Auditing Essay Example
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The auditor’s work is that of preparing a report analyzing the potential acquisition of steel Pty Ltd (Steel). This would include prior verification of the accuracy and completeness of the financial statements provided rest I be provided with information that is not accurate on the basis of which the report would be written. But the CFO does not want me to verify the completeness and accuracy of the cash flow statement claiming that my attention should be on profitability and sales and that the verification of the cash flow statement would confuse the board and would not be helpful to the acquisition or to the likelihood of me being asked to undertake similar engagements in future. resulting from this discussion with the CFO, the following are the threats to compliance with the fundamental principles that may exist therefrom;
Self-interest threat- Naturally, I would be interested in being given similar assignments in future. But now I have been warned that verifying the accuracy and completeness of the cash flow statement is not helpful to the likelihood of me being asked to undertake similar assignments in future (Jared, 2016). This means that if I go on and audit the accuracy and completeness of the cash flow statement, I should be prepared to loose similar assignments in future. Furthermore, the CFO has to justify why am not well placed to handle similar future assignment and this would may be result in him lying about my professional character and hence destroying my reputation and hence his bosses view about me so that I don’t get future assignments in future. This would not only be detrimental to my assignments with the company but also on my relationship with my bosses and hence it would be a threat to my career.Thus, if for instance am a young auditor with few similar assignments and if this particular company’s revenue forms a significant part of my income and if I also lack strong ethics with regard to integrity, then the future financial interest/ need to be given similar assignment in future will inappropriately influence my professional judgement and behaviour since I may avoid verifying the accuracy and completeness of the cash flow statement and if it is not accurate, I will end up giving the wrong recommendations.
Intimidation threat – The CFO’s words are likely to intimidate the accountant and hence deter him from being objective owing to the actual pressure not to audit the cash flow statement and the attempts to exert undue influence owing to the possibility of the accountant being denied similar assignments in future. This may result in the final report not being objective. In addition, the CFO’s threat also give an indication that the CFO wants me to give a verdict that would favor investing in the company. That means that owing to the threat, although I may discover information that would make me discourage such investments, I will not be objective and hence I will conceal such information in a bid to be in line with the CFO wishes and hence assure myself of similar assignments in future.
In this regard, the fundamental principles at risk of being breached include the following;
Integrity- If the accountant bows to pressure and does according to CFO wishes, then his integrity will have been compromised since he will not have acted honestly.
Objectivity- Bowing to the CFO’s pressure will mean that the accountant will have allowed conflict of interest (need to be given future assignments) and undue influence (the threat of not being given similar assignment in future) by the CFO to override professional judgement.
Professional competence and due care- The request by the CFO is a threat to professional competence, knowledge and skill that would ensure the accountant gives a competent professional report. Thus, the accountant will have failed to act diligently and in accordance to applicable technical and professional standards.
Professional behaviour- By acting in accordance to the CFO request, the accountant does not exhibit professional behaviour that requires compliance to relevant laws and regulations while avoiding actions that discredit the profession including bowing to undue pressure and influence not to act in accordance to professional standards.
Solution of the case using AAA decision model indicating what action Luke should take
Step 1: The facts of the case
The facts of the case are that Luke and Zane are competing for the same position. Luke has replaced Zane on a particular job allegedly because this assignment is from a long time client of Zane’s. However, Luke discovers that the client had called the audit manager and said they had not been impressed with Zane’s work since he had missed a number of issues with the audit and was arriving at work late. Though the audit manager had not discussed the issue with both Luke and Zane, Luke discovers that Zane had performed an excellent job and had identified a number of issues that he thought that Zane might have possibly missed after going through the work. Luke thus suspects that Zane and the client had a personality conflict and that the client had misled the audit manager. Luke knows he can finish off the audit, resolve the issues and obtain a good review from the assignment which would help him in the promotion stakes and that the audit manager is unlikely to bring the client’s unsupported allegations to Zane’s attention.
Step 2: What are the ethical issues in the case?
The ethical issue is whether or not Luke should bring the truth he discovers to the attention of the Audit manager. If he does not bring the issue to the attention of the audit manager, he might eventually get the promotion but in a dishonest manner thus putting his integrity to question.
Step 3: What are the norms, principles, and values related to the case?
The values, norms and principles are that auditors are expected to observe honesty and have impeccable integrity in their professional conduct. In addition, auditors are expected to observe objectivity and should not be influenced by their own interests or by others in their professional conduct. Auditor’s competency including knowledge, skills and experience should be the only basis on which their professional achievements are based on.
Step 4: What are the alternative courses of action?
Option 1 is to hide the information he has discovered from the audit manager so that he can be viewed as more professional and hence get the promotion dishonestly. Option 2 is to disclose the information to the audit manager so that the manager makes an informed decision in deciding who between Luke and Zane should be promoted. If he gets promoted, he will not have acquired it dishonestly.
Step 5: What is the best course of action that is consistent with the norms, principles and values identified in step 3?
The course of action consistent with the norms, principles and values identified in step 3 is that of revealing that Zane had actually done an excellent job but he might have had personality differences with the client and hence the reason why the client did not prefer him to the audit manager. This would enable the audit manager make an informed decision as to who should be promoted.
Step 6: what are the consequences of each possible course of action?
Under option 1, Luke would conceal the fact that he had found out that Zane had actually done an excellent job and that personality differences between the client and Zane might have made the client to prefer someone else to Zane. He would get a good report from the client and probably get promoted on the basis that he handles clients work better than Zane. However, he would expose himself to the risk of being in professional trouble if it is later discovered that what the client had said was not true and that he had reviewed Zane’s work and did not report his findings. He probably would have to be demoted or even lose the job. Even if this is not discovered, he would still have to live with the knowledge that he probably was not qualified for the job since he acquired the post through dishonest means since the client lied about Zane’s character. This is despite the fact that may be he would still have been promoted even after revealing the information since the boss might have to consider that act of integrity favorably.
Under option 2, Luke would decide to reveal that he had actually reviewed Zane’s work and had actually discovered that it was excellent and that he suspected that may be there were personality differences between Zane and the client thus making the client to prefer another person other than Zane and lying about Zane. This would may be have some unfortunate consequences of for instance Luke missing the promotion and Zane being promoted if he is deemed to be more qualified for the job. In addition, it would endanger the relationship between the client and the audit firm since the lie would be discovered. However, Luke would be confident that whoever gets the post got it since he was better placed for it. In addition, he would be confident that his integrity and professional ethics have not been compromised by personal interests for promotion. If he is lucky to be promoted, his qualification for the job would never be in question to him in his mind since he would know that he acquired the promotion honestly and genuinely.
Step 7: What is the decision?
The ethical decision is option 2. Luke should disclose that during the review of Zane’s work, he discovered that it was excellent and had covered all areas he was expected to have covered and that probably personality differences may have made the client to prefer another person to Zane causing him to lie about Zane.
b) Whether my decision would have been any different if I had used the Mary Guy decision making
I think my decision would still have been the same had I used Mary Guy’s decision model. The factors that I would have to consider would have included the following;
Caring- Luke should not take advantage of Zane’s differences with the client as a means of gaining the promotion he aims at getting.
Honesty – Luke ought to earn the position through honest means and thus should be willing to reveal the truth given that concealing it may make the audit manager think that Zane is incompetent and thus deny him promotion making Luke earn the post through dishonesty.
Accountability – Luke’s action ought to be accountable and he should be a good example for others. Concealing such important information does not show accountability.
Promise keeping- Luke’s actions at all-time ought to be in line with the profession’s ethical code of conduct.
Pursuit of excellent- Luke should strive to be as good as he can be and concealing the truth does not show effort to be good.
Loyalty – Luke’s action should not be influenced by personal interest and thus he should not conceal the truth so as to get the promotion.
Fairness – Luke should not take advantage of Zane’s unfortunate position to get promotion.
Integrity – Luke should have integrity and hence he should be willing to tell the truth regarding Zane.
Responsible citizenship – Concealing the truth will be against societal values and hence Luke ought to tell the truth.
Respect for others –Respect for others implies being courteous, prompt, decent and providing others with information they need to make informed decisions which is what Luke should do by revealing the truth to the audit manager.
Thus, based on the above arguments, it is clear that my decision would not change even if I used a different decision model by Mary Guy since it would be ethically correct for Luke to reveal that Zane’s work had been excellent and hence other factors might have influenced the client’s lies.
The following are the assertions at risk in relation to accounts payable
Completeness – Do the balances contain all the transactions for the period? For payables to be considered complete, the balances should contain all the transactions that result in payables for the period. If reconciliation of payables reveal some differences, this might indicate a problem with completeness as far as accounts payables are concerned.
Valuation – How are the accounts payable valued? Is it in accordance to GAAP
Justifications for the assertions. For the accounts payables to be accurately valued, the company ought to value them in accordance to GAAP. In addition, there ought to be a clear policy on how the payables will be priced and hence valued so that the accounts payables personnel do not remain in the dark concerning payables valuation and any changes to the valuation policy promptly communicated to the concerned personnel in a bid to eliminate valuation risk hence ensuring the right amount of payables is recorded.
Completeness – The balances do not contain all the transactions for the period since differences are usually noted on reconciliation of the supplier statement and the accounts payable balance as per the creditors’ ledger at the month end. The differences are attributable to a number of reasons including there being unprocessed invoices owing to pricing differences, timing differences in the recorded date of a payment made , amounts requested for credit as well as settlement discounts disallowed. However, the main cause for the incompleteness arise from the management being too slow in informing the accounts payable personnel on the effective dates for implementation of the new contracts with suppliers as well as the revised prices which has for instance made many invoices for the five of the biggest suppliers be held back owing to lack of correct pricing and hence are not included in the transactions for the period meaning that completeness for the company’s payables is at risk.
Valuation -One of the major reasons why the reconciliations between supplier statement and the accounts payable balance as per the creditor’s ledger at the month end is because of valuation issues. The issues include pricing differences and disallowed settlement discounts. On the other hand, the reason why many payables accounts are found missing from the end month balances is because the accounts payables personnel do not know how to price the payables. In other words, it seems there is no proper pricing and hence valuation policy for payables in the company. This brings about the risk of the payables being wrongly valued owing to lack of a proper pricing and hence valuation policy. For instance, if the personnel decided to use the wrong pricing in a bid to ensure the accounts payables are included in the end of the period balances due to the confusion in pricing, then the wrong value of payables will be reported in the end of the period balances.
Substantive test of detail to obtain sufficient appropriate audit evidence for the above assertions
To obtain audit evidence on the company’s accounts payable completeness, I suggest the following substantive test;
The auditor should first use a control account in order to reconcile the accounts payable ledger and see whether there are any differences. The nature of any differences identified should be noted for differences might be an indication of incompleteness. Then, apply a reliable cutoff test to account for all the invoices representing those goods that have or have not changed hands before carefully assessing the turnover rate of accounts payables to determine the standard and investigate questionable relations. If there is anything that is noted to be abnormal, then this ought to be investigated for it might give an indication of incompleteness. In addition, perform a cut off test for the disbursement of cash and hence determine if the accounts payables and cash distributions reconcile (Porter and Campbell, 2014). This is because if accounts payables and cash disbursements fail to balance, this might mean that some payables were left out of the balances or some fraud might have taken place where cash was paid out unnecessarily. Then take the last written check to trace it to its subsidiary ledger. Then match the recorded payment to the payments and determine if checks issued match the accounts payables. If any checks do not correspond to a payable account, this should indicate an unrecorded liability and hence that the accounts payables balances are not complete since some payables were left out. Finally, search for unvouchered accounts payables. These are payments that lack requisition, report or seller’s invoice that is required to complete a voucher. All unmatched documents for the voucher should then be located so that their nature is established and if they have been left out of the company’s accounts payable balances, then they should be included to ensure completeness. These test should give enough audit evidence as to the completeness or otherwise of the company’s accounts payables.
Valuation and allocation
The following are the substantive tests that should be performed on the company’s payables in a bid to establish the accuracy of their valuation.
The auditor should seek to establish the reliability of the company’s accounts payables pricing policy since it seems that the accounts payable’s personnel are not well informed of the policy. The auditor should vouch sample of balances to their supporting documentation such as invoices, receipt notes and purchases orders and also recalculate accruals. Cut-off procedures also should be undertaken by testing transactions around the year end to determine whether amounts have been recognized in the correct financial period. Analytical procedures on purchases returns should be performed by comparing the purchases returns as a percentage of sales or cost of sales to the previous year. By carrying out such procedures, the auditor will uncover enough evidence regarding the correctness of valuation and allocation of the company’s accounts payables.
, Gumtree, Australia.Auditing assurance ethics handbookJared, B2016,
, New York, John Willey & Sons. Auditing: A practical approachPorter, B&, Campbell, F2014,
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