Scenario 1: Potential Ethical Violations
It can be seen from the given situation that Jenny Wang is the auditor of Panania Cars Pty Ltd for last six years. In the presence of an offer for the long established customers, the company is allowing Jenny Wang to purchase a card on 20% discount over the discounted prices. This aspect can lead to the breach of audit ethical principle. According to APES 110, Section 260, Gifts and Hospitality, there is a potential of the development of threat to non-compliance with the fundamental ethical auditing principles in case the auditors accept any gift, hospitality or any beneficial offer (apesb.org.au 2018). More specifically, APES 110, Section 110, Integrity states that the auditors are needed to be clear-cut and honest in all the business relationships. These regulations can be connected with the provided situation of Jenny Wang. According to the above discussion, it can be said that Jenny Wang will be responsible for breaching the APES 110 ethical principles of Integrity in case she accepts the offer to buy a car on 20% discount on the discounted price from her audit client, Panania Cars Pty Ltd. Overall, it will lead to the volition of fundamental ethical principles of auditing (Eilifsen et al. 2013).
According to the given scenario, it is the responsibility on Katrina Wearne to conduct the audit of Lancom Cosmetics for November and December 2018. The provided situation shows that the company has gifted Katrina Wearne $350 worth cosmetics as Christmas gift. Similarity of this situation can be seen with the above case. As per APES 110, Section 260.2, Gifts and Hospitality, in case the client organizations offer or provide any gift to the auditors, this can contribute towards the creation of threat to audit ethical principles (apesb.org.au 2018). More specifically, this aspect can be considered as trivial and inconsequential. Under this situation, the respective accounting authority can impose huge amount of fine on the auditors by accepting gifts or hospitality services from the client company (Karalapillai et al. 2014). Connection of this given scenario can be seen with the above-discussed regulations. It needs to be mentioned that the accounting authority has every right to impose fine on Katrina Wearne for breaching the auditing principle of APES 110 by accepting gift from the audit client. It needs to be mentioned that the members of public practice are required to measure the level of this threat for applying required safeguard (Louwers et al. 2015).
The given situation indicates towards the fact that the role of D. Marron has the responsibility in the organization for the review as the computer consultant. As per the clint, the requirement for him is the review of a new computer system for maintaining the production along with the records of inventory. Given situation indicates towards the inability of D. Marron for reviewing the computer installation program in the presence of less than needed technical knowledge and he provides the required permit for the installation. APES 110, Section 130, Professional Competence and Due Care indicates towards the responsibility of the auditors to have adequate technical knowledge and skills so that they can provide the client with correct advice (apesb.org.au 2018). In addition, the auditors should act diligently as per the needed professional as well technical standards. The provided situation of D. Marron can be evaluated with the help of the above-discussed principle. As per APES 110, Section 130, the correct action for D. Marron would be not to take the review program when he does not have the required skill and knowledge for the review program for the new computer (Nicoll 2016). Apart from this, he has breached the principle of APES 110 by providing the permit without proper review. This whole scenario violated the ethical principles of professional competence and due care (Knechel and Salterio 2016).
Scenario 2: Threats to Auditor’s Independence
As per the given scenario, there is a review of quality assurance working paper in the involvement of quality assurance working paper. Quality assurance review plays a crucial part for providing best auditing services as it helps the auditors in understanding the strengths and weaknesses of the audit procedures. From this point of view, there is not anything wrong in the involvement in the quality assurance programs. However, in this aspect, one major aspect is confidentiality. According to APES 110, Section 140, Confidentiality, the auditors do not have any authority for disclosing any secret business information of the audit client to any outsider third party (apesb.org.au 2018). In the quality assurance program, the auditors of the participant audit firms can check the audit paper of the other firms. In this way, the auditors can get access to the confidential business information of other companies (Han Fan, Woodbine and Cheng 2013). Thus, this whole program can lead to the violation of the confidentiality principles of audit ethics.
The given situation indicates towards the fact that Bill Holland has established a casualty and fire insurance agency in order to complement his tax and auditing services. It can also be seen that he appointed Simone Taylor for running the business and reviewing the adequacy of the insurance part. It needs to be mentioned that this aspects involves in the violation of a specific principle of APES 110. According to APES 110, Section 220, Conflicts of Interests, a member of public practice is responsible for the identification of specific circumstances that can lead to the conflict of interests (apesb.org.au 2018). In this context, it can be observed that Bill Holland is consulting with Taylor about his audit client and disclosing all the important business information of the client without the consent of the client. As per APES 110, Section 140, Confidentiality, the auditors are obliged not to disclose any important business information of the audit client to any third party (Amar 2014). All these regulations are important for evaluating the provided situation. Based on the above discussion, it can be said that the actions of Bill Holland violates the confidentiality principle of audit ethics as per APES 110 (Clout, Chapple and Gandhi 2013). At the same time, this aspect leads to the creation of conflict of interests in the auditing operation of Bill Holland as per APES 110.
According to the given scenario, along with the audit services, Emma Lawrence provide her clients with different other services like management advice, taxation services, accounting bookkeeping services and others. APES 110, Section 220, Conflicts of Interests states that the auditors are needed to consider all the situations those can lead to the development of conflict of interest in the audit profession. In this aspect, one major situation can be considered as the violation of the principle of objectivity. According to APES 110, Section 120, Objectivity, it is needed for the auditors not to negotiation their business and professional judgment in the presence of any conflict of interest or any undue influence (apesb.org.au 2018). It can be seen in the provided situation that Emma has compromised her professional judgment in the presence of her personal interest in the client to provide them with other non-assurance services. Thus, according to the above discussion, in the presence of these kinds of actions, Emma has violated the principle of conflict of interest and the principle of objectivity according to the rulings of APES 110 (Ball, Tyler and Wells 2015).
As per the provided situation, Enid Blyton has been the auditor of Anthony Don Chartered Accounting firm for four years and has been directed to audit the financial accounts of Green Thumbs. The situation shows that the new disposal removal contractor of the company has bad reputation and Enid Blyton is aware of the fact. However, he has direction from his manager only to concentrate on the analysis of financial statements for finding any material misstatements.
Auditors’ independence is a crucial aspect in the audit profession. The presence of five types of threats to audit independence can be seen. They are Self-interest threat, Self-review threat, Advocacy threat, Familiarity threat and Intimidation threat (apesb.org.au 2018). The auditors have the obligation to consider all these threats while performing audit procedures. In this aspect, it needs to be mentioned that the intimidation threat is considered as a threat when an auditor will be deterred from acting in the objective manner in the presence of actual or perceived pressure or any kind of influence over the audit member (Tepalagul and Lin 2015). However, in the given scenario, there is not any mention about any kind of pressure on the auditor that deters him from acting objectively. The main responsibility of the auditors is to conduct analysis on the financial statements of the companies so that it can been ensured that they are free from material misstatements. It implies that Enid Blyton does not have any responsibility to advice the client on correct selection of disposal contractor (Blay and Geiger 2013). Hence, it needs to be mentioned that there is not violation of auditors’ independence in the provide scenario.
It needs to be mentioned that the provided scenario involves in the violation of more than one threat to auditors’ independence. It can be observed from the provided scenario that the CEO of the audit client has not made the final payment of the audit fees. According to him, he would ensure the full payment of the audit fees when he would be satisfied with the audit results and progress. Now, as per APES 110, Section 100.12, Threats and Safeguards, there will be the creation of intimidation threat of audit independence when the some forces deter the auditors from acting objective manner because of actual or perceived pressure from the audit client (apesb.org.au 2018). In the given scenario, the CEO is intending to create pressure on Jean Douglas by stopping the full payment of audit fees so that they conduct audit as per the interest of the company. Hence, there will be creation of Intimidation threat of Audit Independence in case Jean Douglas provides favorable audit results under the pressure of the CEO (Zhang 2017).
As per APES 110, Section 100.12, Threats and Safeguards, familiarity threat of audit independence can be seen when the auditors have close relationship with the audit clients or the employers. In this case, the free trip to Europe for the auditors can be the result of close relationship of Jean with the audit client and this aspect can pose the Familiarity Threat of Audit Independence (apesb.org.au 2018). It can also be seen that the Jean has found major non-compliance of the audit client with the required accounting standards and they also do not does the valuation of their inventories based on fair value that has material effects on the financial statements. Thus, according to APES 110, Section 100.12, Threats and Safeguards, there will be Self-Interest Threat of Audit Independence in case Jean does not disclose these issues in the audit report in the presence of personal financial or non-financial interest to the audit client (Dogui, Boiral and Heras?Saizarbitoria 2014).
References
Amar, A.B., 2014. The effect of independence audit committee on earnings management: The case in French. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(1), pp.96-102.
Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. [online] Available at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 9 Aug. 2018].
Ball, F., Tyler, J. and Wells, P., 2015. Is audit quality impacted by auditor relationships?. Journal of Contemporary Accounting & Economics, 11(2), pp.166-181.
Blay, A.D. and Geiger, M.A., 2013. Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), pp.579-606.
Dogui, K., Boiral, O. and Heras?Saizarbitoria, I., 2014. Audit fees and auditor independence: The case of ISO 14001 certification. International Journal of Auditing, 18(1), pp.14-26.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.
Han Fan, Y., Woodbine, G. and Cheng, W., 2013. A study of Australian and Chinese accountants’ attitudes towards independence issues and the impact on ethical judgements. Asian Review of Accounting, 21(3), pp.205-222.
J. Clout, V., Chapple, L. and Gandhi, N., 2013. The impact of auditor independence regulations on established and emerging firms. Accounting Research Journal, 26(2), pp.88-108.
Karalapillai, D., Weinberg, L., Galtieri, J., Glassford, N., Eastwood, G., Darvall, J., Geertsema, J., Bangia, R., Fitzgerald, J., Phan, T. and OHallaran, L., 2014. Current ventilation practice during general anaesthesia: a prospective audit in Melbourne, Australia. BMC anesthesiology, 14(1), p.85.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.
Nicoll, P., 2016. Audit in a democracy: the Australian model of public sector audit and its application to emerging markets. Routledge.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
Zhang, Y., 2017. Client importance and audit quality, office level evidence from the banking industry: a pitch. Accounting Research Journal, 30(2), pp.147-152.
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