Accessed 17th January 2017) ethicsboard.org., (2012), Revised Code of Ethics Completed, Available at https://www.ethicsboard.org/projects/revised-code-ethics-completed (Accessed 17th January 2017) icaew.com., (2011), Code of Ethics A., Available at https://www.icaew.com/en/membership/regulations-standards-and-guidance/ethics/code-of-ethics-a (Accessed 17th January 2017) ifac.org., (2006), Code of Ethics for Professional Accountants, Available at https://www.ifac.org/system/files/publications/files/ifac-code-of-ethics-for.pdf (Accessed 17th January 2017) ncpa-scribo.com., (2012), CPA Independence When Prior Year Fees Have Not been Paid, Available at https://cpa-scribo.com/cpa-independence-when-prior-year-fees-have-not-been-paid/ (Accessed 10th January 2017)