Identification of Ethical Issues and Misconduct

Discuss about the Ensuring Financial Stability of Companies.

As per APES 110, Section 210, Professional Appointment while engaging with a client for providing audit operations, the auditors are responsible for the determination of the aspect that whether the engagement in the company can lead to the breach of the ethical and fundamental auditing principles (Chapple et al. 2014). This aspect leads to the auditors in obtaining enough understanding and knowledge about the management of the audit client so that the ethical and corporate governance related issues can be ascertained. In the provided situation, the auditors of Billings & Associates should take into consideration two ethical issues. The first issue is related with the toxic chemical spill into the river as a result of the production process of Pharmaceuticals. As per the second issue considers the involvement of the company’s management in covering up the unethical even of chemical spill. Thus, the above-mentioned two ethical issue show the breach of the ethical standards of APES 110 and it will affect the auditing process of Billings & Associates.    

After the identification process of the weakness in internal control and errors, it is the reasonability of the auditor of Billings & Associates to give suggestions to the management of Pharmaceuticals on how they can bring improvement in the internal control so that these types of errors do not repeat. After this process, the auditor is responsible for the issue of quailed audit opinion for Pharmaceuticals. Many differences are not there between the qualified and unqualified audit opinion (Habib 2013). In case of Pharmaceuticals, the auditor will issue the qualified audit report so that the stakeholders of the company can become aware about the hedging strategy related issues faced by the company. In this process, the auditors have the obligation to add the reasons for being qualified in the audit report.

The process of auditing involves in the examination of the financial statements of the entities in order to obtain surety about the presence of material missstements in the financial reports. This process demands the gaining of sufficient audit evidences for ensuring the presence of material missstements (Cao, Chychyla and Stewart 2015). All the terms and conditions along with the nature of audit operations are included in the audit engagement letter and it is required for the audit clients to know all these aspects in audit engagement letter. Billions & Associates has provided this audit engagement letter including the nature of audit engagement to Reaction Pty Ltd. Thus, in the presence of this audit engagement letter, the audit operation cannot be a review engagement of Reaction Pty Ltd as the conduct of full audit engagement was mentioned in the engagement letter.

Qualified and Unqualified Audit Opinions

In addition to the above scenario, it is the obligation on the auditors of Billings & Associates for the issue of Disclaimer of Audit Opinion due to the requirement of modified audit opinion (Xu et al. 2013). The auditors provide disclaimer audit opinion when it is not possible to obtain required information or financial record about the client company. In the scenario of Reaction Pty Ltd, it is not possible for the auditors to acquire sufficient financial information about the accounts receivable and lack of documentation is responsible for it. Thus, the presence of all these aspects indicates towards the issue of disclaimer audit opinion as a part of modified audit report

APES 110, Section 290.167 indicates towards the responsibility of the management of the companies in the preparation and presentation of their financial statements by complying with the required financial standards and principles (org.au 2018). As per the provided situation, the auditor helps the client in the accounting of impairment of assets. This particular scenario develops Self-Review threat of audit independence as Section 290.167 provides the main reason behind self-review threat is the delivery of accounting and bookkeeping services in order to prepare and present financial statements.

Removing that particular auditor from the audit operation is the major safeguard in this scenario. However, Hail Pty Ltd may seek the assistance of accounting regulatory body for accounting purposes.

According to APES 110, Section 100.12, it is the obligation on the auditors not to promote the business or position of the audit client as it creates Advocacy Threat of audit independence (org.au 2018). In the given situation, the auditor has been found in recommending the services of Travel Time Ltd to others as the auditor is satisfied with the services of the company. Thus, this particular scenario creates the advocacy threat of audit independence as the auditor involves in the promotion of the business of audit client.

As a measure of safeguard, the implementation of effective corporate governance policies is required to avoid this kind of scenario.

APES 110, Section 100.12 states that the existence of any close relation between the auditors and the audit client can create Familiarity Threat of audit independence (org.au 2018). The provided situation shows the existence of relationship between the wife of one of the auditors and the Civil Constructions Ltd due to the presence of her major shareholding in the company. This particular scenario can create familiarity threat of audit independence as it can compromise the audit standard.

Types of Threats to Audit Independence

Removal of that auditor from the operation is the major safeguard in this scenario.

According to APES 110, Section 100.12, it is the obligation on the auditors not to deter from acting objectively under any actual or perceive pressure as it creates Intimidation Threat of audit independence (org.au 2018). In the given situation, Pleasure Cruises Ltd is carting indirect pressure on the auditor by seeking additional time. Thus, it can create the intimidation threat of audit independence as the auditor may not act objectively due to the presence of indirect pressure.

Development and implementation of effective corporate governance policies can be considered as a major safeguard in this situation.

1. The detection of material missstements is regarded as a crucial factor in the audit operations of the business entities. Based on the analysis of the given situation of Unique, it needs to be mentioned that there are two accounts in the company at material missstements risk. The account of trade receivable is considered as one account at the risk of material missstements. The requirement of the bank to Unique is to maintain 1.2 as current ratio and the company has 1.24 as current ratio. As per the given situation, the company has a well-developed policy for debtors and it ensures the proper maintaining of the required current ration by the bank. The difference in current ratio can be a potential to material missstements. Sales account is the next account at the risk of material missstements. The requirement of the bank is to maintain a net sales of a minimum of $100,000 per quarter by Unique. In actual, $350,000 is the annual sales of the company. Thus, a major difference can be seen in the sales figure that can be due to the effect of material missstements (DeFond and Zhang 2014).
2. In Unique, one major issue related with the prior year’s figure is the presence of negative purchase price variance in the purchase of timber over the year. Purchase price variance is the difference for an item between the amounts per unit actually paid and budgeted amount per unit. Thus, it implies that the paid price is more than the budgeted price that is not good for the company (Rezaee et al. 2018).
3. It is stated in the going concern assumption of the companies that a business entity will be able to carry on their business operation for the foreseeable future. In addition, the no one will force the entity to halt their business operation and liquidation of assets in the future. It is required for the companies to comply with the principle of going concern in order to prepare and present their financial statements (AICPA 2017). There are three major factors in Unique against the going concern assumption. Massive decrease in both gross profit and net profit of the company near to the level of loss can be considered as one of those factors. The massive rise in the price of the timbers for the two years caused by the increase in US dollars as well as decrease in the value of Australian dollars can be regarded as another factor. After that, the increase in the cost of labours as well as wage rate can be considered as another major factor. It may not be possible for Unique to continue their business in the near future in the presence of all these factors as the company may have to shut down their business due to massive loss (AICPA 2017). For this reason, all these three factors are against the gong concern assumption of the companies.
4. At the time of the planning of the required audit operations, it is required for the auditors to consider the above-discussed risks of material missstements. For the accounts at the risk of material misstatements it is required for the auditors acquire sufficient evidence so that they can become sure about the presence of material missstements in the trade receivable accounts and sales account. Apart from this, it is required for the auditors to take on analytical tests on the financial accounts of Unique so that enough evidence can be obtained on the going concern assumption. Thus, on the basis of the above discussion, it can be said that the auditors of Unique are required to take into consideration all the factors of material missstements and assumptions of going concern while planning for the required auditing activities (King 2014).

1. In Unique, the presence of internal control issue can be seen in the payment of sales bonus. The provided situation indicates towards the presence of major internal control related issue in Unique while doing the payment of sales bonuses as the provided assertion is not fulfilled for the payment of sales bonuses (Nicolaescu 2013).
2. The provided case study of Unique indicates towards the presence of two major factors at the risk of fraud in the company. The non-change in the gross profit can be considered as the first factor. The provided case study of Unique indicates towards a major dip in the gross profit and thus, there needs to be change in the gross profit. In this situation, no change in the gross profit indicates towards the presence of fraud risk. Debtors can be considered as the second factor. The provided information of Unique shows an unnatural change in the debtor’s level between the end day of the year and during the first six months. For this reason, there may a fraud risk related to the debtor’s account (Risk 2013).
3. After considering the provided information about Unique, it can be ascertained that the accounts balances of debtors is at risk and the presence of fraudulent activities around the debtors can be considered as the main reason for this. It implies that there can be the presence of manipulation in the accounts balances of debtors so that sales bonuses can be gained. For this reason, two assertions of the management of Unique related debtors can be considered at risk. At the time of the sales, the initiation and approval of the invoice of the customers is the first assertion. The approval and issue of the credit notes to the customers within the return of 60 days is the second assertion of the management of Unique (Brazel, Jones and Prawitt 2013). The main reason for the risk of these assertions is the fraudulent activity related to the balance of debtors.

The implementation of the test of control can be considered as one of the audit procedures in order to address material missstements. Under this procedure, the auditors will be needed to conduct test of control for acquiring appropriate audit evidence. The implementation of substantive procedures can be considered as another audit procedure for addressing material missstements. In this system, it is required for the auditors to design and perform substantive processes for testing the assertion of the management (Griffiths 2016).

References

AICPA, 2017. Statement on Auditing Standards, Number 126: The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern (No. 126). John Wiley & Sons.

Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. [online] Available at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 25 Apr. 2018].

Badara, M.A.S. and Saidin, S.Z., 2013. Impact of the effective internal control system on the internal audit effectiveness at local government level. Journal of Social and Development Sciences, 4(1), pp.16-23.

Brazel, J.F., Jones, K.L. and Prawitt, D.F., 2013. Auditors’ reactions to inconsistencies between financial and nonfinancial measures: The interactive effects of fraud risk assessment and a decision prompt. Behavioral Research in Accounting, 26(1), pp.131-156.

Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement audits. Accounting Horizons, 29(2), pp.423-429.

Chapple, L., Crofts, P., Ferguson, C. and Hronsky, J., 2014. Professional independence and attachment bias: an exploratory study.

Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.

DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2-3), pp.275-326.

Goh, B.W., Krishnan, J. and Li, D., 2013. Auditor reporting under Section 404: The association between the internal control and going concern audit opinions. Contemporary Accounting Research, 30(3), pp.970-995.

Griffiths, P., 2016. Risk-based auditing. Routledge.

Habib, A., 2013. A meta-analysis of the determinants of modified audit opinion decisions. Managerial Auditing Journal, 28(3), pp.184-216.

King, N., Oracle International Corp, 2014. Audit planning. U.S. Patent 8,712,813.

Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and earnings management. Review of Accounting Studies, 18(2), pp.414-442.

Nicolaescu, E., 2013. Developments in corporate governance and regulatory interest in protecting audit quality. Economics, Management and Financial Markets, 8(2), p.198.

Rezaee, Z., Sharbatoghlie, A., Elam, R. and McMickle, P.L., 2018. Continuous auditing: Building automated auditing capability. In Continuous Auditing: Theory and Application (pp. 169-190). Emerald Publishing Limited.

Risk, F., 2013. Fraud Risk Assessment.

Ruhnke, K., Pronobis, P. and Michel, M., 2014. Audit materiality disclosures and credit lending decisions.

Vasarhelyi, M.A. and Halper, F.B., 2018. The continuous audit of online systems. In Continuous Auditing: Theory and Application (pp. 87-104). Emerald Publishing Limited.

Vîls?noiu, D. and Buzenche, S., 2014. Determining Audit Materiality in the Banking Industry–A Knowledge Based Approach. Procedia Economics and Finance, 15, pp.935-942.

Vovchenko, G.N., Holina, G.M., Orobinskiy, S.A. and Sichev, A.R., 2017. Ensuring financial stability of companies on the basis of international experience in construction of risks maps, internal control and audit. European Research Studies Journal, 20(1), pp.350-368.

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Xu, Y., Carson, E., Fargher, N. and Jiang, L., 2013. Responses by Australian auditors to the global financial crisis. Accounting & Finance, 53(1), pp.301-338.