Ethical Issues In Auditing And Decision-Making Process For MYH Audit Team

Responsibilities of Auditors in Reviewing the Governance of Clients

At the time to conduct the audit operations of the companies, the auditors are needed to governance aspects of the clients. The auditing standard called Auditing Standard ASA 315

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Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement contains all the responsibilities of the auditors for reviewing the governance of the clients and they are discussed below:

As per ASA 315, it is the responsibility of the auditors to obtain understanding about the industry of the client, all the regulatory bodies related to the client, other external factors along with the financial reporting framework (auasb.gov.au, 2018). At the same time, the auditors are also responsible for obtaining information of the client’s business operations, the structure of its ownership as well as governance structure, types of investment the clients are making or planning to make and the structure of the clients’ businesses along with the financial sources. Moreover, the auditors are also responsible for obtaining information so that they can get understanding about the selection and application of accounting policies, reason for change and to understand that whether they are appropriate for the chosen organization or not (Rahman, 2013).

Most importantly, it is the responsibility of the auditors to get understanding about the implemented internal control of the clients as the auditors are needed to make judgment on whether the internal control of relevant for the audit risk or not (Contessotto & Moroney, 2014). At the time to get understanding of the internal control, they are needed to take into consideration design of internal control. Apart from the above, as per ASA 315, the auditors have the responsibility to obtain understanding about all the components of the control environment of the audit clients (auasb.gov.au, 2018). For this reason, the auditors are responsible for taking into consideration the evaluation of all the people responsible for the governance. This evaluation helps the auditors in understanding the fact that whether there is a culture of honesty along with ethical behavior in the companies.

As per ASA 315, as a part of governance review, the auditors are responsible for obtaining understanding about the fact that whether clients have the required processes for the identification of risks in financial reporting (Wang & Fargher, 2017). Estimation of the risks along with the assessment of them is another major responsibility of the auditors. Based on the assessment, the auditors develop required auditing strategies. ASA 315 indicates towards the responsibility of the auditors to obtain understanding about the internal information system of the audit clients and the significance of the system with the financial reporting of clients. Thus, the above discussion indicates towards the fact that the auditors are needed to review all the relevant aspects related to the governance of the clients as per the auditing standard of ASA 315 (auasb.gov.au, 2018).

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Issue

Impact on Raising Audit Risk

Recommendations

Reduction in Audit Risk Because of the Recommendation

The presence of inadequate oversight from the Board members and  the committee in the area of financial and audit (apra.gov.au, 2018)

This aspect increases the chances of financial fraud and manipulation that can lead to audit risk (apra.gov.au, 2018)

There is a greater need for the establishment of legal governance procedures in order to reduce the scope of fraud and manipulation in financial aspects. Another major recommendation  is to develop a more rigorous Board as well as Executive committee for establishing control on the financial aspects

The development of this strategy will help the company in governing the financial activities of the bank on a more accurate manner and it will ensure the reduction of audit risk.

This issue is related to the unclear accountability from the higher management of CAB. At the same time, lack of ownership of the key risks can be from the side of the Executive Committee (apra.gov.au, 2018)

In the presence of this issue, the higher management of the bank does not take the accountability of any kind of illegal financial activities and it leads to increased audit risk

In this situation, the main recommendation is the reinforcement of various accountability standards with the help of different kinds of management practices (apra.gov.au, 2018)

This will make the senior management of the bank responsible for all the financial activities in the bank; and this process will eventually contribute to the decrease in the audit risk of the bank

Another major issue can be seen as the form of overly complex as well as bureaucratic process for making decisions

This issue increases the audit risk by slowing down the process of detecting the financial risks in the bank. At the same time, it creates hindrance for effective outcome by creating over timely collaboration (apra.gov.au, 2018)

For this reason, the recommendation is to take into consideration all the relevant aspects at the time of decision-making (apra.gov.au, 2018)

This strategy will be majorly helpful in the reduction of the errors at the time of decision-making process

The presence of next major issue can be seen in the presence of the operational risk management framework that has not been working in the practical manner. In this process, the presence of an immature as well as under-resourced compliance function can also be seen (apra.gov.au, 2018)

In the presence of this kind of ineffective risk management framework leads to the increase in the possibility to occur the audit risks as well as other financial risks. At the same time, this aspect creates hurdle for the auditors to carry out the audit procedures in the effective manner

In order to come out from this situation, the main recommendation is to upgrade the authority as well as capability of the operation risk management framework in the bank along with bringing accuracy in the compliance function. These all most important recommendations for this situation (apra.gov.au, 2018)

In the presence of effective risk management framework, the management of the bank will be able in the reduction of audit risks from the business operations along with other risks 

The presence of some major issues can be seen in the remuneration framework of CAB. It implies that the remuneration framework for the senior management of CAB is not effective

The presence of this ineffective remuneration framework has negative effects in the audit risk of the company as it passively leads to the incorrect detection of the audit risk of the financial operations (apra.gov.au, 2018)

In this situation, the major recommendation is the implementation of an effective remuneration framework by complying with all the required regulations and rules. At the same time, CAB is needed to bring a cultural change in the organization for the purpose of effective risk identification process along with the remedial processes (apra.gov.au, 2018)

This strategy will assist the company in reducing the audit risk by making the senior management of the bank more efficient

American Accounting Association Model

Decision making process

1. Determine the facts

As per the provided case study, David has come to know the fact that John was out with his girlfriend in the new restaurant in the town. However, he did not attend the office by showing the reason that he was sick. These are the main facts of this case (Everett & Tremblay, 2014)  

2. Define the ethical issues

The presence of an ethical issue can be seen in the situation. First, John missed the office by providing a fake reason while his other team members were working harder to get the job done. This is against the business ethical principles as John neglected his professional duties (Louwers et al., 2015)

3. Identify the major principles, rules and values

This particular situation involves some ethical principles, rules and values.  It needs to be mentioned that it is the responsibility of the auditors to maintain the integrity of the profession by being honest as well as straightforward. At the same time, the professionals will not compromise their professional duties and responsibilities in any kind of circumstances. At the same time, they are needed to comply with all the relevant laws and regulations for avoiding any kind of unprofessional actions (apesb.org.au, 2018)  

4. Specify the alternatives

In this situation, the presence of two courses of action can be seen. As per the first course of action, David should tell their other partners about the illegal action of John so that he does not get the same appreciation like the others. As per the second course of action, David will not tell anyone about the action of John and will let him take the same credit for the job even he did not put that much same effort (Othman et al., 2014)

5. Compare values and alternatives

It can be observed that the first course of action complies with the norms, principles and values of the profession. It is needed for David to tell the other members of the team about the actions of John as John failed to act in the professional, honest as well as integrated way in his profession (apesb.org.au, 2018)

6. Assess the consequences

Under first course of action, David will tell his team members about the illegal activity of John and John will not get the same appreciation. From this aspect, John will get a lesson related to the professionalism, integrity and honesty in the profession and will not do this kind of activity in future.

Under the second course of action, David will not tell his team members about the illegal activity of John and will let John to take the same credit of the task by not performing his duties on proper manner. It may lead to the occurrence of the same action from John in future (Douglas?Jones, 2015)

7. Make your decision

Thus, the ethical decision is the first course of action that is David should tell his other team members about the illegal activity of John (Florea & Florea, 2013)

Limitation of Auditors’ Liability

A major role of the incorporation of auditors and statutory cap can be seen on the limitation of the liability of the auditors can be seen. Under this statutory cap, the presence of some alternative liability arrangement can be observed (Samsonova-Taddei & Humphrey, 2015). Under the first arrangement, when an injured party files a claim against certain tortfeasors, they have the authority for the collection of the damage from the remaining tortfeasors. According to this arrangement, the injured party has the authority to claim all the damages from the auditors in case the presence of misinterpretation can be seen in the financial statements. The availability of this option can be seen to the injured party if the additional tortfeasors have the responsibility for the damage (Philipsen, 2014). Under this option, the auditors have the responsibility to provide full compensation or a greater share of the compensation for his/her level of fault. Under the second arrangement, the proportion of the liability for each tortfeaso to the injured party is the part of their fault. For this reason, the injured party does not have the right to increase the share of the compensation (Ojo, 2013). As per this rule, it is not the responsibility of the auditors for the payment of compensation that exceeds his/her proportionate level of fault.  This rule is applicable in case the remaining tortfeasors are unable for the payment for the payment of their part of damage. For this reason, the greater proportion of risk lies with the injured party rather than the auditors as well as the tortfeasors. Thus, the reduction in the amount of liability for the auditors can be observed here (Eyal, 2013).

 The setting of a cap of compensation can be seen in the third kind of arrangement.  Under this arrangement, the authority set a maximum amount of cap for the amount of compensation that can be imposed on a defendant. Under this arrangement, when the share of the auditors in the compensation exceeds or equals the set cap, there is no authority to charge compensation more than the cap to the auditors (Aziz & Omoteso, 2014). This rule is also applicable in case the other tortfeasors are unable in paying their part of compensation. Thus, the injured party has the authority for the collection of compensation in case it does not cross the set cap. Thus, it can be observed that this cap system helps in the reduction of the liability of the auditors.

References

APES 110 Code of Ethics for Professional Accountants. (2018). Retrieved from https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf

APRA releases CBA Prudential Inquiry Final Report and accepts Enforceable Undertaking from CBA | APRA. (2018). Apra.gov.au. Retrieved 2 August 2018, from https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report-accepts-eu

Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. (2018). Retrieved from https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf

Aziz, U. F., & Omoteso, K. (2014). Reinforcing users’ confidence in statutory audit during a post-crisis period: An empirical study. Journal of Applied Accounting Research, 15(3), 308-322.

Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), 393-418.

Douglas?Jones, R. (2015). A ‘good’ethical review: audit and professionalism in research ethics. Social Anthropology, 23(1), 53-67.

Everett, J., & Tremblay, M. S. (2014). Ethics and internal audit: Moral will and moral skill in a heteronomous field. Critical Perspectives on Accounting, 25(3), 181-196.

Eyal, N. K. (2013). Setting a Statutory Cap on Auditors’ Liability: What Method Should Be Used. Rutgers Bus. LJ, 10, 56.

Florea, R., & Florea, R. (2013). Internal audit and corporate governance. Economy Transdisciplinarity Cognition, 16(1), 79.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.

Ojo, M. (2013). Audits, audit quality and signalling mechanisms: concentrated ownership structures.  

Othman, R., Ishak, I. F., Arif, S. M. M., & Aris, N. A. (2014). Influence of audit committee characteristics on voluntary ethics disclosure. Procedia-Social and Behavioral Sciences, 145, 330-342.

Philipsen, N. J. (2014). Limiting auditors’ liability: the case for (and against) EU intervention. The Geneva Papers on Risk and Insurance-Issues and Practice, 39(3), 585-597.

Rahman, A. R. (2013). The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of its Participative Review Process. Routledge.

Samsonova-Taddei, A., & Humphrey, C. (2015). Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society, 41, 55-72.

Wang, I. Z., & Fargher, N. (2017). The effects of tone at the top and coordination with external auditors on internal auditors’ fraud risk assessments. Accounting & Finance, 57(4), 1177-1202