The Situation
The given information clearly highlights the fact that Jenny Wang is involved in carrying out the audit operations of Panania Cars Private Limited for the past six years. The organisation has proposed a car offer to the auditor, as it announced sales offer for its long-term customers. In this regard, “Section 260 Gifts and Hospitality of APES 110” states that if any hospitality services or offers as gifts are provided to the auditor from the client, audit threat might occur in compliance with the primary auditing principles (Apesb.org.au 2018). Hence, the acceptance of the stated offer might lead to a threat to the integrity principle for Jenny Wang. According to the integrity principle, Jenny Wang need not accept the offer from the client organisation, since this principle restricts the auditors from receiving offers from their clients (Abbott et al. 2016). Thus, this situation implies a significant threat to the principle of integrity.
Based on the provided information, Katrina Wearne carries out the audit operations of Lancom Cosmetics during the months of November and December in 2008. The individual has been provided with cosmetics worth $350 as a Christmas gift. This situation is similar to the previous situation, as it might violate “Section 260.2 Gifts and Hospitality of APES 110”. This is because the audit clients often provide gifts to the auditor, which might result in formulation of the threat of non-adherence to the needed auditing principles. Moreover, self-interest threat might arise to the integrity principle, if Katrina accepts the offer. When this threat is present, the public practice members need to analyse the significance of the threat level in order to apply appropriate safeguards (Abdul Wahab, Mat Zain and Abdul Rahman 2015). Hence, this regulation debars Katrina from accepting cosmetics from the audited organisation in order to avoid violation of integrity principle. However, by accepting the cosmetics, she has breached this auditing principle.
The provided situation states that D. Marron is involved in an organisation as computer consultant in order to maintain its review program. The client has asked the person for reviewing the installation of a new computer system so that inventory and production records could be maintained. However, Marron lacks in technical knowledge and hence, permission has been provided to the organisation for completing the installation. According to “Section 130 Professional Competence and Due Care of APES 110”, the auditors are needed to possess considerable professional expertise and skills for providing effective auditing services to their clients (Apesb.org.au 2018). Hence, diligence act is necessary for the auditors to comply with the needed professional and technical standards while offering audit services. By relating this regulation in this particular situation, it is evident that due to lack of technical knowledge, Marron was unable to conduct the review program of the organisation. Therefore, he could have refrained from providing the installation permission of the computer installation system in order to avoid violation of the “Professional Competence and Due Care” auditing principle (Al Nawaiseh and Alnawaiseh 2015).
It is inherent from the provided situation that there are six small chartered accounting organisations engaged in reviewing the working paper of quality assurance. One of the significant aspects of auditing operations is quality assurance review (QAR) for gauging the different auditing aspects in order to deliver superior auditing decisions and enhance audit quality (Campa and Donnelly 2016). It has been identified that each audit firm is involved in reviewing the papers of the other firms in order to detect their overall strengths and drawbacks. Thus, the primary objective behind such review program is to lay stress on identifying strengths and drawbacks so that better auditing strategies could be formulated. However, one auditing principle under threat in this situation is confidentiality. As all the firms review their audit operations among each other, the documents of the clients are accessed, which might lead to breach of confidentiality principle. However, careful evaluation of the papers along with strict vigilance would avoid such principle violation. Hence, the above discussion clearly signifies the fact that the ethical auditing principles are not violated in the provided situation, as the papers need to be reviewed in this type of program.
The Principle of Integrity
This case deals with a chartered accountant, Bill Holland, who has developed a casualty and fire insurance policy so that his tax and auditing services could be complemented and appointment has been provided to Simone Taylor for running the business operations. Bill has requested Simone for reviewing insurance adequacy, which is a part of the audit program. In accordance with “Section 290.156 Provision of Non-Assurance Services to Audit Clients”, the auditors should not provide any type of non-assurance services to their clients, since it would violate audit independence. Moreover, according to “Section 210.1 of APES 110”, an auditor need not provide any other services than auditing, as compliance threat might raise with respect to the fundamental principles. As a result, possible threats to professional behaviour or integrity might crop up in terms of questionable issues associated with the client (Christopher 2015). The situation is similar for this case, as providing non-assurance services might lead to conflict of interest.
Based on the provided situation, it could be observed that Emma Lawrence is involved in providing management advisory services, tax services as well as bookkeeping services along with providing auditing services to the same clients. This scenario is identical to the previously stated situation, since “Section 290.156 of APES 110” restricts the auditors to provide any kind of non-auditing and assurance services to their clients. The independent threat related to this situation could be identified as self-interest threat and hence, safeguards need to be established for dealing with this threat. This principle would help in explaining the provided situation. By applying this principle, it could be said that “Section 210.1 of APES 110” is violated, since Emma Lawrence has provided non-assurance services to her audit clients and further violation could be observed in “Provision of Non-Assurance Services to Audit Clients” with her actions (DeFond and Zhang 2014).
This situation states that for the past four years, Enid Blyton is engaged in audit functions of Don Chartered Accounting organisation and the individual is responsible for conducting the audit operations of Green Thumbs, which is a small environmental organisation. It was listed as a public organisation only a month back. However, it could be observed that Green Thumbs has appointed a new contractor; however, the individual does not have poor reputation in the market. Peter Don, the audit manager of the organisation, has advised Enid Blyton to concentrate on its major auditing activities for ensuring that there are no material misstatements in financial reports.
One of the significant aspects in audit profession is the independence of the auditor, since it enables in maintaining the overall audit quality of the audit operations. In this regard, it is noteworthy to mention that five threats are inherent to the independence of the auditor, which include self-interest threat, advocacy threat, self-review threat, intimidation threat and familiarity threat (Dogui, Boiral and Heras?Saizarbitoria 2014). The given situation could be described in the light of the above threats. In this regard, it is noteworthy to mention that the primary responsibility of the auditors is to investigate the financial reports of the organisations for assuring that they do not contain material misstatements. By applying the audit independence regulation in this case, it could be found that there is chance of intimidation threat. According to “Section 110.12 (e) of APES 110”, intimidation threat is the threat that a member would be deterred from conducting objective actions due to perceived or actual pressures taking into account efforts to exercise undue influence on the member (He et al. 2017). In this situation, Enid Blyton has assisted in the selection process of the contractor for the organisation, which would be treated as a non-assurance service, as the auditors should not be responsible for providing any services that are not asked from them. Therefore, this aspect would lead to intimidation threat of audit independence (Ratzinger-Sakel and Schönberger 2015).
It has been identified from the provided situation that Jean Douglas is involved in conducting the audit operations of Dooleys. The CEO of the organisation is yet to clear 30% of the audit fees. However, assurance has been provided to the auditor that if he fulfils the progress of the audit program, a cheque would be provided. Moreover, the CEO stated that the organisation would be adding some additional criteria in order to select auditor for the following year. Hence, the CEO is exerting indirect pressure on the auditor by relating the audit fee and performance for obtaining favourable audit opinion. In this case, if Jean Douglas acts accordingly by providing favourable audit opinion, self-interest threat related to audit independence could take place (Tepalagul and Lin 2015).
Moreover, it has been identified that Dooleys has not conformed to certain accounting standard for inventory valuation and instead, the auditor is offered a free trip to Europe after the audit operations are completed. In this context, “Section 260 of APES 110” states that it is necessary for the auditors to refuse acceptance of gifts and offers from the clients, as they would signify financial and other interests of the auditors (Wu, Hsu and Haslam 2016). Hence, the acceptance of the offer would result in self-interest threat of audit independence for Jean Douglas.
References:
Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), pp.3-40.
Abdul Wahab, E.A., Mat Zain, M. and Abdul Rahman, R., 2015. Political connections: a threat to auditor independence?. Journal of Accounting in Emerging Economies, 5(2), pp.222-246.
Al Nawaiseh, M.A.L. and Alnawaiseh, M., 2015. The Effects of the Threats on the Auditor’s Independence. International Business Research, 8(8), p.141.
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 12 Jun. 2018].
Campa, D. and Donnelly, R., 2016. Non-audit services provided to audit clients, independence of mind and independence in appearance: latest evidence from large UK listed companies. Accounting and Business Research, 46(4), pp.422-449.
Christopher, J., 2015. Internal audit: Does it enhance governance in the Australian public university sector?. Educational Management Administration & Leadership, 43(6), pp.954-971.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2-3), pp.275-326.
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.
He, X., Pittman, J.A., Rui, O.M. and Wu, D., 2017. Do social ties between external auditors and audit committee members affect audit quality?. The Accounting Review, 92(5), pp.61-87.
Ratzinger-Sakel, N.V. and Schönberger, M.W., 2015. Restricting non-audit services in Europe–The potential (lack of) impact of a blacklist and a fee cap on auditor independence and audit quality. Accounting in Europe, 12(1), pp.61-86.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
Wu, C.Y.H., Hsu, H.H. and Haslam, J., 2016. Audit committees, non-audit services, and auditor reporting decisions prior to failure. The British Accounting Review, 48(2), pp.240-256.
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