Auditor Independence - AWA Ltd v Daniels - Case Study Example

Name: Lecturer: Course name: Course code: Date Part one Introduction PART ONE Question one Introduction In recent years auditor independence has been put into concern since, practitioners collude with management to fraud the company. Eminent is the HIH failure. The auditor didn’t practice the audit independence, integrity as well as follow the auditing and accounting standard principles in carrying out their audit work. This consequence has lead to review of the current law and reforms governing the audit and to amend the current law so as to minimize the auditor’s negligence as well as the liability. Audit committee is the current practice that has been put in place in order to minimize chances of auditors colluding with directors to perpetrate fraud. An audit committee therefore acts as watchdog of shareholders in ensuring that auditors perform their audit work in a legitimate and prescribed audit guiding principles Case of AWA Ltd v Daniels (1992) 7 ACSR in relation to auditor’s negligence The well-known declaration by Rodgers J in AWA Ltd v Daniels (1992) 7 ACSR 759 that dependence on others is merely unreasonable if the situation are so simple, manifest and straightforward of appreciation that no one with any degree of carefulness would rely on the guidance that has been given, now seems to be obscured. This therefore implies that an auditor’s negligence will be bound by himself since, as an auditor he needs to observe competency as well as professional sceptism in order to avoid auditor’s liability. Negligence is lawful and where an audit is found guilty of the negligence in his audit work will be imprisoned. Therefore [practitioner’s needs to observe duty of care in carrying their audit work Question two State of regulation of auditors and the understanding of auditor independence Auditors independence comprise of audit remuneration, auditors security and freedom so that they will not be under undue influence in making their own judgment. Independence for a certified is a state of mind, No precise boundaries or necessities can realize autonomy. Conversely, some condition can contribute considerably towards the upholding of independence of mind, as well as the manifestation of independence. The law commands that an auditor will appoint during annual general meeting and he will hold the office for until the end of the financial year. In this case an audit is given freedom, security and independence of his audit work. The law prohibit auditors from performing other audit service and require to be free of interest that is deem has incompatible with the objectives as well as the integrity of auditors. The perception of independence is essential to auditing, because the auditor’s intention is to improve, through the appearance of an independent judgment, the trustworthiness of the reported financial information of an entity’. Having regard to the important permissible and proficient consent to when there is a malfunction by an auditor to uphold his or her autonomy and the importance on disclosure , the Working Party is not liable to the fact that any precise constraint must be placed on non-audit services before it is executed by the auditor (Reiner Quick, 2007). Nevertheless, the Working Party is of the opinion that there are superior rationale to necessitate the existing disclosure requirements concerning to non-audit services to be extended to provide an extensive sections of the state of non audit services. PART TWO Question one The role of auditors in the HIH Collapse and other business collapses Professional sceptism of Auditors Auditors are required to perform their audit work with professional sceptism before concluding on the state of the company’s financial affairs. Professional sceptism ensures that a practitioner will perform audit check in details of areas that is susceptible to fraud or of high materiality since, this might lead to financial insolvency of the company if proper audit is not undertaken. Therefore, the collapse of HIH was caused by failure of auditors to observe professional sceptism in ascertaining the ,materiality of the books accounts as well as understanding areas that no more audit in order to mitigate for audit risk. Auditor’s independence, In order to provide a reliable audit report, an audit ought to be independent and seen to be independent in his audit work since; undue influence will lead to distortion of audit report in order to please the shareholders of the company and put the materiality risk of the company at jeopardy. It can be observed that the auditors of HIH were not independent in their audit work since, the beneficiary of continuing benefits from Andersen, were made chairman and were selected to the audit board just 17 months subsequent to his sequestration. Further, the engagement associate was made chief financial executive just the day after his acquiescence from the firm. The third was selected to the panel just five months following his sequestration, having 'played an important function in the examination of HIH for 25 years. This general depicts how the auditor independence was not effective and consequence of auditor’s non-independence on HIH. Question two Independence of Australian company auditors The law presumes that an auditor must be independent and seen to be independent in his audit work. An auditor might as well as provide and audit services in this case an amendment to this article states that, Providing there is an ongoing compulsory prerequisite to hold on to the independence necessities of existing principled rulings as well as auditing standards, the Law should not place any limitations on an auditor who is executing non-auditing services for an audit customer (Prof. Dr. Christoph Watrin, 2007) r. On the other hand in the existing assessment of moral conditions by the accounting bodies, it is not compulsory that concentration be directed toward the provision of additional procedures for application in the more controversial areas of accounting services, internal audit as well as precise and distinct internal control appraisal to reinforce autonomy in these areas. Also, Non-audit services provided to a business by its practitioner ought to be appraised yearly by the company’s audit board or, where there is no existence of this board assessment be made by the full panel to persuade itself that the non-audit services provided are not of the circumstance that would compromise the autonomy of the external practitioner from the point of view of the business. The Working Party position is that, it does not consider it as suitable to get rid of tendering as one of the potential approach for choosing the practitioners. Conversely, the Working Party assumes that auditors of listed company ought to be selected on the proposal of an audit team. This assumption carries with it the anticipation that audit board will be directly concerned in the calling as well as assessment of tenders where this technique of assortment is appreciated by corporations. The Working Party in addition deem that the provisions of AUP 32 on audit tenders ought to be personified in the compulsory audit or moral guiding principles of the accounting bodies The recommendation therefore is that, the regulation must not place any limitations on the use of tendering as an approach of deciding on a company’s practitioner although companies must be optimistic to decrease the amount of prescribed tenders that is essential. Correlation between the external auditors with the audit committee There is an increase in discussion on corporate governance matter more specifically the development toward the overture of audit committee as well as the intensification of the responsibility of non managerial executives (Malachowski, 2001). The Working Party is appreciates the trends which it assumes that a considerably reinforcing the responsibility of the auditor. The Working Party as well presumes the necessities to amplify the level of communiqué among practitioners and the board of directors. This can be attained by attending board conference. Auditors do not have the right to be present at board meetings. Removal of an auditor from the office Whichever suggestion to eliminate the auditor from office must be made under discussion of a constant disclosure notice to be filed with the ASX and/or the ASC, on the ground that it is vital information this must as well point out justification for their dismissal. Correspondingly any acquiescence by an auditor must be the subject of a constant disclosure notice which entails a statement of the auditor’s grounds for leave the job. Question three Corporate Law Economic Reform Program Approval of auditing competency standard (1) ASIC might on submission by any individual, endorse an auditing capability standard the endorsement ought to be in writing. (2) If, on submission by an individual, ASIC endorse an auditing capability standard under subsection (1), ASIC possibly will, on submission by that individual, endorse a distinction of the standard. The endorsement ought to be in writing. (3) ASIC should not endorse an auditing aptitude standard, of an auditing capability standard, if not contented the standard, or the standard as planned to be different, provides that a individuals presentation against every constituent of the standard is to be properly established by a person who is approved by corporation auditor and has enough individual acquaintance of the person’s work to be capable to give that confirmation. Auditor’s independence declaration If an individual practitioner performs an examination of the financial report for a financial year or an inspection or appraisal of the financial report for a half-year; the individual auditor ought to provide the directors of the corporation registered scheme or disclosing body, a documented statement that, to the best of the auditor’s knowledge as well as confidence, (I) no infringement of the auditor independence, requirements of this Act in connection to the audit (ii) No contraventions of any appropriate policy of proficient behavior in relation to the audit. (d) Documented statement that, to the best of the auditor understands and belief, the single infringement of: (i) The auditor autonomy necessities of this Act in relation to the audit (ii) Any appropriate policy of qualified conduct in relation to the audit is those infringement particulars and is mentioned in the auditor’s statement. Question four Review of the Regulatory/legislative response: The provisions that were enacted as further amendments to the Corporations Act and the rationale The Law ought to be revised to provide that a proposed alteration to the auditor of a disclosing body is a constant disclosure matter as well as The Law ought to provide that any proposal for engagement of practitioner of a disclosing body should enclose information on the proposed audit remuneration. On the side of ethical safeguards, the accounting bodies must necessitate a sufficient level of training of specialized as well as business moral principles as a precondition to granting course certification to tertiary establishment for graduates entering the training plans of the accounting bodies. Where an individual who is not a affiliate of an accounting body that is a certified accounting body request listing as a corporation auditor, he or she ought to agree to put up with by the policy of ethics as well as other regulations of the certified accounting body to which they tender their submission on the same basis as members of that body (Leonard J. Brooks, 2009). Where a legitimate accounting entity has in place a capability standard in auditing that has been accepted by the ASC, and candidate should assure the audit constituent of the proficiency standard in so as to be listed. The ASC have to be contented about the suitability as well as workability of the audit constituent of a certified accounting entity’s aptitude standard prior to that standard may be approved for use by the legitimate accounting entity as a basis for concluding whether a candidate meets the sensible know-how thresholds for listing as a corporation auditor. Issue of auditors' liability/negligence and auditor independence and the regulatory/legislative response In summary, auditor’s negligence is unlawful and consequently a practitioner who is found to be negligent or perform a fraudulent entries in the company’s books of account will be imprisoned since, then accounting and auditing standards states, a practitioner must be independent and seen to be independent during his audit work and therefore the report must be free from material misstatement or consequence of undue influence. Auditors are required to be independent in their audit work and their statement should be based on facts gathered form the company books of accounts and not any alteration (Emile Woolf, 2011). Where the auditors finds that their independence is interfered, the law commands him tom include this interference in his audit report as a disclaimer of opini0on since, the audit report will be used by investor in placing reliance as whether to buy or dispose a security based on a given state of financial report provided by the audited statements of accounts. In minimizing the consequence of auditor’s negligence and their independence, the regulatory standards provides that an audit committee shall be established so that it can oversee the work of the auditor as well as ascertaining the ration between the auditor and the directors in order to minimize chances of auditor and director colluding so as to commit fraud. The audit committee therefore acts as a shareholder’s watchdog. Conclusion In general the collapse of HIH was majorly contributed by the practitioners failing to observe the ethical practice as far as auditing and accounting is concerned and therefore reforms in the auditing and accounting body was relevant. The amendment will lead to auditor severe fine as well as the law will be clear on person who want to be an auditor of a company, some of the strict measure to be adhered to before being approved as auditor by the ASC. Where an auditor is to provide non audit service to his client, the auditor committee will be mandated to review the non audit service yearly so as to ensure consistence of audit and non audit service. Auditors are practitioners who are mandated to perform audit work with professional sceptism and as well ascertaining the material level of the company’s books of account. The judgment concluded should be produced under undue influence and where auditor independent was compromised, an auditor is mandated to include this in his audit report to act as disclaimer of option. Reference list Emile Woolf, ‎. H. (2011). Audit and Accountancy Pitfalls: A Casebook for Practising. Gupta. (2004). Contemporary Auditing. Leonard J. Brooks, ‎. D. (2009). Business & Professional Ethics for Directors, Executives . Malachowski, A. R. (2001). Business Ethics: Critical Perspectives on Business and . Prof. Dr. Christoph Watrin, ‎. S. (2007). United States and European Union Auditor Independence . Reiner Quick, ‎. T. (2007). Auditing, Trust and Governance: Developing Regulation in . Read More