Sharing of Client Information
In this scenario, the ethical principle of confidentiality has been breached. This is a fundamental principle of APES 110, which forbids the practicing firm from disclosing information collected during the audit and assurance procedure about the client to other parties without taking prior permission from the client.
Mortdale accounting firm has audited companies from where he has collected working papers of the client. He has shared the information collected during the auditing process to Penshurst accountants, a peer reviewer for executing the assurance activity of Mortdale. This is unethical as such information should not be shared without consulting the client firm.
Yes, in this case, the principle of professional behavior, which is an ethical requirement of APES 110 have been breached by the CPA as well as by the accounting firm. The accounting firm should not wholly rely on the words of the applicant rather should strive to gather more information about his past engagements. It is also necessary to know whether the applicant has no conflicts of interests with the organization.
In this scenario, the recruiting firm should have conducted some basic research on Jan Dungog, a CPA before offering him the job. The information to be collected may entail reasons for living and the general opinion of the past employer. This would have enabled the firm to determine the true reasons for the dissociation of the person with his previous job and get to understand his capabilities. Therefore, the firm should have contacted the previous employer before employing Jan for the position.
The practicing professional accountant has contravened the principle of objectivity. He is not allowed to try to advertise to his current clients about his other engagements by making adverts about the other services other than auditing that he is providing. An auditor is required to strictly follow the requirements in the later of engagement so as to avoid any conflicts of interests. He should not be influenced by many factors in the course of the auditing process as this can lead to conflicts of interests.
In this case particular case study, Wendal Sailor communicated with his current clients about the other services that he was providing other than Auditing and assurance. He did this before expressing his final opinion about the true position of the client. The effect of this is that it may cause biases on the part of the auditor, due to conflicts of interests created by some factors like the expectation of favor from the client, who may purchase his other services. Professional bias is a breach of the ethical requirement of objectivity.
Conflicts of Interest in Auditing
In this case, there is no principle of APES professional standards are not affected in this case breached. Since Judith only holds an honorary post, not connected to any management function. This means that he is not entitled to make any financial decisions regarding the firm. Therefore, Judith’s independence of opinion in auditing process may not be influenced in any way. If in case Judith was involved in making some financial decisions, then this could prejudice his independence of opinion due to some conflicts of interest
Judith Durham has merely been given an honorary post in the firm. An honorary position does not give Judith decision-making privileges. Therefore, Judith can formulate an independent opinion in an audit work. Ideally, an honorary position is a situation whereby a person occupies a position as a way of honor but he does not gain the power of making decisions.
So in line with the above discussion, it can be concluded that Judith can conduct an independent audit of the firm.
A professional accountant should not reveal any information relating to the clients without obtaining prior permission from the client. This is a breach of the principle of confidentiality. The principle of confidentiality requires that the Auditor does not disclose any information pertaining his client to third parties without permission from the client. Therefore, Ernie is not permitted to provide any financial information relating to his clients that he may have received in the course of the audit process to the acquiring firm unless he is permitted to do so by the firm.
In the case, Dengate should have sought permission from his client firm on whether he should communicate the information about the transfer of the working papers relating to the audit process to the acquiring firm. Besides the fact that he took permission before transferring the taxation working papers, he is also obliged to seek permission for the audit documents as well.
In this scenario principle of independence has been contravened. In the APES 110 section 290, it is clearly stated that an auditor should be independent in his views and should void any conflicts of interests while providing an audit opinion. He can provide taxation, management and auditing services but is not allowed to provide all the three services at once to one client. This means that if he is providing management services, he should not provide auditing services to the same client as this may cause some conflicts of interests that may lead to bias opinions.
Independent Audit
In this case, Fred provides auditing services, management services, and taxation services to the same company. Therefore, if in case he makes a material error in tax computations, he may not reveal this in the audit opinion, making the audit report unreliable.
In this scenario, no professional principles of APES 110 have been breached as the accounting firm can maintain any information regarding the accounts of the organization in which it does not give audit opinion on accounts.
The particular accounting firm is also permitted to provide bookkeeping services to the firm. This is exactly what Allgood Chartered Accounting Firm has done, by providing assistance in maintaining accounting records of its branch.
The company’s branch lacks proper computer facilities that may enable it to keep its own records. Therefore accounting firm has taken up the role of maintaining its records. However, it could be against the requirements of the ethical standards, if the company was maintaining the accounting records of the branch and at the same time conducting the auditing activities related to the branch.
In this case, the professional accountant has gone against the requirements of professional behavior, which requires an auditor to behave in a way that does not contravene the reputation of the profession. James has therefore breached the principle enshrined in APES 110 section 150. He has indulged in illegal and unethical activities which could compromise his profession as an accountant. The legal activities include assault due to disorderly behavior drunk driving and fighting. James was also convicted in a court of law and sentenced to three months in jail making his license to be suspended for one year. Therefore, it can be concluded that James did not act in a professional way, which contravenes the principle of professional behavior.
- After a careful study of the case, I can conclude that the auditor should form an unqualified opinion. The auditor has made successful attempts to obtain material information about the client’s financial status. Although he was not able to obtain information from all the customers, the auditor went ahead to use other necessary audit procedures to grab the required information. If the information is adequate to express an opinion on the status of the firm, then the auditor should express an unqualified opinion.
- The auditor should express a qualified opinion on the basis of limitation of scope. This is because the client has restricted the scope of the audit process by refusing to cooperate with the auditor. The auditor cannot verify the property plant and equipment in this case as the client is not giving him the necessary assistance in verifying the value of PPE. In a case where a professional accountant finds that he is unable to extract material information that would enable him to make an informed opinion about the firm’s financial status like in this case, the auditor should always express a qualified report. The auditor should also consider the materiality of the transactions before expressing an opinion. It is apparent that the property plan and equipment form a material part of the organization as they amount to 35%.
- In this case, the auditor should consider expressing a qualified opinion. This is because the client has not availed the relevant information about the presence and amount of contingent liabilities. However, the auditor must recognize the effect of not receiving this information and whether it would impact materially on the financial position of the firm. In case the non-disclosure of the contingent liabilities would impact on the type of opinion given by the auditor, then the auditor should qualify the report.
The auditor should also take time to discuss issues regarding contingent liabilities with the management. If the management is reluctant to disclose a number of contingent liabilities, then the auditor should write a qualified report, as this would have an effect on the financial statements of the firm.
- The auditor should express an adverse audit opinion. This is because the client firm lacks proper internal controls that would guide it in recording its cash sales. Improper control of cash records may have material adverse effects on the firm’s financial statements. In addition, the auditor is not able to perform appropriate audit test on the cash which even worsens the situation as the auditor will be unable to express an audit opinion on the true and fair value of the firm. In cases where the auditor is not able to collect adequate information on material transactions of the firm, then the auditor should form a qualified opinion.
- In this case, the auditor should consider qualifying his opinion. This is because he finds himself in apposition whereby he is unable to gather adequate information on the opening balances of accounts. Therefore, it is difficult for the auditor to ascertain the true and fair value of the firm. It is the opening account balances that will enable the auditor to do the appropriate analysis so as to find the closing balances and make a judgment on the value of the firm. However, in this case, the auditor was not able to confirm the opening balances since he has never audited the client in previous years. If the auditor is unable to get information on opening balances either from the outgoing auditor or from the client, then the auditor should indicate this fact in his report.
- The auditor should give an adverse opinion. This is mainly because non-adherence to the accounting standards has adverse effects on the financial status of the firm. The accounting standards should always be followed as indicated by the International Accounting Standards. The auditor should, therefore, express an adverse opinion and also indicate in his report, the fact that the Accounting standards were not followed in preparing the financial statements. However, before qualifying the opinion, the auditor should discuss the issue with the management of the firm. If the management agrees to amend the financial statements and conform to the accounting standards, then the auditor should allow them time to do so. If the management does not agree to amend the financial statements, then the auditor should consider giving an adverse opinion.
- The auditor should consider giving a qualified opinion since the client firm has not followed the necessary Accounting Principles. However, the client has followed the principles which are not allowed by the Australian Accounting Standards. The client firm was supposed to make the valuation of inventory according to the required accounting principles to display the true value of the firm’s closing inventory. The auditor should discuss with the management on this issue. If the managers do not agree to adopt the right method of inventory valuation, then the auditor should consider expressing a qualified opinion.
- The Auditor should consider giving a qualified opinion in a case whereby the going concern position of the firm is not appropriate, and the records in the statement of financial position indicate that the entity is facing going concern problems. The auditor should indicate this fact in his report before qualifying the report. In the case study, the major customer of the firm has faced liquidation. Because the firm is producing a specialized product, it is quite difficult for the entity to get new clients.
References
Banimahd, B., Hasas, Y. Y., & Yazdanian, N. (2014). Earnings Management and Audit Opinion: Evidence of Private Audit Firms.
Birt, J., et al., (2014). Accounting: Business Reporting For Decision Making 5e.
Carey, P., Potter, B., & Tanewski, G. (2014). Application of the Reporting Entity Concept in Australia. Abacus, 50(4), 460-489.
Chen, J., Cumming, D., Hou, W., & Lee, E. (2013). Executive Integrity, Audit Opinion, and Fraud in Chinese Listed Firms. Emerging Markets Review, 15, 72-91.
Habib, A. (2013). A Meta-Analysis of the Determinants of Modified Audit Opinion Decisions. Managerial Auditing Journal, 28(3), 184-216.
Newberry, S. (2015). Public Sector Accounting: Shifting Concepts of Accountability. Public Money & Management, 35(5), 371-376.
Rahman, A. R. (2013). The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of Its Participative Review Process. Routledge.
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