AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Rodney Brick’s Case
Rodney has violated the auditing standards and regulations that relate to professional competence and documentation of auditing evidence. The principle of professional competence requires members of the audit profession to use their knowledge and skills to give the clients competent services. Moreover, the principle imposes on member to act diligently when providing professional services to clients (APESB, 19). Rodney violated this standard because he sought to provide professional services by using confidential client information during the audit. Rodney did not bother to disclose the source of the information and this led to incompetence in his part because the opinion he provided from the audit could be considered unreliable. Section 140 of the code of ethics requires that an auditor cannot use confidential information for their personal gain (APESB, 20), Rodney breached this standard because he used confidential client information during his audit. Although the information related to client books, it was wrong for Rodney to use the information to his advantage because it helped him during the auditing process. Since Rodney was paid to provide the professional services, it was his due to extract the information from the sources that had been provided to him during the audit process.
Audit evidence refers to the information that the auditor uses to get to a given conclusion on which their audit opinion is based. The audit evidence needs to be factual so that the auditor can give a reliable opinion on the audited financial statements (Dennis, 107). All the evidence that the auditor uses during the audit process needs to be documented so that anyone going through the audited statements can find supporting information. According to APESB (48) audit documentation refers to the process through which a member collects information to support their professional judgment. An auditor is required to document all the evidence that they use during the auditing procedure. Rodney violated this regulation since he neglected a crucial piece of evidence that he used during the auditing process. The lack of documentation of the crucial evidence also constitutes professional negligence on the part of Rodney.
Rodney should have considered the fact that another member of the profession could be asked to audit the books for the second time and the lack of the audit evidence could have led to professional misconduct. Additional reviews are common in auditing because of the need to have reliable opinions from various members of the professional. If a second review was conducted, it could have revealed that Rodney did not document crucial information that he had relied on and this could have led to penalties on his part. It is therefore crucial for auditors to document the evidence that they use to construct their opinions on the financial statement because the audited books will be used by various stakeholders.
Conclusively, Rodney breached the standards of professional competence and confidentiality in his quest to come up with an audit opinion. Moreover, the lack of documentation of the audit evidence also constituted a breach of the professional code of conduct.
In Australia, the roles of the Company Secretary are set out in the Corporations Act 2001. The roles of the company secretary as outlined in the Corporations Act 2001 including setting up a members register and updating it from time to time to ensure compliance. Moreover, the company secretary is supposed to provide the register for inspection when required. Furthermore, the Corporations Act 2001 prohibits any member of a professional services firm from serving as a secretary or director of an audit client. According to APESB (65), this creates a self-review as well as self-interest threat. The threats that Bertha faces cannot be reduce to any acceptable levels because the Corporations Act 2001 and the ethical code of the audit profession prohibit this case. Since Bertha already accepted the position and has been serving in the position for some time, it leaves her audit firm with no option but to withdraw its audit services from the audit client. The withdrawal of the audit services stems from the fact that Bertha cannot audit the books of account of the audit client because she already works for them. This way Bertha is face with the self-review and self-interest threats which cannot be eliminated unless the audit relationship is terminated.
Moreover, APESB (65) notes that the duties of a company secretary may put the auditor in a compromising situation. The administrative duties that include personnel management and ensuring compliance with corporate regulations reveal that the company secretary has a close relationship with the entity which means that an auditor cannot become a company secretary for an audit client, as this will lead to lack of working objectively when auditing the financial statements.
The other concern that is prevalent in Bertha’s case is the potential conflict of interest. Threats to truthful reporting arise from several potential conflicts of interest. If the conflicts of interests are not dealt with at the initial stages of the audit process, then this may cost the audit firm as well as the client (Crockett, 31). Bertha is faced with several conflicts of interest that may cause her not to perform her duties diligently.
Section 220 of the APESB ethical code requires members of the audit profession to take reasonable steps to identify potential areas of conflict. Nevertheless, Bertha has not taken such steps and this raises concern of the potential conflicts of interest that may arise during the case. Bertha’s conflict of interest stems from the fact that she is the company secretary of an audit client. This may lead her to compromise compliance as well as fundamental audit principles that are supposed to guide her during the audit process. The conflicts of interests that Bertha is faced with are significant and they should be eliminated so that the audit client gets the competent professional services that they require. Bertha should therefore inform her firm of these conflicts of interest so that she can either resign from her role as company secretary or for the company to disengage its relationship with the audit client. If this is done, then the concerns in this case would have been addressed.
Section 191 and 192 of the Corporations Act 2001 apply to John’s situation. John’s father is the factory manager for a company he is supposed to audit and this gives rise to potential conflict of interest for both of them. Section 191, of the Corporations Act 2001, deals with material personal interest in the company. John’s father is required by the law to disclose the fact that it is his some who will be auditing various aspects of the company. The Corporations Act 2001 requires the director of the company to inform other directors of nay material interests that may have an effect on the affairs of the company. John’s father has material interest in the auditing process because it affects the affairs of the company. Subsection (1) of Section 191 requires John’s father to reveal the extent of the interest and explain it nature. Section 192 requires John’s father to ensure that the conflict of interest in put on record for other interested stakeholders to access.
John, on the other hand, is also faced with conflict of interest which he is supposed to reveal to the audit firm. The fact that John is auditing a company where his father has an interest means that he may be biased when giving his audit opinion or neglect alarming facts from his final audit report. The APESB ethical code requires all members of the audit profession to notify all relevant parties involved in the audit of the potential areas of conflict so that the same are dealt with. The essence of this notification is to allow for the audit firm to come up with safe guards during the audit process.
The audit firm should have a mechanism in place to ensure that conflict of interest does not counter professional judgment. Auditors are required to maintain professional judgment throughout the audit process but this cannot be guaranteed if the professional is faced with conflicts of interest. One of the primary things that the audit firm should have in place is a mechanism that identifies areas of conflict of interest before any audit exercise begins. When the audit firm is doing any audit exercise, the first step should be identification of any areas of potential conflict of interest before the audit exercise begins. According to Brooks and Dunn (402) it is important that the conflicts of interests are dealt with before the audit process begins so that the auditors can give a reliable opinion on the financial statements of the company. If John’s audit firm had these mechanisms in the first place, then the conflict of interest he is facing could have been eliminated. John could have been assigned another duty apart from auditing a company where his father had an interest and he could also benefit financially from the audit process. John’s audit firm therefore needs to have appropriate safe guards to detect and deal with any conflicts of interest.
PVC Partners Case
The issues in this case include the lack of payment of audit fees to PVC audit partners for last three years. Audit fees refer to the charges that auditors charge for provision of their professional services (Leung, Coram and Cooper, 18). The issue in this case is that although PVC Partners has been auditing Ocean Adventures financial statements for the last three years, they have not yet been paid their audit fees and this leads to various threats on the part of the auditor. The auditors have been giving opinions about the financial statement without any pay and this leads to the question as to whether the audit opinion they have been giving is reliable. The APESB ethical code requires that auditors should provide grounds for charging particular audit fees as this help the client understand what they are paying for. Nevertheless, PVC seems not to have provided a mechanism for payment of audit fees with the client has substituted the audit fees with a gift.
The other issue in this case is that PVC has accepted non-monetary payment of audit fees which very controversial. According to Leung, Coram and Cooper (19) non audit-fees are very controversial because they are often worth more than audit fees that are charged for the audit process. Moreover, the acceptance of the audit fees gives rise to the perceived problems in the lack of independence of the auditors. The other issue in this is PVC’s acceptance of 15% shareholding in an unrelated company. This acceptance may lead to a conflict of interest in future when PVC may be required to audit its financial statements.
PVC should not have accepted the boat and the gift as part of the audit fees. The auditor’s acceptance of the non-receipt gifts affects their integrity, objectivity as well as independence of the auditor from the client. The principle of objectivity requires auditor to give a true as well as fair view of the client’s financial statements. According to APESB (87), the acceptance of gifts from the clients leads the development of the self-interest threat. The self-interest will occur once the auditor accepts the gift because they may want to keep the client happy by giving an unqualified opinion. Moreover, the auditor’s integrity may also be questioned because he may develop familiarity issues which may mean that they may not audit the books objectively. The auditor is supposed to be independent when performing the audit process hence the acceptance of gifts puts into question this independence. The client may try to influence the audit opinion to their favor by giving gifts to the audit firm hence when the auditors accept the gifts instead of charging audit fees, their independence is compromised. The auditor may be worried that if they do not give an opinion that suits the client then they may be required to give the gift back. When a firm accepts a gift which is significant, there are no safeguards which can mitigate the aforementioned threats hence a firm must not accept gifts of any nature.
APESB,. APES 110 Code Of Ethics For Professional Accountants. Sydney: Accounting Professional & Ethical Standards Board Limited (APESB), 2010. Print.
Brooks, Leonard J. and Paul Dunn. Business & Professional Ethics Authors. 7th ed. Cengage Learning: N.p., 2014. Print.
Corporations Act 2001. Canberra: Office of Legislative Drafting and Publishing, Attorney-General’s Department, 2001. Print.
Crockett, Andrew. Conflicts Of Interest In The Financial Services Industry. Geneva: International Centre for Monetary and Banking Studies, 2003. Print.
Dennis, Ian. Auditing Theory. Hoboken: Taylor and Francis, 2015. Print.
Leung, Philomena, Paul Coram, and Barry J. Cooper. Modern Auditing & Assurance Services. Milton, Qld.: John Wiley, 2011. Print.