Principles of ethical behavior in auditing
1.The auditor needs to follow the code of ethics while discharging his duties and there are few principles that have been highlighted by APES110 for the auditors in general. The APES110 states these principles on ethical behavior by the auditor and they should follow it always. The code of ethics includes principles like integrity, congeniality, professional conduct and professional judgement and confidentiality of information while conducting the audit (Alexander, 2016). In case the auditor fails on these grounds he would be held liable for the same and that would be against his professional competence to indulge in such activities. In the given assignment few such cases related to the auditor and his ethical situations have been discussed below:
In the given case Peter who works for a music company as an auditor from past six years has been offered tickets for a music show at 25 percent discount. These are being offered to him due to his professional competency as the auditor of the company. Given the principles of APES110, he should not accept it. He should not do anything for self-interest and any such thing that might bring disgrace to the situation must be avoided. And therefore, he should not accept the tickets at the discounted prices that the company is offering. He should reject the offer in a polite way (Arnott, et al., 2017).
Jana has been appointed as an auditor in a new company in the same industry for which he has been working from past three years. This is not a violation of the ethical principles as per APES110. An auditor can work for many companies in the same industry and there is no restriction on that. The only thing that Jana needs to take care about is that he should share any of the information between the competitors in the same industry and maintain the confidentiality and integrity of the information and his position as a professional. Else there is no violation of rules from his end.’
In the given case Jack Deck has been asked by the company to check the installation of a new machinery that they want to install and needs his opinion regarding that. Jack had no knowledge regarding that and therefore he hired an outside consultant who had expertise in that without informing the management of the company. Thus, he was sharing crucial information regarding the company to an outsider and this was against the ethical principle of confidentiality (Belton, 2017). And due to tight deadline, he allowed the installation of the new machinery without checking it correctly from his end. Thus, that was an integrity issue as a professional he failed to deliver his duties to the best of his ability. Now in case the client faces losses due to this step the auditor shall be held liable and shall be penalized.
In the given case there are four partners who are working as quality partners and has been indulged in quality assurance reviewers of four different firms in the same industry. They are discussing the strengths and weakness of the audit with each other after every day of work. This is unethical as per APES110 because in case the auditor failed to maintain the confidentiality of the information related to the firms and ends up sharing them among themselves then they are breaching the principles of APES110. But if the auditor does not do share the information but only discusses the strengths and weakness of audit in general then that is not an unethical approach (Choy, 2018). He should make sure that the conversation is a general one and they are not giving out important information pertaining to the company to other professionals who can misuse that for self-interest.
Various ethical situations related to auditors
In the given case Johan Goldens is a chartered accountant and he also has a part-time business
of insurance which he does not runs in his own name and takes the help of his manager to handle it completely. He works as an auditor for a company and shares the personal information of the client with his manager for his insurance business. This is an ethical issue as per APES110, as the auditor is trying to misuse the personal information of the client for his own personal motives. This is both an integrity and confidentiality issue (Das, 2017). There is a threat to the independence of the auditor where he is trying to take advantage of his position and indulge in activities that would help in his self-growth, for his own personal interest.
In the given case there are two accounting firms in the company and there are two partners and they are conducting the audit of two companies in their areas and are sharing information among each other. This is a confidentiality issue and the auditor should be held liable for indulging in such activities as it is against the company and his professional code of ethics. He cannot take information or share information with other auditors. The company has shared information based on lot of trust and the auditor should take care of that fact.
Thus, we see that how important it is to maintain a correct ethical ground while conducting audit related activities in professional competencies and making sure that there might be many such situations where the auditor needs to have a firm ground (Erik & Jan, 2017). He cannot let the company that has trusted on him down, and misuse his position and that is against his competency has the auditor and professional who is working for the company.
2.Independence of the auditor is a very crucial thing that affects the audit that is being conducted. It refers to the freedom of the auditor from all kind of internal and external factors that might have any kind of financial interest in the company. The auditor has been entrusted with crucial powers and he should make sure that the audit report is unbiased and there is no mismanagement in that. It should be free from all kind of errors and should be correct. The stakeholders depend on it to take important decisions regarding the company (Farmer, 2018). Thus, auditor should make sure that there is no such thing that might affect his position or can influence his decisions. There are many kinds of threats like self-interest threats, relationship threats etc. The work of the auditor is to safeguard his position from all such threats. There can be multiple situations where the independence of the auditor can be at a crucial position and we will discuss such situations below:
Situation One
In the given case, Keith Barnes has been working as an auditor of a coal mining company and that company has been using the cheapest method of waste disposal without switching to more environment friendly methods and making use of the resources. They have asked the auditors only to check whether the financial statements are correct and there is no falsification of information on that. As per them the role of the auditor is only to check whether financials are correct or not. In the given case we see that the auditing firm has been working with the stated coal company from past eight years and, they have share of 25 percent in the total revenue of the company (Goldmann, 2016). Thus, in this case, there can be multiple threats to the position of the auditor and his independence as discussed below:
Concept of auditor independence
Self-Interest Threat – The auditor has been working with the company from past eight years and they have been also receiving 25 percent from the total revenue of the company. This means that the auditor is having some personal relationship with the client and there is also self-interest involved and they would not like to lose the client at any cost. Thus, they will act as a biased person for the client and will not report the wrong doings in terms of waste management and polluting the environment (Grenier, 2017).
Relationship Threat – The auditor has been given direction by the partners of the audit firm, so he cannot surpass that. So even if he wants to state that the company is not correct in their approach, as there might be variances he will face at the hands of the company he is working for (Jefferson, 2017). Thus, there is a relationship threat that is there due to the position of the auditor in his own audit firm and the fact that the company does not want to lose the client.
So, all these threats affect the independence of the auditor of the company and puts them in a very bad position where they cannot decide what are the steps that they need to take to make sure that their approach in audit is correct. In case the authorities come to know that the coal mining company has indulged in such activities they will be held liable and the auditor will also be held liable for not disclosing the same in his audit report and giving a wrong impression to the stakeholders who depends on it to take important decisions. It is also important as per the code of ethics to maintain integrity and an unbiased approach and make correct opinion in professional capacity when they are dealing with their clients. Both the audit firm and the auditor would be held for charges of negligence and providing a biased report that was driven by self-interest and self-growth. Their licenses can be cancelled and they can be held liable and might have to pay heavy penalty (Kim, et al., 2017). The correct thing would have been to let the authorities know after advising the management that they should not indulge in such methods which hamper the environment.
Situation 2
In the given situation ken Smith has been working as the auditor of Moonies from past six years and the company has not paid 20 percent of the audit fees from past year. The company has also used the services of the accountant of the audit firm for their own company for four months. The company is thinking of making selection for the auditors for the current period and for this the auditor has indulged in conversations with the partner of the audit firm (Sithole, et al., 2017). In the current period Ken Smith have been joined by Dave Dunne who has been working as the auditor of the company from past 9 years and by Teena Dean who is the daughter of the managing director of the company and has no prior knowledge about auditing and accounting and has just completed her degree program. The auditor has also found that the company is using wrong methods of inventory valuation and has also indulged in non-compliance of accounting and auditing standards while preparation of the financial statements of the company. Based on these points the following are the threat to the independence of the auditor-
- Self-interest Threat – The auditor has been working with the company from past eight years and in case Kirk discusses these issues with Ken before the board meeting for the selection of the auditor, there are high chances that his position would get affected and his opinion would become biased. The audit firm also does not want to lose such a big company and thus they would be influenced to falsify the information.
- Advising Threats – As there are multiple parties involved with the company, there are chances of advising threats as one accountant is working for both the companies for some period. Thus, that is a case of advising threats as there are related parties involved.
- Relationship Threat – The managing director’s daughter has been selected to be part of the audit just because of his relationship and not because of her talent or competencies. It is very much possible that when the audit is conducted the daughter will have an upper hand and can influence decisions largely. There are also cases where in case the other person who is accompanying in the audit is having nine years of relationship with the firm and he can also have his biasness and self-interest involved while conducting the audit and that might affect the overall audit report in general(Trieu, 2017).
The auditor is aware that the company is not abiding with the relevant accounting standards and thus he should mention the same in his audit report. He should make sure that the financials are free from all kind of misstatements and anything that affects the position of the auditor and his independence should be briefly stated and mentioned. The auditor can be held liable in case there are misstatements and he can be put behind the bars. Thus, he should not falsify the audit report at any cost (Werner, 2017).
Thus, there are many such thing that might affect the independence of the auditor but he must always maintain a neutral stand and should see that there are no such things that can make him give a wrong opinion
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations. Decision Support Systems, Volume 97, pp. 58-68.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Erik, H. & Jan, B., 2017. Supply chain management and activity-based costing: Current status and directions for the future. International Journal of Physical Distribution & Logistics Management, 47(8), pp. 712-735.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), pp. 241-256.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.
Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), pp. 23-40.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.
Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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