Auditor’s independence and confidentiality principles violated

The analysis of the provided case of Eric and Alan indicates towards the presence of some major ethical, legal and other issues; and they are discussed below:

            It is the requirement of the auditors to take into consideration the rules and regulations of Auditing Standard ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information at the time to conduct the audit operations. According to ASA 220, Paragraph 11, Independence, it is needed for the auditors to maintain the aspect of the independence of the auditors. For this reason, the auditors are needed to obtain relevant information related to the breach of auditor’s independence, to involve in the evaluation of this information for the identification of breaches and to take the required action for the elimination of such threat (Ball, Tyler & Wells, 2015).

            It can be seen from the provided case study that Alan and Eric has a long-standing relationship as they have been friends for the years; and this aspect can lead to the violation of auditor’s independence. According to APES 110, Paragraph 100.12 (d), there can be the development of the threat of audit independence in the presence of any long or close relationship of the auditor with the audit client due to the fact that the auditors can become too sympathetic to their interests or to accept the work. Thus, in the sheds of this regulation of APES 110, it can be said that there is the potential for the development of the issue of the threat of audit independence by Alan due to his relationship with Eric (Sanderson, 2014).

            It can also be observed from the provide scenario that Alan becomes aware about the fact that Eric has used the amount of $12,345 of tax payment for paying the office bill his wife from the notes of Jackie Yong and the audit trail; and this aspect caused the delay in the payment for the taxation. However, he agreed with the explanation provide by Eric and did not take any action. It can be seen from the earlier discussion that ASA 220 puts the obligation on the auditors to take the required actions in case there is any indication of the violation in auditor’s independence. Instead of complying with the regulation, Alan decides not to take any actions. For this reason, this action leads to the issue of the violation of the auditor’s independence principles of ASA 220 (George, Jones & Harvey, 2014).

            In addition, APES 110, Section 140, Confidentiality, puts the obligation on the auditors not to disclose any confidential business information of the audit client to any third party without any right to disclose. The provide scenario states that Alan shows the audit working papers to his chartered accountant as well as audit manager friend for discussing the issue. However, Alan does not obtain the authority from Eric to show the papers to friend. For this reason, the delivery of audit working papers without the authority of Eric can lead to the issue related to the breach of APES 110 Confidentiality standard (Carey, Monroe & Shailer, 2014).  

Impact on careers

Part 2

            The above discussion indicates towards the presence of certain issues related to the provided situation; and it needs to be mentioned that these issue have impact on Alan, Eric and the friend of Alan. They are discussed below:

            It can be seen from the above discussion that there are some major issues like the violation of auditor’s independence, familiarity threat of audit independence and the issue for the violation of confidentiality principles of auditing. Thus, in the presence of all these issues, it will not be possible for Alan to maintain the quality as well as integrity of financial reporting of Cement Manufacturing Pty Ltd. At the same time, the threat to auditor’s independence can create negative impact on the professional career of Alan (Knechel & Salterio, 2016).

It can be happened in the presence of familiarity threat of audit independence that Alan can be removed from the audit assurance team to carry on the audit operations of Cement Manufacturing Pty Ltd. Apart from this, Alan will be responsible for illegally providing the confidential financial information of Cement Manufacturing Pty Ltd to his audit manager friend and this aspect will create negative impact on the career of Alan. Hence, it can be seen based on the above discussion that these issues will have major impact on the professional career of Alan as it will not be possible for him to maintain the integrity of financial reporting and audit profession (Louwers et al., 2015).

            It needs to be mentioned that these issues will have some major impact on Eric also. In the presence of all of these issues, it will not be possible for Eric to maintain the integrity of accounting profession for his post in Cement Manufacturing Pty Ltd. As it will not be possible for Alan to maintain the independence of auditors, the financial statements of Cement Manufacturing Pty Ltd will fail in reflecting the financial frauds and manipulation with the account balances by Eric. Most importantly, in the presence of all of these issues, it will not be possible for Eric to maintain the ethical principles and standards of accounting profession; such as honesty, integrity, professionalism, objectivity and others. On the overall basis, these issues will contribute towards ineffective financial accounting for the financial activities of Cement Manufacturing Pty Ltd (Duncan & Whittington, 2014).

            Lastly, it also needs to be mentioned that these issue can have major negative impact on the audit manager fiend of Alan. In this context, it needs to be mentioned that the auditing standards do not permit an auditor to involve in the audit program of other company while he is already providing the auditing services and this is against the audit ethical principles. Hence, it can be said that the audit manager friend will not be able in maintaining the ethical principles of audit profession while provide opinion on the audit of other company. Hence, he will be involved in the violation of the principles of APES 110 (Chambers & Odar, 2015).

References

Ball, F., Tyler, J., & Wells, P. (2015). Is audit quality impacted by auditor relationships?. Journal of Contemporary Accounting & Economics, 11(2), 166-181.

Carey, P. J., Monroe, G. S., & Shailer, G. (2014). Review of Post?CLERP 9 Australian Auditor Independence Research. Australian Accounting Review, 24(4), 370-380.

Chambers, A. D., & Odar, M. (2015). A new vision for internal audit. Managerial Auditing Journal, 30(1), 34-55.

Duncan, B., & Whittington, M. (2014, September). Compliance with standards, assurance and audit: does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.

George, G., Jones, A., & Harvey, J. (2014). Analysis of the language used within codes of ethical conduct. Journal of Academic and Business Ethics, 8, 1.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.

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

Sanderson, J. (2014). Audit issues. SMSF Guide: Current Issues and Strategies for the Self-Managed Superannuation Funds Adviser, 377.