Judgment And Decision Making Research In Auditing

Auditor’s Independence

The background of the current report lies on the reporting requirements related to the auditor that are initiated by the International Auditing and Assurance Board (IAASB). Following the line of these new requirements the current report analyses the company’s annual report. The areas analysed include the declaration for auditor’s independence, report of independent auditor, the performance of non-audit services by the auditor, remuneration of auditor, the composition of the audit committee, and its role and functions, and key consideration to the audit report issued by the auditor with special emphasis on the key audit matters. The limelight question is if the company has followed with all the reporting requirements in its annual report. All the assurance services as related to the auditor are also reviewed. The company selected for the case study purpose is Harvey Norman Holdings Limited and auditor’s independence and their responsibilities have been analysed to determine the key information about the company.

The auditors of the Harvey Norman Holdings Limited are named Ernst & Young. It is well evidenced by the directors that the regulations laid by the Corporations Act 2001 are well complied. These regulations do relate to the independence of the auditor. Further, the mention of audit committee is also made. It is specified that the audit committee is also convinced and have recommended that the auditors have been independent in their operation. The auditors have also given a declaration to the directors of the Harvey Norman Holdings Limited regarding their independence (Harvey Norman Holdings Limited., 2016).The declaration clearly states that the auditors have not made any contraventions as far as the applicable codes of the professional conduct and the corporations act 2001, in relation to the audit conducted are concerned (Tepalagul, and Lin, 2015). This auditor’s independence report has shown how well auditors have performed and their independence with the Harvey Norman Holdings Limited. It is analyzed that auditors should keep their independence with the company when they are auditing the financial statements (Louwers, et al. 2015). In the audit report, it is considered that auditor has complied with Independence requirements of the auditing and assurance. 

It is well mentioned in the report that the auditors are engaged in the provision of non-audit services to the client along with the appraisal work. This thing is mentioned with a specific headline in the annual report. Further, the directors have taken the recommendations of the audit committee too regarding this provision of the services by the auditor. The non-audit services extended by the auditor also comply with the requirements of the corporation’s act 2001. It is completely analysed by the management that in no case the provision of these non-audit services has harmed the independence that the auditors need to comply with. For the financial year ending on June 30, 2017 the auditors have provided tax compliance services worth $205,803 and other services worth $71,756 as non-audit services to the client (Bell, Causholli, and Knechel, 2015).  There are several other non-audit services which is offered by auditors to Harvey Norman Holdings Limited such as advising the management about the legal compliance and preparing the financial statement as per the applicable accounting standards and harmonization with the international and domestic accounting standards (Harvey Norman Holdings Limited., 2016).

Provision of Non-Audit Services

The remuneration of the auditors includes the payment that is either made or has to be made to the auditors for the services they have provided to the client. The services include both the audit and non-audit services (Choong, and Leung, 2015). In the case of Harvey Norman Holdings Limited, there is an audit committee too. The remuneration in this case is bound to be finalised by the audit committee after it gets decided either in the general meeting or gets fixed by the board of directors. The following table represents the remuneration that is paid to the auditors for the financial years 2016 and financial year 2017. The changes that have taken place in the remuneration are also shown in percentage form (Harvey Norman Holdings Limited., 2016).

The auditors in their report have mentioned certain key audit matters that are relevant for the shareholders to obtain a better understanding of the entity and the environment in which the entity operates (Sirois, Bédard, and Bera, 2018). The following table highlights those key audit matters. The procedures that have been undertaken by the auditor in order to gather sufficient and appropriate audit evidences have also been discussed. A decision is made in light of those audit procedures. However, no separate opinion is expressed by the auditor on these key audit matters (Harvey Norman Holdings Limited., 2016). They are just those issues that in the judgement of the auditor are of high significance for the purpose of audit. These all are the key audit matters which need to be analyzed by the auditors which have been given in the audit report of the Harvey Norman Holdings Limited (Harvey Norman Holdings Limited., 2016).

There are both audit committee and audit charter formulated in the Harvey Norman Holdings Limited. All the three members of the committee are the non-executive directors (Czerney, Schmidt, and Thompson, 2014)

The structure of the audit committee has been determined on the basis of the corporation act and Australian listing rules and regulations. There is below given the members of the audit committee include:

• Graham Charles Paton: Chairman of the Harvey Norman Holdings Limited and a certified practicing Accountant.
• Christopher Herbert Brown: an experienced solicitor
• Kenneth William Gunderson – Briggs: an experienced Chartered Accountant (Harvey Norman Holdings Limited., 2016).

• Audit committee is bestowed with the function of oversight. This includes overseeing the function relating to the appointment and review of the external auditor.
• The other parties needed to be overseen include internal auditor and the management (Badolato, Donelson, and Ege, 2014).

• As far as the external auditors are concerned, the audit committee is bound to make decisions regarding the selection, evaluation and replacement of the external auditor. It is the duty of the committee to review the audit engagement letter and the audit plan. Determining the nature of non-audit services and considering the communications that take place between the management and the auditor also comes in the purview of this. Reviewing the independence of the external auditor and his effectiveness (Beck, and Mauldin, 2014).
• When the internal audit is concerned, it is the duty of the audit committee to make decisions regarding the person who shall be considered as the head of the internal audit function. The committee is expected to help the board in reviewing and approving the annual budget and annual internal audit plan. The committee is responsible for assessing the effectiveness of the function of internal audit and helping the board to assess the performance of the internal audit head (Khelil, Hussainey, and Noubbigh, 2016).
• Other responsibilities as relating to the review of risk assessment and management policies, handling of accounting and related complaints, and those related to financial reporting (Harvey Norman Holdings Limited., 2016).

The auditors have issued a clean and unmodified opinion on the financials of the Harvey Norman Holdings Limited. In their opinion the financials of the Harvey Norman Holdings Limited are prepared fairly and comply with the requirements of the Corporations Act 2001, Australian Accounting Standards and, the Corporations Regulations 2001. However, the audit report, auditors have given no disclaimer and passed non-qualified audit report. It has stated that company has complied with the all the applicable rules and regulations and maintained proper corporate governance program. This audit opinion is very much required for the business sustainability and increased business outcomes in long run (Jans, Alles, and Vasarhelyi, 2014).

Auditer Remuneration

As far as the financial reporting is concerned, it is the duty of the management to prepare the financial reports that comply with the requirements of the applicable accounting standards, and corporation act 2001. It is the duty of the management to assess whether the entity is able to continue operations as a going concern or not. Management is expected to ensure that enough controls exist in the entity that provides for preparation of the financial information free from any sort of misstatements (Hammer, 2015). The differences between the auditor and management is very much needed to keep the business more transparent and effective in long run (Eilifsen, Hamilton and Messier., 2017).

However, the auditors are responsible to behave professionally and provide a reasonable assurance regarding the presentation of the financial information by the management. The auditor is required to state whether the regulations are complied with or not. Further, the auditors are required to assess the viability of the going concern assumption laid by the management (Murphy, and Hogan, 2016).  If auditors perform their responsibilities effectively then it will not only strengthen their overall outcomes but also result to increased business outcomes in determined approach. This helps in strengthen the overall outcomes and business efficiency (Harvey Norman Holdings Limited., 2016).

As per the declaration given by the directors in the annual report, there has been no observation of any material subsequent events. In the opinion of the directors, there are no transactions or events happening after the balance sheet date that can have or had a significant effect on the Harvey Norman Holdings Limited’s operations, or the results of company’s operations, or the state of affairs relating to the entity or the consolidated entity in the future financial years. These are the subsequent events and material sections which reflects how well company has been performing its business. Harvey Normal needs to increase the transparency of its business by complying with the international and domestic reporting compliance program (Harvey Norman Holdings Limited., 2016).

Conclusion

When the assessment of the audit report issued by the external auditor is made from the view of a third party stakeholder, the material information reported by the auditor seems perfectly fine. The auditors have clearly mentions the key areas which as per their judgement are of the highest significance for the stakeholders. These areas are explained as well as the audit procedures followed to reduce the risk persistent in them is mentioned in the report. The presentation seems highly effective. From the reading and understanding of the report, it can be easily concluded that there is no material information that has been missed by the auditor. The report is presented in a manner that is able to fully explain and disclose the required information to the users. There seems no doubt regarding the professionalism with which the reports are prepared and hence the need to ask any follow up questions is also ruled out. The main crux of this report is that auditors are the key person who performs the fiduciary position in the best interest of the stakeholders. The transparency and true and fair view of the assets and liabilities of company depends upon the audit program and activities undertaken by the auditors.

References

Badolato, P.G., Donelson, D.C. and Ege, M., (2014). Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2-3), pp.208-230.

Beck, M.J. and Mauldin, E.G., (2014). Who’s really in charge? Audit committee versus CFO power and audit fees. The Accounting Review, 89(6), pp.2057-2085.

Bell, T.B., Causholli, M. and Knechel, W.R., (2015). Audit firm tenure, non?audit services, and internal assessments of audit quality. Journal of Accounting Research, 53(3), pp.461-509.

Choong, K.K. and Leung, W.Y., (2015). Auditor remuneration, corporate governance and auditor independence, 2^nd ed, Hong Kong, Pearson.

Czerney, K., Schmidt, J. J., and Thompson, A. M. (2014). Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?. The Accounting Review, 89(6), 2115-2149.

Eilifsen, A., Hamilton, E. L., and Messier Jr, W. F. (2017). The Importance of Quantifying Uncertainty: Examining the Effect of Audit Materiality and Sensitivity Analysis Disclosures on Investors’ Judgments and Decisions. 8(6), 215-219

Hammer, M., (2015). What is business process management?. In Handbook on business process managemen, 3^rd ed, Springer,Berlin : Heidelberg.

Harvey Norman Holdings Limited., (2016). Annual report. Available at https://www.harveynormanholdings.com.au/reports-announcements-1/., Accessed on 12^th June 2018

Jans, M., Alles, M. G., and Vasarhelyi, M. A. (2014). A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), 1751-1773.

Khelil, I., Hussainey, K. and Noubbigh, H., (2016). Audit committee–internal audit interaction and moral courage. Managerial Auditing Journal, 31(4/5), pp.403-433.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., and Thibodeau, J. C. (2015). Auditing & assurance services. 3^rd ed, USA: McGraw-Hill Education.

Mala, R., & Chand, P. (2015). Judgment and Decision?Making Research in Auditing and Accounting: Future Research Implications of Person, Task, and Environment Perspective. Accounting Perspectives, 14(1), 1-50.

Murphy, L. and Hogan, R., (2016). Financial Reporting of Nonfinancial Information: The Role of the Auditor. Journal of Corporate Accounting & Finance, 28(1), pp.42-49.

Sirois, L.P., Bédard, J. and Bera, P., (2018). The informational value of key audit matters in the auditor’s report: evidence from an Eye-tracking study. 2^nd ed, Austdralia: Accounting Horizons.

Tepalagul, N. and Lin, L., (2015). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.

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