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ACC305 Auditing and Professional Practice Assignment Help
This assignment relates to the accounting and auditing practices applied in the case studies with practical examples. The case studies that have been analysed involve the different scenarios for auditors. The analysis has been done based on the fundamental principles as suggested by ISSAI and threats in relation to non-compliance of these principles, ethical decision making models given by American Accounting Association and Mary Guy and audit risk, risk assertions and procedures used for substantive test of details.
Bolts Ltd is likely to acquire Steel Pty Ltd. For the analysis of potential acquisition, verification of accuracy and completeness of cash flow statement for the year ended 30 June 2012 is required but the CFO of Bolts Ltd require the sales and profitability rather than cash flows. In the view of CFO the cash flow issues will not be helpful in identifying the likelihood of engagement and that the acquisition will provide substantial future financial benefits. The threats that may incur due to non-compliance of fundamental principles include the following:
An influential and biased audit opinion – The analysis report that will be prepared by the auditor to guide the stakeholders of the company for the potential acquisition will be influential and biased since it is not independent as during the discussion the CFO asked the auditor to shift his attention towards analysis of sales and profitability and not to verify the accuracy of Cash Flow Statement to identify the potential future cash flows from the target company (Laughlin, 2010).
Non- compliance of materiality – The concept of materiality states that while exercising professional judgement, an auditor shall consider the materiality of transactions for his decisions. For an analysis of potential acquisition of a company, the cash flows that can be generated from the company are material to decide about the acquisition. Therefore if the focus is being made on the sales and profitability of the company and cash flows are ignored, the concept of materiality will be violated and therefore there is a threat of non-compliance of fundamental principles which relates to professional judgement of auditor and consideration of relevance of materiality of transactions involved.
If the requirements of CFO are complied for the analysis the following fundamental principles will be at the risk of being breached:
Principle of Ethics and Independence – In accordance with ISSAI, the auditor shall remain independent while conducting the audit. The CFO of Bolts Ltd. is affecting the independence of auditor by asking him to focus on sales and profitability rather than cash flow statement of the target company. As a result the opinion of auditor may be influential. While preparing the report for the potential acquisition of Steel Pty Ltd, the auditor shall not be influenced by the opinion of CFO, otherwise this will be considered as the breach of principle of independence.
Principle of professional judgement and professional scepticism – The auditor shall apply own professional judgement and scepticism developed by him through experience and knowledge and application of his professional skills. The auditor using his professional judgement decided to verify the cash flow statements of the company for the analysis of potential acquisition and therefore he shall implement his decision. If he follows the requirement of CFO to verify sales and profitability rather than cash flows, the principle of application of professional judgement could be at the risk of being breached by the auditor (Leung, 2015).
(a) Work through this scenario using the American Accounting Association decision-making Model, and decide what action Luke should take.
The American Accounting Association model involves a seven stage process for ethical decision making. The decision about the action to be taken by Luke can be taken by using the following seven steps or questions:
Determine the facts
Luke and Zane are audit seniors working in same accounting firm for last 18 months. They both are competitors of each other seeking promotion to audit supervisor for which only one vacant position is available. On a particular job Luke had to replace Zane since Zane already had another assignment with long-term client. Client told the audit manager that he was not impressed by Zane as he missed various issues and used to arrive at work late. Luke realised that Zane did an excellent job by identifying various issues that could be missed. Luke also identified that the client had a personality conflict with Zane because of which he was misleading the manager. Luke could finish the audit, resolve the issues and can obtain good review to help him in his promotion. Audit manager is unlikely to bring the unsupported allegations of client to the attention of Zane (Leslie, 2012).
Define the ethical issue
The stakeholders to the issue include the audit manager, audit client, Luke and Zane. The ethical issue is with Luke to decide about getting promotion for self or protect the rights of Zane by informing the manager about his excellent performance and personality conflict with client.
Identify the major principles, rules and values
The ISSAI suggest that the auditor shall display ethical behaviour and conduct which do not create disrepute to the profession. The major principles of ethical behaviour include principle of beneficence which focus on duty to do well to others, principle of justice and principle of respect of persons to protect the rights of others.
Specify the alternatives
The alternative course of actions available with Luke is to finish the audit by resolving the issues and obtaining good reviews for promotion or to disclose the facts to the audit manager about the excellent performance of Zane and personality conflict of Zane with the client.
Compare values and alternatives – see if clear decision
The ethical values suggest that the auditor shall protect the right of others by doing well to them and ensuring justice to them. This ethical behaviour that shall be complied matches with the second alternative to disclose the facts about the performance of Zane to the audit manager and prevent him from the misleading action taken by the client.
Assess the consequences
The consequences of adopting the alternative course of action that matches with the values and principles of ethical principle will be that Luke will not be able to get promotion for self and the rights and justice to Zane will be protected due to transparency of facts and as a result of excellent performance of Zane his chances of promotion will be increased.
Make your decision
Luke shall disclose the facts about the excellent performance done by Zane during the audit to the audit manager and the facts about the conflict between them in order to prevent the audit manager from being misled by the client and ensure justice (Anderson, 2015).
(b) Would your decision be any different if you used the Mary Guy decision-making model?
Under this model Mary Guy suggested ten core values which shall be referred while making ethical decisions. These values include caring, honesty, accountability, promise keeping, pursuit of excellence, loyalty, fairness, integrity, respect for others and responsible citizenship. There are five rules to integrate these values in ethical decision making which are as follows:
Rule 1: To consider the wellbeing of others including those who are non-participants.
Rule 2: To act as a member of community rather than acting as an isolated member emphasizing loyalty, integrity, respect for others and responsible citizenship.
Rule 3: Obey the law and not depending on it solely based on integrity and responsible citizenship.
Rule 4: Emphasizing the values by calling the question about what sort of persons would do such thing.
Rule 5: Respect the customs of others but not at an expense of own ethics ensuring accountability, fairness, integrity and respect for others.
By applying these values and rules in the given case study of Luke and Zane the decision taken by Luke for the course of action chosen under AAA Model will not change. These values focus on respect for others, fairness and responsible citizenship which can be adhered to by Luke only if he disclose the true facts about the performance and conflict to the audit manager rather than hiding them and obtain good reviews to get promotion. However, Rule 5 of this model suggests that the customs of others shall not be respected at the expense of own ethics. The decision taken by Luke will affect his promotion which means that the respect for Zane will be at his expense of not getting the promotion. But this is not an ethical expense for Luke and thus his decision shall be the same to comply with Mary Guy decision making model. Rule 4 also suggests that these things are done by those people who are not professional and are incapable. Rule 2 emphasize to act as member of community by protecting the rights of others and ensuring justice. Thus the ethical decision under this model for Luke will be to protect the rights of Zane by disclosing the true facts to the audit manager rather than hooding them for individual interest and self goals (Stephanos, 2012).
The peak Sawmill Limited operates a timber sawmill in a regional town. As a senior on the audit of the company, analytical procedures were performed which revealed that the average number of days to make Payment to creditors has declined to a large extent during the last three financial years. From the investigation it was also found that more than 90 percent of the accounts payable includes the log suppliers. The internal control of the company for accounts payable include matching the details of goods received with the invoice issued by the supplier and the discrepancies occurring from the invoice and the actual amount charged is sent to the supplier through “request for credit” form which is already pre-numbered. The correct amount of invoice is entered into the accounting system for accounts payable and the balance of accounts payable from the creditor’s ledger at the end of month is reconciled with the monthly statement of supplier. The reasons of discrepancies include unprocessed invoices which are so due to pricing differences, difference in date of recording and payment, requests for credit and discounts disallowed for settlements by the suppliers. It has been informed by the financial controller of the company, Cathy Vernon that the negotiations with the suppliers have been going since past year due to increase in the price of timber. He also reported that the management is slow in communicating the implementation of contracts and revised prices. The incorrect pricing has also caused holding back of invoices by five biggest suppliers as observed from the inspection of accounts payable reconciliations of them (Laughlin, 2010).
(a) List two key assertions at risk in relation to accounts payable.
The two key assertions that are at risk with regards to accounts payable for the company are as follows:
1. Weak internal control for accounts payable – The internal controls of the company in relation to accounts payable are not strong enough to ensure that the accounts payable balances are accurate and risk free. The goods received from the supplier are matched with the invoice issued by the supplier in respect of goods and the discrepancies are communicated to the supplier through request for credit form but after this stage the amount of invoice is recorded in the accounting system of accounts payable and not the rectified amount which creates differences in the actual amount of account payable balances. However the supplier’s monthly statement is reconciled with the balances of account payables in ledger but the discrepancies cannot be reflected since the entries in the ledger as well as the supplier’s statement is made from the same invoices and the status of request for credit forms is neither updated in the accounting system nor reflected in the monthly statement of the supplier. Thus the holding back of invoices is the major issue which creates the risk for the accounts payable not being reported accurately.
2. Delay in communication of implementation of contracts and revised prices – The prices of timber are such that they keep on increasing due to which pricing difference arise between the suppliers and the company as a result of difference in timing of record date and payment date. Also the management delays in informing the accounts payable personnel about the date of implementation of contracts and the revised prices of timber which affects the amount of recording transactions accurately. As a result the transactions are not recorded at revised prices in the accounts payable accounting system.
(b) Provide your justification for each assertion.
The justification for each of the above mentioned assertion is as follows:
1. The weak internal controls result in increase of chances of fraud and errors in the accounting system and inappropriate reporting of amount of account payables. This creates risk in the accuracy of balances of accounts payable for the company as the invoices are held back and the request for credit forms are not updated in the accounting system.
2. Due to delay in communication of date of implementation of contracts between the company and suppliers and informing the revised prices of timber to the accounting department, the transactions are recorded in the accounting system at old prices which creates pricing differences and discrepancies in the amount of invoice issued by the supplier and the actual amount charged by the supplier. This also results in large difference in the date on which transactions take place and the date on which transactions are recorded in the system giving rise to huge pricing differences because of increasing prices of timber (MV Kali, 2012).
(c) For each assertion, outline one substantive test of detail to obtain sufficient appropriate audit evidence.
The substantive test of detail for each of the above mentioned assertions are as follows:
1. For the substantive procedures that relates to test of details for internal control relevant for accounts payables, the third party information shall be obtained from the supplier to verify the amount of balance at the end of the month in the credit ledger of the company as obtained from the accounting system with the ledger balance of supplier at the end of the month. This will help in the identification of the discrepancies in the balance of Account payables and reasons for the differences. The request forms sent to the supplier shall be verified with the discrepancies in the supplier’s invoice and actual amount charged as noted separately or calculating by obtaining information from the bank account used for payment to suppliers and copy of invoices of suppliers with the company.
2. The test of details that can be performed to identify the delay in communication of contracts entered with suppliers and revised prices of timber include the verification of communication mails and other documents sent by the management to the accounting department. The affect of these communications can be tested by comparing the ledger balances before recording the details of contracts and revised prices in the accounting system with the ledger balances of accounts payables after updating the details.
From the above mentioned examples and case studies which relate to the application of auditing and accounting practices, it can be concluded that the these practices involve e values and ethics such as professional judgement, independence, ethical decision making, respect for persons, responsible citizenship, materiality, integrity, fairness, accountability etc. For the effective auditing process use of analytical and substantive audit procedures is appropriate to collect sufficient and appropriate audit evidences. Thus the auditor shall ensure ethical decision making and compliance of fundamental principles and core values for the effective application of audit practices.
Anderson, U.L., Christ, M.H. & Janvrin, D. 2015, "Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on The Institute of Internal Auditors' Proposed Enhancements to the International Professional Practices Framework (IPPF)", Current Issues in Auditing, vol. 9, no. 1, pp. 150327093910007.
Chan, D.Y. & Vasarhelyi, M.A. 2011, "Innovation and practice of continuous auditing", International Journal of Accounting Information Systems, vol. 12, no. 2, pp. 152-160.
Laughlin, R. 2010, "A comment on "Towards a paradigmatic foundation for accounting practice"", Accounting, Auditing & Accountability Journal, vol. 23, no. 6, pp. 759-763.
Leslie C. Levin & Lynn M. Mather (eds.) (2012). “ Lawyers in Practice: Ethical Decision Making in Context”, The University of Chicago Press.
Leung, P., Coram, P., Cooper, B.J. & Richardson, P. 2015,Modern auditing & assurance services, 6th edn, John Wiley and Sons Australia, Milton, Qld.
M V Kali Prasad 2012, Audit conclusions and reporting, Kasturi and Sons Ltd, Chennai.
Maqellari, M. & Dika, I. 2016, "Materiality And Risk Essential Pillars Of The Auditor's Work", European Scientific Journal, .
Research and Markets: The Best Accounting Tips & Techniques for COOs for Year-End 2010 2011, , Business Wire, Inc, New York.
Stephanos A & Joanne R. 2012, “Whistleblowers in Organiizations: Prophets at work?”, Journal of Business Ethics, 110(1)71-84pp