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ACCT3005 Auditing Theory and Practice Oz Assignments
The Auditing Issues
Auditing is a vital activity in a company setup and if not done properly, a company can suffer major financial losses and even collapses like the Harris Scarfe in Australia which was shut down in 2000 (Sookhak et al. 2014). Harris Scarfe collapsed due to poor management, poor internal control and poor auditing and accounting activities. The internal auditors were not independent, and their decision was being influenced by some of the management members (Wang, Li and Li 2014). An example is when the Harris Scarfe accountant, Mr. Wight alleged that he was told to make false accounting reports by Hodgson who was one of the Harris Scarfe management members. The collapse of Harris Scarfe has brought the discussion about the role of auditors in a company growth (Wang, Li and Li 2015). Therefore, the paper has looked at three audit issues that led to the closure of Harris Scarfe one of the biggest companies in South Australia. The issues to be discussed are auditing business ethics, independence of auditors, and the composition and the roles of audit committee.
According to Hashem et al. (2015 p. 98), the auditor independence is where both the external and the internal auditors are allowed to perform their duties without interference from the company management they are working for or any other party of interest. Independence of auditor is an issue that cannot be ignored by any business interested person. Rasheed (2014 p. 367) states that if the auditors` reports are influenced by other people then those reports are not accurate and can lead the company in path of collapsing. It is the responsibilities of the auditors to ensure that they are not influence by the interested people who may be harmed by the audit reports. Harris Scarfe suffered financial losses because some of the management did not allow the auditors to perform their work independently (Kavrar and Y?lmaz January 2017). A good case is where Mr. Wight testified that he was compelled by Mr. Hodgson who was one of the Harris Scarfe management to prepare false auditing reports for that company`s financial year. The work of the auditors is to act as oversight and report any suspicion of mismanagement of funds and this cannot be done if they are not independent (Sookhak et al. 2014). Therefore, to prevent collapse of companies to today`s market, the management should not interfere with the auditors` work.
Every department in an institution must run in accordance with the code of ethics that have been dictated by the institution in question and the state in which that organisation is based. In that manner auditing processes must also be done in compliance with the code of ethics in auditing profession (Sookhak et al. 2015). One of the ethics is independence which has been discussed as the first issue in the part above. Other ethical codes that auditors should follow as prescribed in the Australian law include competency, integrity, objectivity and confidentiality (Griffin and Wright 2015). Competency requires the auditors to take part in auditing activities that they are knowledgeable on, they should not take part in auditing activities that they do not know. Integrity requires the auditors to perform their work based on trust, and write their recommendation based on their judgment not influence form other people (Fernie and Sparks 2014 p. 10). Objectivity requires the auditors to conduct their activities in an objective manner and assess the reports without the influence form the interested parties in the audit process. And lastly, confidentiality requires auditors to only show the contents of the auditing report to the relevant people and not every person who want to see the report (Sookhak et al. 2015). Auditors from Harris Scarfe did not follow the code of ethics and that is one of the reasons why the company collapsed. Wight could have not agreed to be influenced by his boss because ethically, he should not agree to influence by external forces.
Composition and roles of Audit Committee
The composition of an Audit Committee is also an important factor when an organisation needs a trustworthy financial reports. According to Kshetri (2013 p. 372), the audit committee should have three to five people who are very independent and make sound decisions without personal or external influence. However, the composition of the Harris Scarfe audit committee was not that good that is why the company had financial problems. The figure below shows the composition of Harris Scarfe Company
Harris Scarfe Company Audit Committee in 1998 to 2000 (Kavrar and Y?lmaz January 2017)
The table has shown that the Harris Scarfe Company Audit Committee was majorly made of directors who were not independent hence the decision by the committee would be easily be interfered with. Kasim and Sanusi (2013) reported that the major role of an Audit Committee in any company is oversight. The committee can also investigate how the company`s money is spent and make necessary recommendations. Therefore, if the composition of the Audit Committee is not according to the regulations that dictate the formation of an Audit Committee, the roles and functions of the committee will be affected badly (Rönnberg, Lindgren and Segerholm (2013). The composition of the Audit Committee should be in a way that the committee members should discuss the financial reports with both the internal and external auditors in absence of the management and non-independent directors (Kavrar and Y?lmaz January 2017).
The relevance of Developments following the Collapse of Harris Scarfe
Harris Scarfe was a giant industry in the South Australia, hence its collapse brought about major developments in accounting and auditing professions (Kavrar and Y?lmaz January 2017). Harris Scarfe was closed with the debt of close to $ 265 million which was a huge loss for the Australian stoke market hence an investigation was conducted to study the reasons for the collapse of the company (Fernie and Sparks 2014 p. 10). Other companies also suffered the same fate in that same period when the Harris Scarfe collapsed and therefore, the Australian business fraternity came with developments to prevent closure of other such business entities. The developments included the amendments of Corporate Law Economic Reform Programso that the problem could be eradicated (Kasim and Sanusi 2013).
The government of Australia responded to the collapse of the companies by giving the International Accounting Standards the legal baking. Even though these standards were there before the companies started to collapse, the government did not efficiently backed these policies and from that experience, the government backed the International Accounting Standards fully ((Rönnberg, Lindgren and Segerholm 2013). Other reform was that the Audit Committee of any corporate institution must be involved in the auditing process. In other words, the Audit Committees, should not just wait for the final reports form the auditors, they should be part of the auditing process (Sookhak et al. 2015). They should ensure that the auditors conducting the process are independent, competent, and qualified for the job. The Audit Committees should also select and arrange the auditors who should conduct the auditing process according to the law. The analysts’ independence were also mentioned in the reforms (Griffin and Wright 2015). The analysts should study the report by the auditors and make recommendations which are fair and true so that the investors should not be misinformed. The recommendations by analyst is very vital in determining the fate of the corporate organisation. Therefore, if their analytic work is interfered with, they will cost investors a lot of money and the public will not know the truth about the company being analysed (Hashem et al. 2015 p. 98).
Another development that was made was creation of the Corporate Governance Councilin Australia to monitor the way managements are governing their corporate organisations (Wang, Li and Li 2014). It was found out that not only the accountants and auditors were the cause of corporate collapses, the leaders of the organisations which collapsed were also to be blamed (Wang, Li and Li 2015). For example there was bad governance at Harris Scarfe because some of the directors compelled the auditors to record false financial reports. Therefore, the Corporate Governance Councilhas the role of regulation how the leaders of corporate companies should behave (Kavrar and Y?lmaz January 2017).
The collapse of Harris Scarfe and other corporate organisations shaded some light on the accounting and auditing issues that should be treated with outmost care. The independence of accountants and auditors should be respected at any cost (Fernie and Sparks 2014 p. 10). The corporate managers should allow their accountants to conduct their activities in an independent way for an accurate report to come out. The auditors should also know their code of ethics and comply with them every time they are auditing a firm (Wang, Li and Li 2015). Lastly to tackle well the accounting and auditing issues, the corporate management should appoint Audit Committees which are totally independent form others (Sookhak et al. 2015). The developments that were brought as a result of collapse of the corporate organisations in 2000s have played a significant role in the corporate growth in Australia (Kavrar and Y?lmaz January 2017).
Assessment Three: Reflective Essay
Important Attributes of a Qualified Auditor
Qualified auditors are vital for a progress of any corporate organisation (Christensen et al. 2016), the auditors who handle the auditing processes of Harris Scarfe and other corporates that were shut down on that period lacked a lot of qualities and attributes. The knowledge management I have gained in may study, shows that the important attributes of a qualified auditors are not just learnt in class, some are personal. Yeh et al. (2014 p. 98), supported my argument in their research and argued that there are three types of qualities and attributes of an auditor. They include, the statutory qualification, professional qualification and general personal qualities. Huang and Nicol (2013) discussed the statutory qualification as the situation where the auditor must be a certified member of a chattered Auditing organisation as per the laws of Australia for example, the Institute of Internal Auditors in Australia.The auditors must also pass the examinations set by the charted organisation to qualify as a professional accountant (Kavrar and Y?lmaz January 2017).
The professional qualification measures the professionalism of the auditor, it defines what the auditor should know in order to be considered as a professional auditor (Khlif and Samaha 2014). One, the auditor must have knowledge of the various laws that govern businesses and corporations which include the banking acts, Companies act, the contract acts and the sale of goods acts. Second quality is that the auditor should know almost all the auditing techniques and should be up to date with the changes and reforms in the auditing sector (Kavrar and Y?lmaz January 2017). Third, the auditor should have vast knowledge of the auditing principles, its practices and theory of auditing Al-Khaddash, Al Nawas and Ramadan 2013). Fourth and one of the most important professional attributes is that the auditor must be educated in computer auditing and have knowledge on auditing software available in the market (Lim et al. 2016 p. 185). Lastly the auditor should understand the economic principles, the commercial laws and should be knowledgeable in mathematics and statistics.
When I was analysing the journal by Kavrar and Y?lmaz (January 2017) about the collapse of corporate organisations including Harris Scarfe, I learnt that the accountants and auditors in these firms had the attributes that I have mentioned in the paragraph above. The socking thing is that even though the auditors of Harris Scarfe and other fallen corporations had both statutory and professional qualities, they still did mistakes which affected their various corporations a lot. I discovered that most of the auditors lacked the third type of attribute which are the personal qualities and are not learnt in class. Al-Khaddash, Al Nawas and Ramadan (2013) outlined these qualities as honesty, impartial, cautious and vigilant, courage, common sense, and ability to investigate and come up with facts. If Mr. Wight could be honest, he should have not tempered with the auditing reports even if he was compelled to record false reports. Impartiality is the ability of an auditor to discourage internal or external influence in his/her judgement (Eshleman and Guo 2013). He or she should not be bias, rather he should produce a balanced report.
The auditors should always be vigilant and cautious and should always be alert in working setup and have open eyes (Emeh and Appah 2013 p. 14). If the Harris Scarfe auditors could be vigilant and cautious, they could have found out that there was a financial problem and give recommendations on how to fix the problem before the corporation collapsed. The common sense could have helped the auditors in Harris Scarfe to make good decisions while working, however, many people do not possess common sense (Al-Khaddash, Al Nawas and Ramadan 2013). Lastly, the auditors of Harris Scarfe other firms did not have the investigative attribute. Investigations can help and auditor to come up with a lot of facts which can help the company grow (Siriwardane et al. 2014 p. 193).
How the Knowledge in the Subject will help me in Future
As an aspiring auditor, the knowledge I have gained while studying this subject will be of help to me in my future career. I have learnt many mistakes that auditors make while working which costs them a great deal. The case of Mr. Wight has taught me that no matter the pressure, I can never compromise the outcome of the audit report even if the manager has threatened to sack me. I have learnt that there are laws which protect the auditors from being exploited by their bosses. Therefore, if any boss will threaten me in the future because I have disagreed with him or her, I will take legal actions against him. I have also learnt the attributes of a qualified auditor which I am going to practice so that I can be perfect. I have learnt that auditing is all about knowing what you are doing and stand by your principles. The subject has been a big impact in my career life.
Auditors should learn to have all the three types of attributes which are statutory, professional, and personal qualities so that they can deliver quality work (Kavrar and Y?lmaz January 2017). I have learnt that the auditors of Harris Scarfe and other corporation that collapsed in 2000s lacked the personal qualities of a good auditor and that why they failed their corporations. I will not make the same mistake in future, I will consider all the qualities and attributes of a qualified auditors in my line of work. I have also learnt that auditing department is a vital body and must be independent so that it can perform its duties perfectly. Above all the auditors should work hand in hand with the management and other departments so that they can get accurate data during auditing (Siriwardane et al. 2014 p. 193). Huang and Nicol (2013) found out that poor relationship between the accounting and auditing departments and the other departments the source of false financial reporting. Hence in future, as an auditor I will ensure that there good relationship between my department and others within the company and outside.
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