Auditing Corporate Entities Essay Example

Corporate Audit

Corporate Auditing

The Corporate Act 2001 and code of ethics

Australia Federal government has set comprehensive legislative and professional requirements concerning the auditor’s independence (Carson, 2005). TEOGL reporting and audit work should be guided with this code of ethics. Some of the cardinal requirements include:

  1. Audit Standard ASA 220 dealing with the quality control for audits of the historical financial information that was given by assurance and Audit Standard Board in April 2006

  2. Part 290 of the code of Ethics for professional Accountants (APES 110) given by Australian Standard Board (APESB) in June 2006; and

  3. APES 320 Quality control for firms that was issued by the APESB in May 2006 (ISA, 2009)

Under the Companies Act, all disclosing entities, public and other listed companies, which are registered, are required by law to prepare end year financial reports and have them audited. Authorized auditors that are registered by the ASIC and auditors must audit the reports. Audit and assurance is their main reasons and aim of (APES 110), one of the distinguished the profession as the most special as it takes its own responsibility and act in a way the will always maintain public confidence and interest(ISA, 2009)

. Moreover, the responsibility of the members is not to satisfy the need of individual client but public in general

The three major component of the code include:

i. Responsibility by the auditor to identify threats to compliance with fundamental principles;

ii. Auditors’ to evaluate the significance of the threats identified during audit activity and lastly

  1. To apply safeguards, where and when necessary in order to eliminate the threats and reduce them to an acceptable level (ISA, 2009).

The fundamental principle of the code states that members shall comply with the following fundamental principles at any given time:

  1. Integrity – Auditors must be straightforward and honest in all professional and other related business relationships during and after their functions.

  2. Objectivity – Auditors not at any given time should allow bias, conflict of interest or any undue influence other to override professional duty or business judgments

  3. Due care and professional competence – auditors are expected to maintain professional knowledge and skills at the required level to ensure that their clients receive competent professional services that are purely based on current development and practices, techniques and legislation and should act diligently, and in accordance with the applicable technical and professional standards.

  4. Confidentiality – the auditors should respect the confidentiality of information acquired because of professional and business relationship. Therefore, auditors’ should not disclose any such information to third party without specific and proper authority, unless there is a legal right and duty to disclose such information, nor use such information for the personal advantage of the members or for the third party.

  5. Professional behavior— the auditors are required to comply with the relevant laws and regulations and avoid any action that may discredits the profession.

Following the audit report and the responsibilities bestowed upon auditors, there was contravention of the code of ethics by the auditors of the TEOGL Company in the case study. The negligence was also present in the part of the management as they were not able to advise the shareholders on follow the accepted reporting standard regarding revenue recognition. Auditor also when a head and accepted the engagement yet there were questionable integrity issues.

Familiarity threat: The shareholders accordingly concerning the actual activities of the company,

In the case of the TEOGL gas and exploration Company, there has been violation of these ethics and code of conduct and result into familiarity threat. This can arise in situations where by any member of the engagement team having a worked for the client in the recent past. The director or officer of the client or any of its employee is in a position of exerting material influence over the subject matter of the engagement and to some extend have recently served the engagement partner in any capacity; this is elaborated in APES 110:200.7.

As per APES 110:200.7 states that senior personnel is having a close relationship or association with the assurance clients might bring familiarity threats. It further states that the member of audit team should have not served the client in any recent past as this might bring familiarity threats. The threat that would be created would be so material that no safeguard will be able to reduce it to an acceptable level. The possible action is for the auditor to quit the engagement Safeguards that may eliminate or reduce threats to an Acceptable Level fall into two broad categories:

(a) Safeguards created by the profession, legislation or regulation; and

(b) Safeguards in the work environment

Accepting Audit Engagement

In any auditing, there are mostly four phases involve;

  • Accepting the audit engagement

  • Planning for an audit

  • Performing audit test and lastly

  • Reporting audit findings

Accepting the audit engagement

The auditing board in 1992 recommended the use of an engagement risk approach in the client retention and acceptance decision when accepting audit engagement. Engagement risk is composed of three components, these include;

The risk associated with the client business of profitability and survival

The risk that the auditor may fail to detect during his or her course of duty known as audit risk and lastly the risk of potential litigation costs from an alleged audit failure and the risk that arises from cost such as free realization and reputation effects on the business (AU, 2010).

In deciding whether to accept an engagement or not the following are the key steps in doing that;

First, evaluating the management integrity – the fraud, material error or any other irregularities are more likely to occur when the management is dishonest. Therefore, if the management is straight forward, the auditor should accept the engagement and if the integrity of management is wanting, they should not accept the engagement (AU, 2010).

Secondly, before accepting the engagement, the auditor should identify some special circumstances and unusual risk, the auditor should concentrate in identifying the intended users of the financial statements, the legal liability exposure of the auditor may vary depending on the intended user of the financial statements (AAS, 2004). The firms or business that faces potential material legal claims increases the chances of an auditor lawsuit. The auditor should have a discussion with both the management and the creditors, review creditors reports and other filings with the regulatory. Poor quality accounting methods and policy should be checked along with the control system of the company to be audited. The auditor should be satisfied in his or her opinion that the above conditions are met and in case they are not met, then the auditor should not accept the engagement (AAS, 2004).

Thirdly, auditor should assess its ability to perform the audit in line with AU section 150.02. The auditor should assess the nature and the amount of supervision that is necessary. The nature of the client and his business. The auditor must be certain the he or she is capable of carrying out the audit work in case the auditor believes that the work is beyond his capability, and then he should not accept the engagement (AAS, 2004).

Fourthly, the auditor should evaluate his independence as outlined the GAAS 101 where the auditor’s independence is defined. If the auditor feels that his independence is in jeopardy, then he should not accept the audit engagement

Fifth, the auditor should determine its ability to use its due care as outlined in the third GAAS and in this, there are two factors to be considered that include the timing of the appointment and the fieldwork scheduling.

Lastly, the auditor should prepare the engagement letter if all the above conditions have been ascertained.

Factors to consider when planning the audit

Auditing Standard number 9 explains or outlined the procedures that should be followed and factors to be considered when carrying out an audit plan. They include;

  • Knowledge of the company internal control over the financial reporting as this will affect audit outcome

  • Auditor should be well conversant with the industry in which the client is operating it hence a factor to consider

  • The auditor should consider matters relating to the Company’s business including issues like organization structure, operating characteristics and the capital structure

  • Recent changes in case there is, in the company including its operation internal control issues that have effect on the financial reporting

  • Legal and regulatory matters

  • Type and available evidence relating to the effectiveness of the company internal control systems

  • Preliminary judgment on the effectiveness of internal control system

  • Risk related to the company

  • Complexity in company reporting

Reference

Carson, V. (2005). «One.Tel auditor denies conflict». The Australian (Canberra, A.C.T.)
(1038-8761), p.
22. http://0-global.factiva.com.library.ecu.edu.au/ha/default.aspx

AU (2010) Section 314 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

ISA 501, (2009) Audit Evidence—Specific Considerations for Selected Items, paragraph 13

Standards Australia and Standards New Zealand (2004), Australia/ New Zealand Standard Risk

Management AS/NZS 4360:2004, Standards Australia, Sydney/Standards New Zealand, Auckland