Discussion
At the time to conduct the audit operations, the auditors are needed to take into consideration all the relevant factors and one of them is the governance mechanism in client. In Australia, the presence of ASA 315 can be seen that contains all the standards and principles for the auditors to consider the governance of the audit clients. The main aim of this report is the analysis of the responsibility of the auditors to review the governance of the audit client by considering ASA 15. The next part of the report includes the analysis of the key governance issues in Commonwealth Bank along with ASIC recommendation.
At the time of the auditing process, the auditors should take into account the governance mechanism of the clients. For this purpose, they are needed to follow the principles of Auditing Standard ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement as it provides the auditors with the required steps to review the governance mechanism of the clients (apesb.org.au, 2018). This section is considered as a major aspect for the auditors as they are needed to follow these guidelines while conducting the audit operations. The main parts of this regulation are discussed below:
According to the standards of ASA 315, the auditors are responsible for gaining understanding about some of the major factors of the clients like industry nature, major regulatory bodies and other external factors such as financial reporting framework and others. In addition, the auditors should gain information some other aspects like business operations of the client, ownership structure, investment types and the available financial resources of the clients. Most important, the auditors need to gain such information that helps them in understanding about the client’s processes to select and apply accounting policies along with their appropriateness with the client’s business operations (Xu et al., 2013). All these aspects are required for the auditors for the preliminary stage of the audit operations in order to obtain information about the major activities of the audit clients.
This particular standard of ASA 315 puts the obligation on the auditors to understand the implementation process of internal control of the audit client so that they become able in making judgment on the appropriateness of this control with the business risks. While gaining understanding about the internal control of the audit clients, they should also consider the internal control design process. On the overall basis, it can be said that ASA 315 makes the auditors obliged in gaining all the information about all the dimensions of the internal control of the audit clients (Rahman, 2013). In this process, it is needed for the auditors to take into account the evaluation process of the staffs that are responsible for the implementation of effective governance. Information about all these factors helps the auditors to understand the fact that whether the culture of honesty as well as ethical behavior is present in the client’s business.
Commonwealth Bank Governance Issue
According to the standards of ASA 315, in the process of the review of the client’s internal governance, it is responsible for the auditors to obtain understanding about the fact that whether the employed governance procedures are appropriate for identifying the financial reporting related risks of the companies (Sanderson, 2014). In this process, the main roles of the auditors can be found in the process of risk estimation and the process of risk assessment as the results of these assessments and identification is needed for the formulation of apposite auditing strategies. Apart from all these, ASA 315 also puts the obligation on the auditors for obtaining information about the internal information system within the organizations along with its role towards the process of financial reporting of the audit clients. On the overall basis, ASA 315 puts the obligation on the auditors for reviewing all aspects of governance and internal control of the audit clients (Margret & Hoque, 2016).
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Issue |
Impact on Raising Audit Risk |
Recommendations |
Reduction in Audit Risk Because of the Recommendation |
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One can observe the ineffective oversight from the bank’s board members along with the committee related to finance and audit (apra.gov.au, 2018) |
This factors leads to the increase the potential of financial reporting fraud as well as manipulation |
This aspect indicates towards the requirement of establishing legal governance procedures so that potential fraud and manipulation can be minimized. It is also recommended for forming more effective board and executive committee in order to establish control in financial reporting (Beck & Mauldin, 2014) |
This strategy development process will lead to effective governance of the financial activities of the bank so that the audit risk can be reduced. |
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The presence of unclear accountability can be seen from the side of senior management of CAB. Additionally, ownership lacks can lead to key risks from the side of executive committee |
In the presence of this issue, the senior management of CAB denies to be accountable of any kind of illegal financial activities that can increase the audit risk |
In this context, it is recommended to the senior management of CAB for the reinforcement of different standards of accountability of the financial reporting related fraud activities (apra.gov.au, 2018) |
This strategy will make the senior management of CAB more responsible for the bank’s financial activities; and it will lead to the decrease in audit risk |
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Major issues in CAB can be seen in the decision-making process that is highly complex and bureaucratic |
This aspect slows down the risk detection process from the financial statements. Moreover, it leads to the development of obstacles for gaining financial reporting outcomes |
In this process, the main recommendation is taking into consideration all the required factor for the decision-making process (Latif et al., 2014) |
The main outcome of this strategy will be the reduction of errors in the financial decision-making process |
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One can identify the next issue in the operational risk management framework for CAB as this has not been operating in the most practical way. One can also observe the presence of an under-resourced and immature compliance function in bank |
The presence of this type of immature and ineffective risk management framework can contribute to the increased possibility of risks related to the financial reporting. In addition, the auditors face obstacles in effective conduct of audit procedures in the presence of this types of framework |
In this context, one major recommendation is to upgrade the capability and authority of the risk management framework of the bank (apra.gov.au, 2018) |
The presence of effective risk management framework will help CAB in managing the business as well as financial risks of the bank |
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The remuneration framework of CAB consists of some major issues that has made the remuneration framework ineffective |
Ineffective executive remuneration framework leads to the development of audit as well as financial risks in the process of financial reporting |
In this context, it is recommended that CAB needs to consider the implementation of an effective executive remuneration framework that will comply with all the required regulations and policies (Guénin-Paracini, Malsch & Paillé, 2014) |
This strategy will lead to the reduction in financial as well as audit risks |
2.
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American Accounting Association Model |
Decision making process |
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1. Determine the facts |
According to the given scenario, David is aware of the fact that John was in the new restaurant of the town with his girlfriend. However, he made the excuse of sickness for not attending the office. These can be considered as the main facts of the case |
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2. Define the ethical issues |
The above facts involve a major ethical issue. It can be seen that John makes an excuse of sickness for missing the office while his other team members were working hard for the completion of the task. It implies that John was involved in the negligence of professional duties that is against the business ethical principles (Gul, Wu & Yang, 2013) |
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3. Identify the major principles, rules and values |
The involvement of some ethical values, rules and principles can be seen in this case. According to the auditing standards, the main responsibility of the auditors can be found in maintaining the integrity as well as professionalism while being honest and straightforward (apesb.org.au, 2018). This will not involve any process that leads to the compromise of professional and responsibilities. Additionally, their responsibility is to make compliance with all the needed rules, regulations and standards for avoiding unprofessional activities (apesb.org.au, 2018) |
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4. Specify the alternatives |
Two alternative actions can be seen in this case. According to the first alternative, in order not to provide the sale amount of appreciation like others, David needs to confront the unethical action of John to other team members. As per the second alternative, in order to maintain the good relation with John, David will avoid telling the fact to the other team members about his unethical activity of missing office |
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5. Compare values and alternatives |
In this situation, the compliance of first alternative can be seen with all the principles, norms and values of the profession. In this process, David needs to involve in confronting the members with the unprofessional activity of John that John did not comply with the professionalism and regulations on intentionally (Blay & Geiger, 2013) |
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6. Assess the consequences |
As per the consequence of the first alternative, John will be barred from getting the same amount of appreciation like the other team members as he has missed the office in an unethical and unprofessional manner. This aspect will provide John with the required lesson that he must be professional in the workplace by complying with the principles of integrity and honesty. As per the consequence of the second alternative, John will get the same amount of appreciation for the work in spite of missing the work intentionally by providing a fake reason. Thus, John may repeat the same incident in future due to not receiving any kind of lessons (Pizzini, Lin & Ziegenfuss, 2014) |
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7. Make your decision |
Based on the above discussion, the appropriate ethical decision will be the adoption of the first alternative that is related to confront the unethical action of John to the other team members of the group |
3.It needs to be mentioned that the incorporation of the statutory cap of the auditors has major impact on the process to limit the liability of the auditors. According to this statutory cap, there are some alternative liability arrangements for the auditors. According to the first agreement, at the time of the filing of claim by an injured party against specific tortfeasors, they are given with the authority to collect all the damages from the remaining tortfeasors (Samsonova-Taddei & Humphrey, 2015). As per this particular arrangement, it is the authority for the injured parties in claiming all the damages from the auditors when there is presence of misinterpretation in the company financial statements. However, the injured parties will be able to avail this option in case of the presence of responsibility related to damages by the additional tortfeasors. This arrangement puts the obligation on the auditors in providing full compensation or a greater share of the compensation as per his/her level of fault. Hence, the injured party has not right to increase the amount of the compensation. However, as per this regulation, it is not the obligation on the auditors for the payment of compensation that is not appropriate with the auditors’ level of fault (Philipsen, 2014). The applicability of this arrangement can be seen when the remaining tortfeasors are unable to pay their part of damage. According to these regulations, the injured party bears the greatest proportion of risk as compared to the auditors and the tortfeasors. Thus, the whole discussion indicates towards the reduced amount of liability for the auditors.
The third arrangement involves in the establishment of a compensation cap. According to this arrangement, the presence of a maximum amount of cap can be seen for the amount of compensation. As per the regulation of this arrangement, when the auditors’ share in the compensation equals or exceeds the equivalent cap, one does not have the authority in charging more compensation that the set cap to the auditors (Eyal, 2013). The applicability of this rule can also be seen at the time of the inability of other tortfeasors to pay their part of compensation. For this reason, the authority lies with the injured party to collect the compensation when it does not cross the previously set cap. Thus, it can be seen from the above discussion that the specific arrangements under cap system play an integral part in order to reduce the auditors’ liability at the time to conduct the audit operations.
References
APES 110 Code of Ethics for Professional Accountants. (2018). Retrieved from https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf
APRA releases CBA Prudential Inquiry Final Report and accepts Enforceable Undertaking from CBA | APRA. (2018). Apra.gov.au. Retrieved 17 August 2018, from https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report-accepts-eu
Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. (2018). Retrieved from https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
Beck, M. J., & Mauldin, E. G. (2014). Who’s really in charge? Audit committee versus CFO power and audit fees. The Accounting Review, 89(6), 2057-2085.
Blay, A. D., & Geiger, M. A. (2013). Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), 579-606.
Eyal, N. K. (2013). Setting a Statutory Cap on Auditors’ Liability: What Method Should Be Used. Rutgers Bus. LJ, 10, 56.
Guénin-Paracini, H., Malsch, B., & Paillé, A. M. (2014). Fear and risk in the audit process. Accounting, Organizations and Society, 39(4), 264-288.
Gul, F. A., Wu, D., & Yang, Z. (2013). Do individual auditors affect audit quality? Evidence from archival data. The Accounting Review, 88(6), 1993-2023.
Latif, R., Abbas, H., Assar, S., & Ali, Q. (2014). Cloud computing risk assessment: a systematic literature review. In Future information technology (pp. 285-295). Springer, Berlin, Heidelberg.
Margret, J., & Hoque, Z. (2016). Business Continuity in the Face of Fraud and Organisational Change. Australian Accounting Review, 26(1), 21-33.
Philipsen, N. J. (2014). Limiting auditors’ liability: the case for (and against) EU intervention. The Geneva Papers on Risk and Insurance-Issues and Practice, 39(3), 585-597.
Pizzini, M., Lin, S., & Ziegenfuss, D. E. (2014). The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), 25-58.
Rahman, A. R. (2013). The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of its Participative Review Process. Routledge.
Samsonova-Taddei, A., & Humphrey, C. (2015). Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society, 41, 55-72.
Sanderson, J. (2014). Audit issues. SMSF Guide: Current Issues and Strategies for the Self-Managed Superannuation Funds Adviser, 377.
Xu, Y., Carson, E., Fargher, N., & Jiang, L. (2013). Responses by Australian auditors to the global financial crisis. Accounting & Finance, 53(1), 301-338.
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