Scenario One

Discuss about the Auditing and Professional Practices for a Report on Different Scenarios.

The financial feasibility of the proposed acquisition is better adjudged by analysing the cash flow forecast rather than analysing the sales and profit forecast (Havard, 2013). Therefore, it is the prime responsibility of the auditor to verify the genuineness of the cash flow forecast in an audit of merger and acquisition. In the present scenario, the auditor has been appointed by Bolts Ltd to audit the management’s estimations regarding acquisition of Steel Pty Ltd. Thus, the primary objective of the auditor in this audit will be to report to the owners of Bolts Ltd as regards the financial viability of the proposed acquisition of Steel Pty Ltd. For this purpose, the auditor is required to verify the correctness and completeness of the financial forests results as regards sales, costs, profits, and cash flows (Financial Forecast and projections, 2001).

Since, the verification of cash flow forecast is the essential requirement of audit of the potential acquisition of Steel Pty Ltd., therefore, the auditor need to pay more attention to this aspect. In this regard, the auditor should bear in mind that it is of paramount importance for him to comply with the fundamental principles of auditing. The fundamental principle of auditing includes accountability, integrity, objectivity and independence, competence, and rigour (Gray and Manson, 2007). The primary objective of the audit being conducted in relation to potential acquisition of Steel Pty Ltd  is to provide a reasonable assurance to the owners that this proposed acquisition will be financial advantageous for them.

Further, the principles of audit require that the auditor should maintain professional skepticism, which implies that the auditor should always have a questioning mind. The auditor should be alert to the situations that may pose threats to the compliance with the fundamental principles of auditing. In the present scenario, the management of Bolts Ltd does not want the auditor to verify the accuracy and completeness of the cash flow forecast (Gray and Manson, 2007). The auditor should be alert to this situation as there may be a possibility of management being involved in some kind of mischief. Thus, the management’s denial for verifying the cash flow forecast should be identified as a threat that may hinder compliance with the fundamental principles on the part of the auditor (Gray and Manson, 2007).             

Another threat could be the nature of information being audited in the audit of potential acquisition of Steel Pty Ltd. In this audit assignment, the audit has to verify the correctness of the forecast, which is being prepared by the management. The verification of the forecast becomes a challenging task for the auditor due to unavailability of the verifiable assertions (Gray and Manson, 2007). This means that the auditor does not have strong base to verify that whether the forecast is accurate or not. However, despite these threats and challenges, the auditor needs to comply with the fundamental principles governing the audit such as accountability, integrity, objectivity and independence, and competence. Following these principles, the auditor should make an honest report to the owners of the Bolts Ltd on the accuracy of the cash flow forecast (Gray and Manson, 2007). 

Scenario Two

The ethical issues arise in every business, but proper management of the ethical issues is crucial to manage the business adequately and conduct the affairs smoothly. In order to manage the ethical issues, it is important for the management to follow a structured approach that helps in resolving the ethical issues (Trevino and Nelson, 2010). The American Accounting Association (AAA) has prescribed a seven step decision making model, which is considered to be helpful in resolving the ethical issues in business (Cartlidge, 2011). The first step of the model prescribes to set up the foundation for analysis of the case by identifying the crucial facts about the case. It is needed to be kept in mind that there does not remain any ambiguity as regards the facts involved in the case at hand. This step is very crucial because the overall direction of the decision making process would be set based on the outcome of this step (Cartlidge, 2011).

The second step of this model is considered to be the most crucial as it relates to enlisting the ethical issues involved in the case at hand. This is an analytical step, which requires that the facts are analysed properly and the ethical issues are tracked based on that critical analysis of the facts (Wilson, 2014). The decision maker is needed to be impartial while analysing the facts and should link the ethical issues with those facts in such a manner that all the ethical issues at stake are identified adequately. The third step of the model comprises of recognition of the norms, principles, and values connected with the case at hand. At this step, the decision maker is required to think on the issues taking into account the social and professional ethics. Further, in regard to this, it is essential to note that the requirements of code of ethics or social principles would be taken as the norms against which the compliance has to be adjudged (Wilson, 2014).

The next step the model is to locate the alternative courses of actions that one could take to resolve the ethical issues in business (Jackson, Sawyers, and Jenkins, 2007). At this step, the alternative courses of actions are only identified without verifying them against the principles and values. The verification of the alterative courses of actions against the principles and values and evaluation of their appropriateness is done at the fifth step of the model. The sixth step is to analyse the outcome of the chosen course of action before finally resorting to the decision. Finally, at the last step, the decision maker jumps to the decision and decides what finally is to be done. Thus, the AAA model provides a comprehensive and concise approach to deals with the ethical issues in the business (Jackson, Sawyers, and Jenkins, 2007).

Applying AAA model on the current scenario, the decision could be reached as under:

Step 1: Facts of the case

Zane is taking up an audit assignment, which if was allocated to Luke, could have earned him a promotion. The relationship is in conflict with Zane and client now. Luke knows that Zane (current auditor) is right at his place, it is the client, who is misleading the audit manager and trying to defame the auditor (Work Ethics, 2016).

Step 2: Ethical Issues

Luke’s promotion depends upon this assignment, thus, the ethical issue is that whether Luke should favour the client and ask the audit manager to replace Zane disregarding the fact that Zane is right (Work Ethics, 2016).

Step 3: The Norms, Principles, and Values Concerning the Case         

The code of ethics of professional accountants applies on the current case. The code of ethics requires that the auditor maintains proper quality control while managing the client relationship. In the suspected cases, the auditor should inquiry about in more detail (Work Ethics, 2016).

Step 4: Alternative Course of Action                      

There are two alternatives available to Luke; first is to support the client and get the assignment and second is support Zane revealing to the audit manager that the client was wrong.

Step 5: Best Course of Action   

The best course of action for Luke in this situation will be to support Zane by revealing to the audit manager that the client is wrong and Zane is right at his place. This will be in conformity with the code of ethics.

Step 6: The Possible Outcome of Each Course of Action   

The first alternative may get promotion to Luke, but it is unethical and against the guidelines of professional code of ethics. The consequences of this alternative in the long run would be hazardous for Luke. Second alternative may not get him promotion as of now, but in the long run it would be really fruitful because it is in conformity with the ethical guidelines (Work Ethics, 2016).

Step 7: Final Decision 

Based on the possible outcome, the second option is better than the first one. Thus, Luke should support Zane by exposing the client in front of the audit manager (Work Ethics, 2016).

Another model namely Mary Guy decision-making model could also be applied in ethical decision making. All ethical decision making models are based on some common concepts such as honesty, accountability, loyalty, fairness, and integrity, thus, the final outcome of all the models is expected to be the same. Therefore, even if the current issue is analysed by applying the Mary Guy decision-making model, the final decision would remain the same.

Verification of the accounts payable is a crucial aspect to be considered by the auditor in auditing the current liabilities of a company (Schaeffer, 2008). Since the accounts payable covers a significant part of the current liabilities, therefore, the auditor need to pay special attention while verifying the accounts payables. Further, the verification of the accounts payables is linked with the stock verification also, thus, the auditor need to maintain professional skepticism throughout auditing the accounts payables (Schaeffer, 2008). The verification of the transactions is done on the basis of few verifiable audit assertions such as occurrence, completeness, accuracy, cut-off, and classification. In respect of assets, liabilities, and equity, the auditor is also required to take into account additional assertions such as existence, rights and obligations, and valuation (Delaney and Whittington, 2009).      

The occurrence assertion verifies that the transaction has actually been occurred and that it relates to the entity. This assertion helps the auditor in assuring that the fake transactions are not recorded in the books of accounts (Puncel, 2007). The completeness assertion relates to assuring that those all transaction, which should have been recorded, have in fact been recorded in the books of accounts. The accuracy assertion states that the recorded transactions have been reflected in the financial statement accurately. One of the most important assertions that the auditor has to take into account for the year end transactions is cut-off. The cut-off assertion requires the auditor to ensure that the yearend transactions have been recorded in the correct accounting period (Puncel, 2007).

In the present case, completeness and valuation are the two primary assertions that are considered at risk. The result of analytical procedures performed by the auditor depicts that the credit period of the account payables has fallen down to a significant level as compared to the previous years (Dauber, 2009). This sudden downfall in the credit period of the account payables raises doubt over the valuation of the account payables. Further, it has been identified that the internal controls over the purchase of raw material are also weak, which raises doubt over the completeness assertion in respect of the account payables. The internal controls are so weak that the invoices are not processed on time resulting into mismatch of the book balance with the supplier’s books (Graham, 2015).

The auditor needs to verify completeness and valuation assertions in respect of account payables in a great detail. It is essential for the auditor to apply substantive audit procedures to verify the assertions in detail (Gray and Manson, 2007). In the present case, the auditor needs to collect conclusive evidences as regards completeness of the account payables. Applying the substantive procedures for all the accounts payables may be problematic, thus, the auditor should draw samples based on materiality (Whittington, 2012). Further, the auditor should first verify the internal controls that the entity has in place to ensure that the transactions relating to purchase, payment, and discount settlements are recorded appropriately. After verifying the internal controls, the auditor should proceed with verifying the account payable ledger.

In order to ensure that all the transactions which should have been recorded, have in fact been recorded, the auditor should request the management to provide him with a list of suppliers. Further, the purchase invoices should be verified with the purchase requisitions raised by the purchase department of the company (Beasley and Carcello, 2008). The entries in the suppliers ledger should tracked with the serial number of the invoices to ensure that all the invoices have been recorded in the books. Further, in order to track unusual fluctuations, the auditor should perform analytical procedures by comparing the level of accounts payables in the current period with the level of accounts payables in the previous periods (Beasley and Carcello, 2008).           

Apart from verifying the completeness assertion about the account payables, it is also crucial for the auditor to ensure that the value of account payables shown in the books of accounts is correct. The auditor should cross check, the purchase day book with the accounts payables ledger and ensure that all the purchases are reflected in the accounts payable ledger (Beasley and Carcello, 2008). Further, the physical copy of the purchase invoices should be verified with the entries in the accounts payable ledger. The payment to the account payables should be checked with the bank statement to ensure that payments made are genuine. Further, the settlement discounts allowed by the suppliers should be checked with the debit notes issued by them and ensure that the same have been adequately posted in the ledgers. Last, but not the least, the auditor should request the balance confirmations from the suppliers and cross check them with the balance in the supplier’s ledger. In this regard, the auditor should bear in mind that the differences in balance if any is satisfactorily explained by the management (Beasley and Carcello, 2008). 

References

Beasley, M.S. and Carcello, J.V. 2008. GAAS guide 2009: a comprehensive restatement of standards for auditing, attestation, compilation, and review. CCH.

Cartlidge, D. 2011. New aspects of quantity surveying practice. Taylor & Francis.

Dauber, N.A. 2009. Wiley the complete guide to auditing standards, and other professional standards for accountants 2009. John Wiley & Sons.

Delaney, P.R. and Whittington, O.R. 2009. Wiley CPA exam review 2010, auditing and attestation. John Wiley & Sons.

Financial Forecast and projections. 2001. [Online]. Available at: https://www.aicpa.org/research/standards/auditattest/downloadabledocuments/at-00301.pdf [Accessed on: 13 August 2016].

Graham, L. 2015. Internal control audit and compliance: documentation and testing under the new COSO framework. John Wiley & Sons.

Gray, I. and Manson, S. 2007. The Audit Process: Principles, Practice and Cases. Cengage Learning EMEA.

Havard, T. (2013). Financial Feasibility Studies for Property Development: Theory and Practice.

Jackson, S., Sawyers, R., and Jenkins, G. 2007. Managerial accounting: a focus on ethical decision making. Cengage Learning.

Puncel, L. 2007. Audit procedures 2008. CCH.

Schaeffer, M.S. 2008. Fraud in accounts payable: how to prevent it. John Wiley & Sons.

Trevino, L.K. and Nelson, K.A. 2010. Managing business ethics. John Wiley & Sons.

Whittington, O.R. 2012. Wiley CPA exam review 2013, auditing and attestation. John Wiley & Sons.

Wilson, R.M.S. 2014. Routledge companions in business, management and accounting. Routledge.

Work Ethics. 2016. [Online]. Available at: https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p1/technical-articles/ethical-decision-making.html [Accessed on: 13 August 2016].