International Auditing and Assurance Standards - Case Study Example

Auditing Name: Institution: Course: Tutor: Date: QUESTION 1. As an audit review partner, APES 110 Code of Ethics for Professional Accountants defines Mr. Mitchel Barnes, who has been recently appointed as a Technical Director of Acret & Allen Chartered Accountants ("AACA"), as a person who in the firm reviews the conduct of audit engagements and performances. In addition, the Technical Director reviews auditors reports issued on behalf of the firm and has the appropriate right to, where required, from a legal, professional or regulatory body to do so all as his/ her responsibilities (APESB, 2006, pg. 84 ). Potential threats to Independence in AACA The potential threats that can result due to the engagement manager’s wife, Mrs. Megan Acret purchasing shares in the company are as follows. There would be the threat of advocacy which according to the code of ethics for the professional accounts, is brought about by one prompting shares in a listed entity when that entity is a financial statement audit client. There would also be the threat of familiarity, which also according to the code of ethics for the professional accountants is as a result of, “an associate of the engagement team having a close or immediate kin relationship with the officer of the client, or with an employee of the client who is in the position to exert direct or significant influence over the subject matter of the engagement. Such significant influences may be in respect to influencing business decisions and obtaining benefits from such a company” (APESB, 2006, pg.6 and pg.74-75). Threat of self-interest is also likely to occur, which according to the code of Ethics of Professional Accountants is due to a firm, member of the of the assurance team or a close associate the firms member(s) benefiting from a financial concern such as profits, loans, guarantees. Besides, personal interest may pose threats when a firm inappropriately uses its personal corporate assets or looks on forward to get arranged incentive compensations. Intimidation as a threat may also occur. According to code of Ethics of Professional Accountants, this threat can arise because Mrs. Megan Acret may have been buying shares in Multiprop Limited to coerce this company as a result of a fallout with the husband or wanted to manipulate the decision making process of either of these two companies. Safeguards Recommended. Safeguards to the above listed threats can be classified into two categories according to Code of Ethics of Professional Accountants; they include safeguards produced by the line of work, legislation or guidelines, and safeguards in the work environment (APESB, 2006, pg.6 and 75- 76). Safeguards created by occupation, parameter or legislation include having: non-partisan legally empowered third party external audit appraisal of the firms reports, interactions, information or proceeds produced by a member; all employees to have good education, experience and preparation; good dogmatic monitoring and penalizing measures; good company’s authority procedures. Work environment safeguards include having clearly laid out and communicated procedures and policies to encourage and empower junior employees to report any unethical issues that concern them and employees being able to consult with other members. When all the appropriate safeguard measures have failed, legal measures must be instituted or/ and such a member must resign. Potential Threats to Independence of Sydney PTY Limited Self- review threats may occur when the firm’s decisions or data are being reviewed and justified by the same associate in business responsible for making those decisions or preparing that data. Another threat would be personal interest threats of which Mr. Ellen may have financial gain objectives or having concerns over safety of his employment. There may also be advocacy terrorization when the associate in this firm (AACA) promotes a view or point to the extent that ensuing independence may be impaired. Familiarity threats may also ensure that Mr. Ellen having had a protracted relationship with Sydney PTY Limited may influence business decisions, financial and non financial reporting. There are other threats to AACA as a firm that may not specifically be related to the above set of threats but exert a significant level of uncertainty in the firm’s capability of being independent. Such a threat would be for example threats related to conformity to deep-seated principals. Safeguards Recommended According to APES 110 rules of Ethics for Professional Accountants, safeguards that may lessen or remove the above threats are grouped into two expansive categories: Safeguards formed by occupation, parameters or legislations, and work scenery safeguards. Sydney PTY Limited is required to employ a qualified experienced full time accountant, get audited by an impartial lawfully empowered firm, and follow apposite professional values. In situations when actions of an associate in the firm become unethically intolerable, it is important that legal measures are taken and such an employee reigns to pave way for investigations and internal firm’s re- institution. Sydney PTY Limited should also ensure it has proper documentation of its financial reports because there is no way it can be audited without proper financial reports. These rules and regulations of professional accountants provide Mr. Barnes M., a Technical director with the first hand approaches he is to choose from and implement in sequence. If he will not be able to implement safety measures, AACA or Multiprop is at risk of fraudulent activities. He should recommend that Mrs. Acret to sell her shares or AACA not be an auditor for Multiprop limited and that Mr. Ellen must resign from either Multiprop or AACA. QUESTION 2. White auditors could have been negligent if according to International Standards on Auditing (ISA) 501 which states that facts precise considerations for preferred items and ISA 315 which states that the magnitude of recognizing and assessing the risks of resources misstatement in the way of understanding the unit and its setting must be considered. Radiant limited is right to have sued them because the over valuation of the product the company they bought relied on the audit reports that White auditors produced which by law of auditing was inappropriate and required legal measures to be taken. White auditors require to be stopped from working as accounting auditors because even within its firm they were supposed to carry out internal auditing of their work, which was a violation of ISA 610 auditing guidelines. There is negligence here because whenever an accountancy firm is carrying out audit of a client’s company, they are required not only to work with the financial reports provided but also to inspect these said products, assets or services. In respect to auditing rules, it was a lax conduct for White auditors. In relation to the case of Esanda Corporation Limited (ECL) versus Peat Marwirk Hungerfords (PMH), in the High court of Australia, Justice Moffit concluded that PMH did the right thing relying on information they were provided with by Excel limited and that ECL had no jurisdiction to sue PMH, as PMH was no partner in whatsoever way with ECL. ECL was supposed to sue Excel limited for damages as ECL was in a financial relationship with Excel limited. The Chief Justice Brennan dismissed the appeal case of ECL versus PMH. Radiant limited in this case against White, accusing them of negligence would not go through since auditors work on the information from financial reports they get from the company they are auditing and only scrutinize goods or services if there was due important reason to do so. On another perspective, the case of Pacific Acceptance Corporation Limited (PACL) versus Forsyth (1970)92 WIN (NSW) 29, was concluded that PACL had no obligation of suing Forsyth because auditors were not insurers and that auditors were only responsible for working on information of a firms financial reports. It would be an act of negligence for White to have fully relied on the information provided to it by Elegance managers and that they were supposed to check these stock that were written in financial documents of Elegance. As an auditor, guidelines, ISA 500 stipulates that auditors must view audit evidences unless there are legal barring reasons not to. White would also not be negligent in their audit reports because Elegance Limited relied on one of the warehouse managers financial information concerning the current value of the stock, because if these stock were to follow due analysis, their values could have appreciated in future or seriously lost value. In such cases Radiant would not be able to fully win its case against White, but will duly get compensated with Elegance Fashion House if they argue their case well. In relation to the of Esanda Corporation Limited (ECL) versus Peat Marwirk Hungerfords (PMH), in the High court of Australia, Esanda Corporation Limited sued Peat Marwirk Hungerfords for giving them falsified information in connection with auditing reports on accounts of PMH. PMH in this case was the auditing company that audited Excel, a company and provided it with audited reports that it had audited its accounts for the year ended June 30th, 1989 in harmony with Australian Standards of auditing. ECL was not a member of Excel limited but a financer that entered into a several dealings with Excel. PMH was not found guilty liable of all charges of negligence against them, but at the same time were not ripped of their practicing license as Excel Limited did not disclose all the information required for auditing thus the crippled audit report was provided to Excel limited by PMH. Excel limited did not suffer much damage; however its business ties between ECL and her were destroyed as it became clear that it produced falsified information to do business. In relation to this, Radiant limited would not certainly win the court case since White auditors could have been acting on financial information given to them by Elegance limited which produced falsified financial information from its management. Radiant limited might also win the case if it Elegance limited issued information about them having defective garments valuing millions of shillings. White would win this case owing to the fact that they as an audit firm do analyze written financial reports of a firm and any other important information provided by the managers of such a firm. When correlating to the case of Pacific Acceptance Corporation Limited (PACL) versus Forsyth (1970)92 WIN (NSW) 29, Justice Moffit accredited that auditors have never been insurers and that the auditors duty was to go after the company’s books and establish the company’s financial state. However, Forsyth were supposed with experience to not only to rely on Kingston Cotton Mills Financial papers, but also to give something the once-over the said goods, unless otherwise. With relation to this case, Radiant would not evidently win the case against White auditors as White relied on the information they were given and Radiant limited in their part were supposed to analyze and evaluate first the value of Elegance Fashion House. They can win the case if it is found that Elegance had no proper reason to stop White from inspecting their warehouse, and if White did not also ask to inspect these warehouses. The most probable result is that Radiant limited would not win the case as the entity they have sued is supposed to be Elegance limited and not White auditors. The synopsis here is that auditors or audit companies are not liable for any losses a company makes when it has accrued losses after it has engaged in any financial relationship with a firm that has been audited with such an audit firm. Reference List Accounting Professional & Ethical Standards Board. 2006. “APES 110 Codes of Ethics for Professional Accountants”. [online] Accessed 21st August, 2012. Available at http://www.ceo.wa.edu.au/home/carey.peter/Accounting_and_Finance/APES_110.pdf Bottomley, S.. . Part I. Approaches to the critique of auditing. Bottomley, S. Accessed 21st August, 2012. Available at http://epress.anu.edu.au/wp- Esanda Finance Corporation Limited v Peat Marwick Hungerfords (Reg) HIGH COURT OF AUSTRALIA. 2012. Accessed 21st August, 2012. Available at http://think.io/pub/Law%20Notes/Torts/Esanda%20Finance.txt International Auditing and Assurance Standards Board (IAASB). 31st July, 2012. The Clarified Standards. IAASB, online. Accessed 21st August, 2012. Available at http://www.ifac.org/auditing-assurance/clarity-center/clarified-standards Leung, P, Coram, P, Cooper B.J. & Richardson, P, 2011, Moder Auditing And Assurance Services ,5th Ed , Jhon Wiley And Sons Australia, Milton, Qld Read More