Overview of Conversations Highlighting Breaches of APES 110 and Auditing Principles
- The applicable threat associated with each of the conversations presented below is as identified below.
Conversation 1: Chris, LTH’s CEO communicates to the audit manager of CJI that the board would like to extend the association by awarding the audit contract but it would be dependent on the extension of a favor by Geoff whereby he would have to deliver a promotional speech in the interests of the client thereby helping it to attract higher investors. Indulging in such promotion activities is prohibited by APES 110 due to presence of advocacy threat (Section 200-6). The users coupled with the investors may look at the promotional speech with suspicion thus raising doubts regarding the auditor independence and the company needs to take the relevant safeguards in order to minimize the current threat (APES, 2010).
Conversation 2: A holiday package of 14 day duration is offered by CEO of the client to the audit partner and manager where all expenses would be taken care by the client and also carrying family along was possible. In case of accepting of high value gifts, the familiarity thereat is present as highlighted in s. 200-7. The acceptance of gifts that too of significant financial value must not be undertaken as the underlying objectivity may undergo significant impairment as the auditor may be tempted to promote the interests of companies at the cost of the trust bestowed by users thus drawing on the necessity to take appropriate measures (APES, 2010).
Conversation 3: When Michael learns about him being part of LTH’s audit team, he assures that his addition would be quite valuable as his father occupied the office of financial controller for LTH. Michael should be dropped from the team or else the familiarity threat (Section 200(7)) would be significant. Michael may experience this situation where on one hand his professional ethics would be tested when he might have to upheld the interests of his father thus leading to conflicting interest and hence through adequate safeguards, threat must be minimized (CPA, 2013).
Conversation 4: When Annette learns about her being part of LTH’s audit tea, she assures that the audit of LTH is not expected to be time consuming and this inclusion opportunity would also provide her interaction with former colleagues as it has been only a month since she joined CJI and LTH happens to be her previous employer. The applicable threats are s. 200(5) (self review threat) and s. 200(7)) (Familiarity threat). Here there is presence of self review threat as some of the statements that would be analyzed by Annette may have been prepared by her own self and thus it is likely that fails to see errors or chooses to ignore the same. Further, the inclusion of Annette would lead to threats of familiarity because of the reputation with the senior employees. Clearly the risks are quite material and need appropriate mitigation techniques. (CPA, 2013).
- The appropriate safeguards to enabling of minimization of identified threat above are indicated below.
Risks Arising Due to Breaches of APES 110 and Auditing Principles
Conversation1: At the firm level the appropriate strategy would be to enact a policy if one does not exist so as to broadly commit to the APES 110 principles and thereby ensure zero tolerance towards engagement in any promotional activity. Further, there would be strict enforceability of this policy. The client also on its part must ensure that no favoritism and unethical requests should be expected in the selection of the auditor as in the long run wrongdoing would harm the company (Arens et. al., 2013).
Conversation 2: At the firm level the appropriate strategy would be to enact a policy if one does not exist so as to broadly commit to the APES 110 principles and thereby ensure that the employees accept no gifts from clients irrespective of their value and in case a particular gift is retained , then the same should be revealed to the company. Also, there must be strict enforceability of this policy measures and no deviation would be acceptable (Gay & Simnett, 2012).
Conversation 3
The appropriate safeguard existing at the firm level is ensuring that the audit firm has complete data about the employment of near relatives’ which would ensure that the audit firm can take additional measures to safeguard the independence. Through a online database, the employees would be expected to update this as and when required. Further, a declaration on the candidates’ part is required before a member can be selected to any audit team in order to ensure that no immediate or distant family member has been employed in any position by the client (Caanz, 2016).
Conversation 4
The appropriate safeguard existing at the firm level is ensuring that the audit firm has complete data about the employment of member which would ensure that the audit firm can take additional measures to safeguard the privacy.. Further, a declaration on the candidates’ part is required before a member can be selected to any audit team in order to ensure that member has not been employed in any position by the client ( (Leung, Coram & Cooper, 2012).
- The various details about purchasing of spare parts along with equipments has been offered so as to enable understanding key business aspects. The two business risks worth highlighting are indicated below.
Risk of demand estimation not been correct
The company has contacts with global suppliers with whom it has enacted long term purchasing contracts. Thus, majority of the spare parts and equipments are sourced through ship from these overseas partners which results in a time lag between order placing and receiving the same. Hence, it is imperative that the company should make sincere attempt to avoid any shortage in this regard as this would hamper the servicing to be offered by the company. However, excess inventory also has its issues namely the high carrying cost, potential obsolescence, maintenance and repair expense, higher security and insurance charges besides opportunity cost of idle cash. Thus, a equilibrium needs to be maintained between the above two endeavor or else company would suffer potential losses (Arens et. al., 2013).
Safeguards to Mitigate Risks and Ensure Compliance with APES 110 and Auditing Principles
Risk of cash crunch
Based on the details provided, it seems apparent that MSL has worked out long term purchase agreements with the foreign suppliers which makes it mandatory to buy a particular amount of spare parts and equipment. However, considering that mining is a cyclical business, hence for the company credit crunch is observed as it has to make payments to the suppliers while the customers would not offtake new machines and this would lead to higher inventory whose perils have been written rather recently. Meanwhile, the revenues would be lower and also there is lack of incremental new sales resulting in weak operational cash flows. In such a scenario, the company may witness shot term liquidity crisis especially if the prevailing gloom in mining extends (Caanz, 2016).
- b) Risk of demand estimation not been correct
Inherent Risk: One of the components of audit risk that is enhanced is inherent risk since demand estimation of spare parts is particularly very difficult to do wit high precision which results in a business risk that is inherent.
Detection Risk – It is likely that for a given demand which has been estimated for a given period may be difficult for the auditor to comment as right or wrong due to a host of factors involved in the estimation of the same.
The impacted accounts which can be misinterpreted are indicated below (Leung, Coram and Cooper, 2012).
- Inventory account is likely to be understated as the various incremental costs borne during the keeping of excess inventory may not be reflected .
- Expense account understatement is quite plausible as for the items that are used in keeping up the inventory are not adequately represented.
Risk of cash crunch
Inherent Risk – The customer of the company have a cyclic business and considering the specialized nature of the products and services offered, there is an inherent risk of business not doing too well.
.Control Risk- The company is left with little measures to improve on the potential slowdown and deteriorating financial position of the customers and hence needs to embrace the same.
The account those primarily affected in a material manner are given below (Gay & Simnett, 2012).
- Inventory account is likely to be underestimated as the company to offtake some of the lost sales can potentially create incremental sales which would not being any cash flow.
- Overstating of the revenue account in order to present a robust picture to the creditors and other shareholders who can then invest in the business.
References
APES (2010), APES 110 Code of Ethics for Professional Accountants, APESB Website, Retrieved on May 02, 2017 from https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf
Arens, A., Best, P., Shailer, G. & Fiedler,I. (2013). Auditing, Assurance Services and Ethics in Australia (2nd ed.), Sydney: Pearson Australia
Caanz, S. (2016), Auditing And Assurance Handbook 2016 Australia (3rd ed.), Sydney: John Wiley &Sons
CPA (2013), Independence Guide, CPA Website, Retrieved on May 02, 2017 from https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/auditing-assurance/independence-guide.pdf?la=en
Gay, G. & Simnett, R. (2012), Auditing and Assurance Services in Australia (5th ed.), Sydney: McGraw-Hill Education
Leung, P., Coram, P. & Cooper, B.J. (2012), Modern Auditing and Assurance Services (4th ed.), New York: John Wiley and Sons