Discuss about the Auditing and Professional Practice.
1. The Auditing standard of Australia AUS 202 states that the purpose of an Audit of financial report is to facilitate the auditor to express an opinion on the financial statement prepared on the basis of established financial reporting framework. For the purpose of performing the audit objectively and efficiently the standard has prescribed general principles of an Audit. It is mandatory for Auditor to act in accordance with the ethical requirement of CPA Australia and ICAA (Gray and Manson 2007). The fundamental principle of Audit prescribed by the standard are:
An Auditor is required to encounter a number of threats while rendering professional services these threats may result in the non compliance of fundamental principles (Dogui and Herasâ€ÂSaizarbitoria 2014). The threat for noncompliance with fundamental principle may come from the following:
In the given case the Bolt Ltd has asked its auditor to analyze the potential accusation of steel pty ltd and to prepare a report on it. The Auditor was performing his duty but after reviewing a draft report the CFO has asked the Auditor to focus on sales and profitability and to avoid the analysis of cash flow. The fundamental principle includes independence but in the given case it can be seen that CFO is providing direction or judgment about the analysis to be made thus hampering the independence of the auditor. As the auditor is unable to analyze the situation independently this will affect competency with which an auditor functions. Therefore violation of one fundamental principle of independence will further lead to the violation of another principle of competence and due care. The objectivity principle requires the auditor to perform the work in such a manner that the quality of the work is not compromised. The suggestion of the CFO if followed will not only be violation of independence but it will also hamper the quality of work performed thus principle of objectivity is also violated.
In the given case the threat to violation of fundamental principle is from self interest of the auditor. In order to protect the audit engagement the auditor may compromise on the quality of the analysis. The fundamental principle is at risk due to intimidation. In the given case the auditor was deterred from performing his task effectively thus violating the fundamental principles.
In conclusion it can be said that the discussion with the CFO indicates that there is a threat to the fundamental principles of independence, objectivity and competence. This threat to the fundamental principles arises from self interest and intimidation faced by the auditor.
2. (A) In a business a manager or an executive is always engaged in making decision. The decision made by them affects various stake holders therefore it is very important that an ethical decision making process is followed. The American Accounting Association (AAA) Model puts forward an effective framework within which an ethical decision can be made (Craft 2013). The AAA model was developed from a report written by Langenderfer and Rockness in 1990 which has suggested seven logical steps for an ethical decision making (Thomas 2012). These steps are outlined below:
In the given case of Luke and Zane the AAA model can be used for ethical decision making the seven steps are given below:
B) The Mary Guy in 1990 has developed a list of ten core values for making ethical decisions (Shapiro et al. 2014). These values are:
Apart from the ten core values Gury also suggested five rules that integrate the values and help in ethical decision making (Lauesen 2012). They are:
The decision to inform the manager about the work done by Zane is in accordance with core value of outlined by Mary Guy. Further the decision is in accordance with the rules outlined by her therefore it can be concluded the decision taken will remain the same.
There are two important key assertions at risks in relations to the accounts payable are as follows
If the degree of assessed level of control risk for the completeness and valuation assertions is low, then the auditor may review low number of cash disbursement transactions for a determined period after the date of balance sheet, so that the length of review period is shortened up in order to exclude or reduce reconciliation of vendor’s invoice on monthly basis by undermining the records of clients.
All the goods and services which the entity received prior to the end of financial year under the indications of issuance report must include accounts payable at the end of the accounting period. It is the duty of the auditor to obtain from the clients those files for all the reports which has been received as unmatched with the invoice of the vendors. The auditor on the other hand should then inspect the receiving reports which are issued at the end of the accounting year in relation to the invoice of the vendors to determine if it has been included in accounts payable. In addition to these, if the client has not received the related invoice of vendors report, then the auditor must inspect to the clients purchase order or prior to the vendors invoice for identical items. The auditor on the event of unmatched reports could consider calling the vendor to determine the amount of obligations.
For each of the assertions there has been one substantive test in order to obtain sufficient audit evidence which are follows
The extent of analyzing the client’s reconciliations significantly varies depending upon the level of control risk. The auditor should recall three assessments to evaluate the level of risk such as low medium or high. A probable procedure for a client reconciliations are as follows;
Vouching of other Reconciliation Items in Order to Support the Process of Documentations.
Treasury operations: The information to be long-established or requested under the audit evidence verification is related to the treasury operations and utilization of treasury management instructions.
Reference
Badertscher, B., Jorgensen, B., Katz, S. and Kinney, W., 2013. Litigation risk and audit pricing: The role of public equity. Unpublished working paper, University of Notre Dame, University of Colorado Boulder, Columbia University, and University of Texas at Austin.
Craft, J.L., 2013. A review of the empirical ethical decision-making literature: 2004–2011. Journal of Business Ethics, 117(2), pp.221-259.
Dogui, K., Boiral, O. and Herasâ€ÂSaizarbitoria, I., 2014. Audit fees and auditor independence: The case of ISO 14001 certification. International Journal of Auditing, 18(1), pp.14-26.
Gray, I. and Manson, S., 2007. The audit process: principles, practice and cases. Cengage learning EMEA.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: A Risk-Based Approach to Conducting a Quality Audit. Cengage Learning.
Lauesen, L.M., 2012. Ethical Decision Making. Multidisciplinary Journal for Applied Ethics.
Shapiro, J.P., Stefkovich, J.A. and Gutierrez, K.J., 2014. Ethical decision making. Handbook of Ethical Educational Leadership, p.210.
Srivastava, R.P. and Kogan, A., 2012. Assurance on XBRL instance document: A conceptual framework of assertions. International Journal of Accounting Information Systems, 11(3), pp.261-273.
Thomas, S., 2012. Ethics and accounting education. Issues in Accounting Education, 27(2), pp.399-418.
Waller, W.S., 2013. Auditors’ assessments of inherent and control risk in field settings. Accounting Review, pp.783-803.
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