APES 110: Ethical Requirements And Auditing Standards

Question 1: Breaches of Ethical Requirements

Question 1- Solutions

1. There is a breach of confidentiality as information is being disclosed to a third party. Mortdale must seek their client’s permission to allow them to use Penhurst to review their opinions. If the client refuses to give permission for this service, Mortdale should consider an alternative to a second opinion(APES 110, 2010, p. 20).
2. In this scenario there is no breachto ethics. Firstly, the local company obliged to Jan’s request of confidentiality. Secondly, they may have performed other background checks to verify her credentials without referring to her contacts.
3. By providing other non-audit services, Wendal is creating a self-review threat. This is because non audit services can have a material effect on the company’s financial statements on which Wendal must express an opinion. Hence there is a threat of independence and breach of the principle of objectivity (APES 110, 2010, p. 18).
4. The fact that Judith is a partner on an audit firm to the NGO she sits on as a Director, it impedes her ability to make unbiased decisions. For example, it will be difficult for her to remain objective when deciding a course of action. Therefore the principle of objectivity has been breached (APES 110, 2010, p. 18).
5. As Ernie will be selling his practice to Jago, he needs to verify that Jago comes from a firm that has quality reviews and no ethical problems. Furthermore,  Ernie does not have permission for the other services he provides. Therefore, there is a breach of professional competence and due carefor his clients (APES 110, 2010, p. 19)
6. Since Fred works in a small town, chances are that he may be faced with conflicts of interest while doing his main job and other non-audit services. For example, he may be auditing a buyer while advising a seller in an M&A deal presenting a conflict of interest. To avoid such situations, Fred should ensure that there are adequate safeguards in his firm. For example, he can set up chinese walls like having separate teams for audit and advisory or even have them operate from different locations.

However, should Fred not be able to provide proper safeguards, the codes states that Fred should reject these offers as they would threat his independence. If he does not take the above into place, then he will be breaching the principles of objectivity (APES 110, 2010, p. 18).

Furthermore, Fred faces a risk of handling a lot of information which he may disclose to other parties. So we can also add that the principle of confidentiality may also be at breach (APES 110, 2010, p. 20)

The All Good chartered accounting firm has breached the principle ofintegrity because it continues to maintain records on its computers despite Branch requesting otherwise. Apes 110 require that companies involved in business relationships should act straightforward and honestly (APES 110, 2010, p. 17).

As an accountant, James should comply with the regulations and laws .Furthermore, he should stay away from any actions that will harm the reputation of the accounting profession. In this scenario, James acts unprofessional by getting drunk at a work function. Furthermore, he gets in trouble with the law for public disturbance and drunk driving which are illegal activities. Thus the principle of professional behavior has been breached (APES 110, 2010, p. 22).

Question 2- Solutions

1. Given the auditor has been able to satisfy themselves on the balance of the account using an alternative audit procedure, the report opinion should be unqualified.
2. The report issued should be a disclaimer of opinionbecause:
3. There could be a material misstatement since auditor could not verify the value of the assets or use an alternative procedure.
4. PPE represents 35% of the total assets, hence it is pervasive .
5. According to AASB 137 guidelines, contingent liabilities are defined as potential future obligations that arise from the past whose occurrence depends on the outcome of an event in the future.  Furthermore, all contingent liabilities that are material should be disclosed and the amount disclosed should reflect the best estimate of amount needed to cover current obligations (AASB 137, 2010).

In this scenario, the company has excluded a contingent liability which is material in value. However, we do not know the likelihood of this event happening. Therefore, this is a material misstatement, but its effect is not pervasive. Hence the auditor should issue a qualified opinion.

As the auditor, I will issue a disclaimer of opinionbecause the internal controls are inadequate and values cannot be verified. Furthermore, there are no alternative audit tests that can be done verify the cash sale figures. Thus there is no evidence to support the cash values as true a representation of the financial statements.

1. ASA 510 requires that when taking on new clients, auditors must ensure that their opening balances do not contain material misstatements (AUASB, 2015). In this situation, despite the client not providing the information, the auditor has used alternative means to ascertain there is no material misstatement. Therefore, an unqualified opinionshould be issued.
2. The report issued should be an adverse opinionbecause the company has not adopted the Australian Accounting Standards that were introduced 4 years ago. Consequently, the statements don’t represent the company’s true and fair view and there could be a material misstatement (AASB 101, 2015, p. 9).
3. The Australian Accounting Standards  state that organizations should disclose any departure from the standards. By using the LIFO method, the inventory values do not reflect the true and fair value. This is a material misstatement but we have been advised its effect is limited to inventory, hence not pervasive. Therefore, the auditor should issue a qualified opinionwith an explanatory paragraph stating deference from the Australian Accounting Standards (AASB 101, 2015, p. 10).
4. According to ASA 570, businesses with access to financial resources, that have a history of profitable operations, are not required to disclose detailed analysis of their assumptions in regards to going concern(AUASB, 2015) 

However, in this case study, this company has prepared their financial statements under a going concern assumption even though they face losing their main customer which may eventually put them out of business. Therefore, the auditor should issue an adverse opinion on the basis of material misstatement and pervasive.

References

AASB 101, 2015. Presentation of Financial Statements. [Online] Available at: https://www.aasb.gov.au[Accessed 10 August 2017].

AASB 137, 2010. Provisions, Contigent Liabilities and Contigent Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf[Accessed 10 August 2017].

APES 110, 2010. APES 110 Code of Ethics for Professional Accountants. [Online] Available at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf[Accessed 10 August 2017].

AUASB, 2015. Auditing Standard ASA 510- Initial Audit Engagements- Opening Balances. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_510_Compiled_2015.pdf[Accessed 10 August 2017].

AUASB, 2015. Auditing Standard ASA 570: Going Concern. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf[Accessed 10 August 2017].

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