Auditng and Assurance Standards Professional Accountants

Questions: 1. The following are a number of different situations where there may be violations of the ethical principles .You are asked to state whether there has been a violation of the Accountants Code of Ethics and state which ethical principle has been violated briefly providing a reason for your opinion: (a) Peter Harmon , professional accountant, does the bookkeeping, prepares the tax returns and provides various management services for Bunker L td .When providing these services it frequently advises its clients to buy its computer equipment from Computer Services Ltd. Computer Services has agreed to pay Harmon a 10% commission if the referral leads to sales for Computer Services . (b)David Smith ,an auditor ,was asked by Allied Insurance,for its help in finding clients. David Smith subsequently referred ten clients to the insurance company without letting them know. (c) Wrench and company,Chartered Accountants,keeps details of its clients in its computer records at its office .Since i t also has time available it will allow its clients to use its computers if they requirethem.If necessary Wrench will arrange for members of its staff,mainly administration but sometimes from the audit branch to assist with the input of data for these clients.The staff from the Audit section can be involved in the audit of clients, depending upon the Audit Partners requirements. (d)Stephanie Barry has an audit client,Williams Pty Ltd ,which uses another public accountant forits management services work. Barry sends her firms literature regarding its management services capabilities to Williams on a monthly basis,unsolicited . 2. Indicate the type of opinion that should be expressed in each of the following situations,providing reasons for your choice. (c) Management have excluded from the financial report the necessary disclosures in relation toa contingent liability .If this becomes an actual liability it will have a material effect on the financial report. (d) A significant proportion of a retailers sales are on a cash basis and inadequate records have been maintained. There are no audit tests that can be done to assure yourself that cash sales are accurate. (e)You have been asked to do the audit for a new client this financial year .While you are satisfied that there appears to be no material misstatements for the information during the current financial year the client will not provide any information about the opening balances of accounts at the start of the financial year. (f) You have just started auditing the financial statements of a client which has not been followingthe Australian Accounting Standards since it began operating five years ago. Answers: 1. a) APES 110, Code of Ethics for Professional Accountants clearly states in Section 240 that an auditor has full rights to enter into an arrangement with any dealer or such other shop keeper wherein he would be entitled to receive a referral fee if any of his recommended clients buy something from them. However the same is acceptable only once it is disclosed to the concerned client about such an arrangement mentioning the details about the dealer and the calculation of such a fee (APESB, 2010). Therefore in this case Peter Harmon is said to have violated the APES 110 as he had not informed the client about his agreement with Computer Services Limited. b) An auditor is expected to maintain confidentiality in his conduct. It is a pre-requisite of the said profession and hence giving away details about the client to any third party be it an insurance company also should be done after prior consent form the client (cpaaustralia.com., 2014). Therefore in this case David had not taken any assent from the client and forwarded their contacts to Allied Insurance which was in contravention to the ethical code of conduct which details about maintenance of secrecy of client data. c) A professional is entitled to perform one task at a time i.e. either audit or non-audit. Simple reason behind the same is the maintenance of independence. An auditors profession requires him to be independent and unbiased in his conduct and performing those two tasks of the client would be contradicting the same (Causholli et.al. 2015),. However if the auditor takes due permission from the client for doing both the tasks then the same is allowable but at the same time the work has to be again checked by another auditor of the same firm so as to be doubly sure about the maintenance of integrity and objectivity. Thus the auditing staff can do the book keeping work as well but only after getting due permission from the client. d) The fundamental principles of the auditing profession clearly mentions that an auditor can advertise his professional work but in a certain specific manner so that it does not bring any kind of disregard to the profession. On critically understanding the said case it is concluded that the performance of Barry is unethical and that he has not complied with the basic principles of professionalism by sending the management services to the client without is assent just to snatch away the work being performed by other auditor(ethicsboard.org., 2012). Therefore Stephanie Barrys act brings disrepute to the auditing profession. 2. c) Liabilities which are reflected at the bottom of the line of balance sheet are contingent liabilities and they are an inseparable part of the financial statements. They generally show the liability that may arise in future and is materialistic in nature to the extent that it would have a major financial impact on the company. Thus its disclosure is a must since the investors and the other users of the financial statements take decisions with regards their investments basis the financial statements and this item also is a contributor to the same (aasb.gov.au., 2011). Therefore an auditor should ensure that such contingent liabilities should be adequately disclosed and if not then an adverse opinion should be given. Hence in this scenario since the management has excluded the disclosure of the said liability, the auditor is to give a qualified audit report. d) Maintaining books of accounts is a must for all entities even if it conducts its major part of sales in cash. If the books of accounts are not prepared in a timely manner then the same would be impossible for the auditor to conduct the audit. Thus in the present scenario the auditor will not be able to commence his work of audit at all thus would not be able to give any opinion as such. e) Verification of opening balances is one of the main stages of an audit and the first as well. Without verifying last years closing balances it would difficult to decide upon the correctness of balances since if the opening balances are incorrect then it would show an incorrect account balance at the end of the present year as well and the same would be carried forward year on year basis. Thus even if the client does not permit the auditor to verify the same, he should take all steps to try to assure himself about the sanctity of the opening balances. Further to this even if the auditor is able to verify the same, he should give a negative opinion just to safeguard himself against any future legalities. f) It is a compulsion for all the entities which are registered in Australia to maintain their financial statements as per the Australian Accounting Standards. However, if any company does not maintain so then the auditor should ask the company to again prepare the books of accounts as per the said standards (aasb.gov.au. 2012). Even after intimation if the Company does not then the auditor should give a qualified report stating the said fact. References APESB, (2010), APES 110 Code of Ethics for Professional Accountants, https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf aasb.gov.au., (2011), AASB 137 -Provisions, Contingent Liabilities and Contingent Assets, https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf aasb.gov.au., (2012), AASB 101- Presentation of Financial Statements, https://www.aasb.gov.au/admin/file/content105/c9/AASB101_09-07_COMPsep11_07-12.pdf Causholli,M., Chambers, D.J., Payne, J.L., (2015), Does Selling Non-Audit Services Impair Auditor Independence ? New Research Says, yes, American Accounting Association, vol.9, no.2, pp. 1-6 cpaaustralia.com., (2014), An Overview of APES 110 Code of Ethics for Professional Accountants, Available at https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/ethics/an-overview-of-apes-110-code-of-ethics.pdf (Accessed 29th January 2017) ethicsboard.org., (2012), Revised Code of Ethics Completed, Available at https://www.ethicsboard.org/projects/revised-code-ethics-completed (Accessed 29th January 2017)