Auditing And Professional Practice : Reporting Decision Making

After the effective evaluation of the scenario, certain threats might be identified, which might have a negative impact on the fundamental principles of the auditors. In this context, Weigand & Elsas (2012) stated that fundamental principle mainly helps in reducing the unethical practises conducted by the companies to inflate their overall balance sheet. Moreover, the over identified threats of fundamental principles are as follows.

Advocacy threat:

According to the scenario the CFO of the company, mainly ask their auditors to project valuation of Steel Pty Ltd based on income and balance sheet statement. In addition, the advocacy threat mainly occurs if the auditors comply with the overall statement of the directors regarding certain point. In this context, Zeff (2016) stated that the auditors mainly support the unethical practices conducted by the company, which in turn helps in increasing their profits. On the other hand, Eilifsen et al., (2013) criticises that IFRS and GAAP effectively lays out rules of punishment and penalty, which might be imposed on auditors to reduce frauds conducted in the financial statements.  

Self Interest threat:

In addition, the overall scenario mainly depicts that the auditors in term of self-interest mainly complied with the CFO of Bolts Ltd. Thus, the request of the financial report of Steel Pty Ltd without adding cash flow statement mainly increases the treat of self-interest. In addition, the self-interest threat mainly reduces the overall efficiency of the fundamental principles of auditing. Gebhardt, Mora & Wagenhofer (2014) stated that due to the laid out rules of IFRS and GAAP auditor fear from losing their credential as authentic auditors. On the other hand, Power & Gendron (2015) criticises that auditor with the help of identified loopholes in accoutring are able to suggest ways, which might help in inflating their financial statement.    

The overall fundamental principles that might be at risk are mainly evaluated as objectivity and professional behaviour. Kim, Liu & Zheng (2012) mentioned that risks to fundamental principles are mainly controlled with the help of adequate control over operations of the auditors. In addition, the depicted risks are further explained as follows.

Objectivity:

In addition, the objectivity principle mainly depicts the auditor not to be biased in evaluating balance sheet of the company. However, accoutring to the scenario the auditor is forced to become biased in evaluating the financial performance of Steel Pty Ltd. Thus, the fundamental principle, objective is at risk in the given scenario. Weigand & Elsas (2012) stated that identified principles of auditing mainly helps ACA to control ethical practises conducted by the auditors. On the contrary, Kouakou, Boiral & Gendron (2013) cited that due to less monitoring process used by ACA the auditors with the help identified loopholes are able to increase their personal wealth.  

Professional Behaviour:

In addition, the professional behaviour principle mainly depicts the use of laid out laws and rules in evaluating the financial performance of the company. However, in the overall scenario the CFO of Bolts Ltd mainly forces the auditors to evaluate the financial statements of the Steel Pty Ltd by leaving its overall cash flow statement. In this context, Lord (2016) stated that auditing process mainly helps in reducing portraying the adequate financial valuation of the company, which might be used by investors to make adequate decisions. On the other hand, Tsunogaya, Sugahara & Chand (2016) criticises that auditor’s use loopholes in accounting process to compensate their personal desire and conduct unethical practises.     

Figure 1: Depicting the AAA decision-making model

(Source: Francis et al., 2015)

Table 1: Depicting the decision of Luke in the basis of AAA decision-making model

(Source: As produced by the author)

Figure 2: Depicting the Mary Guy decision-making model

(Source: Pettigrew, 2014)

Table 2: Depicting the decision of Luke in the basis of Mary Guy decision-making model

(Source: As produced by the author)

The overall scenario three mainly helps in evaluating the two-risk assertion, which is mainly affecting the accounting payable of the company. In addition, after the evaluation, Account balance assertion, and Transactional-level assertion is mainly at risk in scenario three. According to Mock & Fukukawa (2015), identified risks mainly help auditors to reduce unethical practises, which might be deployed by companies to manipulate their overall financial statements. 

Account balance Assertion:

In scenario three, accounting balance assertion risks is mainly conducted due to unprocessed invoices of major suppliers being held and not recounted in the accounts payable statement. In addition, this mismatch in accounts payable statement might depict wrong financial statement of the company. Sonnenberg & vom (2014) argued that portraying reduced profitability mainly help companies to decrease their overall tax payout.    

Transactional level Assertion:

In addition, the slow flow of information conducted by the management to the accounting department is the reason for wrong transactional data depicted in the account payable statement. Mock & Fukukawa (2015) argued that wrong depiction of profitability in the financial statement mainly help companies to reduce their retained earnings and in turn decrease their overall dividend payout ratio.  

Table 3: Depicting the substantial test for each

(Source: As produced by the author)

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Francis, B., Hasan, I., Park, J. C., & Wu, Q. (2015). Gender differences in financial reporting decision making: Evidence from accounting conservatism.Contemporary Accounting Research, 32(3), 1285-1318.

Gebhardt, G., Mora, A., & Wagenhofer, A. (2014). Revisiting the fundamental concepts of IFRS. Abacus, 50(1), 107-116.

Kim, J. B., Liu, X., & Zheng, L. (2012). The impact of mandatory IFRS adoption on audit fees: Theory and evidence. The Accounting Review, 87(6), 2061-2094.

Kouakou, D., Boiral, O., & Gendron, Y. (2013). ISO auditing and the construction of trust in auditor independence. Accounting, Auditing & Accountability Journal, 26(8), 1279-1305.

Lord, C. (2016). A democratic audit of the European Union. Springer.

Mock, T. J., & Fukukawa, H. (2015). Auditors’ Risk Assessments: The Effects of Elicitation Approach and Assertion Framing. Behavioral Research in Accounting.

Pettigrew, A. M. (2014). The politics of organizational decision-making. Routledge.

Power, M. K., & Gendron, Y. (2015). Qualitative research in auditing: A methodological roadmap. Auditing: A Journal of Practice & Theory, 34(2), 147-165.

Sonnenberg, C., & vom Brocke, J. (2014). The missing link between BPM and accounting: Using event data for accounting in process-oriented organizations. Business Process Management Journal, 20(2), 213-246.

Tsunogaya, N., Sugahara, S., & Chand, P. (2016). Judgments of auditors on “principles” versus “guidance” in lease accounting standard: evidence from Japan. Asian Review of Accounting, 24(3).

Weigand, H., & Elsas, P. (2012). Model-based auditing using REA.International Journal of Accounting Information Systems, 13(3), 287-310.

Zeff, S. A. (2016). Forging accounting principles in five countries: A history and an analysis of trends. Routledge.