Peer Review and Ethical Duties

Q1(a) A peer review is a review which helps to increase the quality of the professional work carried out by various accounting and auditing firms. Peer review is of two types, system and engagement and the said case is about the system review. During a system review, the reviewer i.e. Penshurst Accountants in this case, has the authority to go through the engagement working papers which the auditor Mortdale Accounting would have prepared while auditing the books of accounts of various clients (Aicpa.org., 2016).

In the particular case study, as per Section 140.7 of the APES 110, there is a professional duty of the auditor to disclose the relevant information about the audit of a client to the reviewer even if the same is not demanded by law without the permission of the client. However AUST 140.7.1 strictly mentions that a legal advice should be taken before making such disclosures. Thus there seems to be no contravention of the APES 110 Code by Mortdale Accounting, however, they should seek for legal advice for professional safety.

(b) In the present scenario, Jan Dungog, a CPA who has applied for the job in a local public accounting firm of Chartered Accountants, for a position, has requested them not to contact either his current employer or her other referees. However the same is a breach of the ethical requirements as per APES 110, since she has no rights to state to the firm whether they are to consult the referrals or not as it is a part of the HR policy which the firm cannot let go off. There is a breach of the fundamental principles as per Section 100 of APES 110.

Jan should have maintained integrity in his business relationship with the firm by being honest and straightforward, but asking for not referring to the referrals shows that he has something crucial to hide. Further to this, it is not an acceptable professional behaviour on the part of Jan (ethicsboard.org., 2012).

(c) A chartered accountant is allowed to be conduct a business simultaneous to practicing as an auditor if the two are not in conflict to each other. Thus in the present scenario the business conducted by Wendal Sailor is does not create any kind of conflict of interest since the insurance and the superannuation business is not related to any of his audit clients. However, the fact that Wendal very often communicates to the clients about the said business especially just before releasing the final audit opinion entails to a breach of the ethical code of conduct.

The said action of Wendal, contravenes the professional code of ethical conduct as per APES 110. The said conflict of interest is creating a threat to objectivity as well as other fundamental principles of integrity, independence and professional behaviour. The clients may end up taking up the insurances simply because of a fear of a qualified audit report which is very evident from the fact that he discusses about his business with the clients just before signing the final audit report (cpaaustralia.com., 2014).

Breaches of Ethical Requirements in Job Application

(d) The present case study ends up creating a self interest and a self review threat if a professional is asked to perform the dual functions of an auditor as well as a director even if honorary in nature of not for profit charitable organization as states in Section 290.146 of APES 110, Code of Ethics for Professional Accountants. Even though an honorary director is one who is not an active party to the management of the company or at the board meetings, yet it creates a threat to the integrity and objectivity to the duty of an auditor. Thus here, Judith Durham has contravened the provisions of APES 110 by accepting both the roles (auasb.gov.au., 2015).

(e) The case study basically is about selling of an accounting practice which comprises of book keeping, tax and auditing services as well. While selling the same to Jago, he had taken permission for the release of tax working papers but released the papers related to other two also without any permission. The same is against the professional code of ethical conduct. First and foremost, Ernie Dengate, before to Jago should check upon his professional competence and inform all his clients about such a sale. Further if they agree to continue with Jago, only then should the papers be released to him, else should be returned to the client. Thus in this case, since he had taken permission with regards tax related papers, thus giving those to Jago is well within the APES 110 standards, but releasing of other papers was in violation to the professional code of ethical conduct as releasing the papers related to book keeping and auditing means releasing the confidential information of client without his concurrence.

(f) The same person performing both audit and non-audit services gives birth of three kinds of threats namely advocacy, self review and self-interest. However, an auditor is capable of performing all these three services but not to the same client. Providing management advisory services such as how to manipulate the accounts, how to do book keeping entries without the actual outflow of cash so as to portray a rosy picture etc by a professional and then asking him to conduct the audit will never lead to flashing of such advises to the investors and the shareholders, thus posing a threat to the independence in the professional conduct (icaew.com., 2012). Thus Fred Nerk, should not provide all the services to the same client else it would be a breach of the professional code of ethical conduct as per Section 290.156 to Section 290.219 of the APES 110.

(g) A chartered accountant is entitled to perform book-keeping and accounting function also. But performing both accounting as well as audit functions poses a threat to independence as well as self-review as per APES 110. The Allgood Chartered Accounting who maintains its books of accounts in various systems installed in the office has also maintained some of the accounting records of Branch Company on its computers which is not in contravention to the provisions since an auditor can perform the function of an accountant, provided the computer which is being used does not contain the firm’s accounts. Further the audit can also be performed independently, if the person doing the accounting entries and that conducting audit are different, else it would a breach of the professional code of ethical conduct as per APES 110.

Conflict of Interest in Concurrent Businesses

(h) The said case connotes breach of the professional behaviour – a fundamental principle of the APES 110, Code of professional conduct since James Jameson had over drunk at the party and ended up fighting and assaulting a person at the hotel. He further behaved in a disorderly manner due to which he was sentenced for three years and also his license got suspended for a year. Thus since his actions had bought in disrepute to the profession, hence the actions of James is in contravention to the APES 110, Section 100.5, Code of Ethics for Professional Accountants (APESB, 2010).

Q2 (a) An auditor should on priority, unfailingly obtain a confirmation from the debtors, financiers and the creditors of a client while auditing the books of accountants. It is done so as to be extra sure about the balances and the fact they are true. But there can be situations when obtaining such confirmations may not be possible and therefore should try his best to obtain the fact that the said balances are true and fair.

Thus in this case study, the auditor will give an unqualified opinion because he was able to satisfy himself about the correctness of the debtors balances of eight main customers of the client via other audit procedures which is also acceptable.

(b) For any client, its assets are the most important for generation of income. Hence it is the duty of the auditor to satisfy himself about the asset section in the balance sheet. The client has no rights to limit the checking of the assets to the auditor. But in this case, the auditor was not allowed to verify the plant property and equipment which comprised of 35% of the entire asset base. Hence he should give a negative opinion since the main revenue generating unit was only not verified by the auditor, hence it would be difficult to define the sanctity of the same.

(c) The contingent liabilities are an unavoidable part of the financial statements of companies. Hence if an entity thinks that the situation is such that there can be a liability recurring in future which would have a significant impact on the future of the company, then its disclosure is a must as a contingent at the bottom of the balance sheet. The investors and the other readers would then be able to gain a basic idea about the occurrence of such an expenditure in future and hence would not have to face an unpleasant surprise. Hence, by not paying heed to what client desires, the auditor should ensure that the same is disclosed and if not then a qualified opinion be stated as the results of the audit report is what the outsiders trust upon and act accordingly (aasb.gov.au., 2011).

(d) Maintenance of the books of accounts by the retailers is mandatory irrespective of the fact that the main chunk is in cash. The auditor would not be able to audit the accounts if the same is not maintained in accordance to the standards. Hence in this case, since no books of accounts is maintained, the auditor will not be able to conduct the audit only, thus will not be able to state any opinion, neither qualified nor unqualified.

Dual Functions of Auditor and Director

(e) Verification of the opening balances is the pre-requisite to the start of any audit, specially of a new client. Thus if the audit is being conducted by the same auditor then the said step can be avoided. Thus irrespective fo the denial from the client from checking the opening balances, the auditor should ensure to do the same. After the same, if the auditor adopts various other ways and satisfies himself about the true and fairness of the opening balance, the opinion stated should be qualified (ifac.org., 2009). The same should be done so as to satisfy from any future mishaps and legal hearings.

(f) Companies and business entities who are operating in Australia, have to mandatorily ensure to maintain their books of accounts as per the Australian Accounting Standards. If they do not comply with the same, then it is the duty of the auditor to make the client aware of the same and implement the same with immediate effect. But even after suggesting the same, the client does not, then the auditor will have to give a negative mark, thus a qualified audit report would be issued stating the same.

(g) The Australian Accounting Standard on inventories AASB 102, specifically mentions that inventory should be valued either as per FIFO or as per weighted average method. But if any organization is valuing inventory as per LIFO method, then the auditor should ensure to inform the client about the incorrectness of the method of valuation adopted as per the standard thus demanding for valuing the inventory again as per the prescribed methods. However, if the client still considers to continue with the age old method then the auditor will have to give a qualified audit opinion with regards the valuation of inventory (aasb.gov.au., 2015).

(h) If the continuity of the client is questionable at the time of issuance of the audit report due to exit of  main customer then the auditor should not release the audit report as on a going concern basis. He should request the client to prepare the accounts as per cash basis. However, if the client does not nod concurrence to the same, then a negative remark should be given in the audit opinion so that the readers are not misled.

References:

Aicpa.org., (2016), Summary of the Nature, Objectives, Scope, Limitations of and Procedures Performed in System and Engagement Reviews and Quality Control Materials and Continuing Professional Education Program Reviews  (as Referred to in a Peer Review Report). Available at https://www.aicpa.org/Research/Standards/PeerReview/DownloadableDocuments/PRSummary.pdf (Accessed 23rd May 2017)

APESB, (2010), APES 110 Code of Ethics for Professional Accountants, Available at

https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf (Accessed 23rd May 2017)

auasb.gov.au., (2015), Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with the Australian Auditing Standards, Available at  

https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_Compiled_2015.pdf (Accessed 23rd May 2017)

aasb.gov.au., (2015), AASB 102 – Inventories, Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf (Accessed 23rd May 2017)

aasb.gov.au., (2011), AASB 137 -Provisions, Contingent Liabilities and Contingent Assets, Available at

https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf (Accessed 23rd May 2017)

cpaaustralia.com., (2014), An Overview of APES 110 Code of Ethics for Professional Accountants, Available at

https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/ethics/an-overview-of-apes-110-code-of-ethics.pdf (Accessed 23rd May 2017)

ethicsboard.org., (2012), Revised Code of Ethics – Completed, Available at https://www.ethicsboard.org/projects/revised-code-ethics-completed (Accessed 23rd May 2017)

icaew.com., (2012), The provision of non-audit services to audit client, Available at

https://www.icaew.com/en/technical/ethics/auditor-independence/provision-of-non-audit-services-to-audit-clients (Accessed 23rd May 2017)

ifac.org., (2009), International Standard On Auditing 510, Initial Audit Engagements – Opening Balances. Available at https://www.ifac.org/system/files/downloads/a025-2010-iaasb-handbook-isa-510.pdf (Accessed 23rd May 2017)