Fundamental Principles and Threats to Compliance - Essay Example

Subject Title: Subject Code: Name: ID No.:   Fundamental Principles and Threats to Compliance The Code of Ethics and Conduct for ACCA graduate pursuits is based on overall fundamental principles. These principles include integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. These principles guide the auditor to offering unbiased and professional advice in all his or her work. Integrity entails providing honest, professional and business advice to the client no matter the results. Objectivity involves providing professional advice that is void of bias, conflict of interest or hidden agendas. Professional competence and due care entail maintaining professional skills to offer skilled professional service based on all up to date practices and techniques while being alive latest legislation and provide diligence in work give. Confidentiality entails maintaining a professional rapport with the client so as to ensure that the customer information is kept secret by the professional, technical and contractual standards. Finally, the principle of professional behavior allows the accountant and auditor to offer their services and work in a manner that is lawful and professional. (Gay, 2000) Following the case provided in scenario 1, there are several fundamental principles at risk of being broken if the communication from the CFO is to be taken under advisement. These include integrity, objectivity, and professional behavior. Integrity will be breached since the results of the analysis will not offer a completely realistic option reflecting the kind of investment Bolt Ltd would be getting into with Steel Pty Limited. Objectivity of the financial analysis will then be lost by following the advice of the CFO. This is true since the results that will be getting will only look at profitability and sales made. However, analysis of especially the cash flow will expose other risks that Bolt Ltd might be getting into. Finally, not doing a complete review of the financial records shows a lack of professionalism. (Fisher, 2001) It is not prerogative of the auditor or accountant to follow every principle every time. There are some outside circumstances that principles do not apply. However, there are threats to these principles as the accountant, or the auditor is working. Scenario 1 provided, is alive to two threats. These are advocacy threats and intimidation threats. Advocacy threats occur when an accountant or an auditor tries to push one objective or agenda to the extent of the compromising the results of the analysis. Following the advice of the CFO will mean that the audit will be expected to pursue the CFOs means instead of objectively offer an unbiased opinion on the financial position of Steel Pty Limited. (Fisher 2001) Intimidation threats occur when the auditor or the accountant cannot act justly due to actual or perceived threats. As per scenario 1, the auditor will feel threatened as to losing the job in case advice given by the CFO is not taken. This "threat" then places the auditor in a dilemma between acting in a professional manner and losing future jobs or compromising on professional ethics and getting future jobs.   Ethical decision models Ethical decision models have been developed to provide an intuitive way to step wisely solve problems and assist in making informed, sound and right choices. These models have similar features. These functions include principles and guidelines or rules, means, methods and parts played by the individual involved and finally what are the consequences of the actions taken. (Leung, 2007) American Accounting Association Decision-Making Model The American Accounting Association Decision-Making model is a seven step model by which cases on ethical behavior are analyzed. These measures include determining the facts, defining the ethical issues that are being faced, identifying the major principles, rules and values in question, specify the alternatives that are available to the party in the particular case, assessing the consequences than making the decision. This model is used to analyze cases in ethics. (May, 1990) As for scenario 2, the American Accounting Association Decision Making Model is an excellent guide to assist in making the ethical decision. This is because the ethical questions that are to be analyzed in the case study can be classified and analyzed using the seven steps in the AAA model. Analysis of the situation entails considering the actions; Determine the facts evident in the case. (May, 1990) The facts in this are a number including, Zane did excellent work for the parts that he was assigned, Zane and the client appear to have a personality mismatch and the chances of Luke getting promoted to audit supervisor increase exponentially. This promotion also means more to Luke than it might to Zane since he is recently married and paying off a mortgage, unlike Zane. What are the ethical issues in the case? (May, 1990) Alive to the fact that Zane did excellent work apart from a few minor issues and that the client might have misled the manager as about the quality of labor and the work ethic of Zane, Luke is faced with the ethical dilemma to inform the manager. Not doing this might amount to having Zane unfairly treated about any future engagements. There is also the question of Luke getting promoted at the expense of Zane’s career and future commitments. What are the norms, principles and values related to the case? (May, 1990) The norms, principles, and values followed by auditors and by extension in relationships mature working environments are that one should not be blamed for wrongful accusations nor should one use such circumstances befalling another to advance their career. Luke is should at the very least approach his manager and use that to get an advantage. What are the alternative courses of action? (May, 1990) Option 1 is to decide not to inform anyone of what Luke has discovered. Option 2 is to after finishing the audit, approaching the manager and telling his of the concerns that came up in the review. Best course of action (May, 1990) The course of action that is most consistent with the norms, principles and values as provided in step 3 is to approach the manager with the information that is what not really the quality of work handed in by Zane but rather a personality mismatch that was the primary cause of dissatisfaction of the client with Zane’s work. What are the consequences of each possible action? (May, 1990) Under option 1, Luke can decide to keep his discoveries to himself and take credit for the audit. He will most probably be considered for the promotion over Zane helping with the financial obligations that Luke currently has. Under option 2, Luke can decide to go to his manager, thus neutralizing any advantage he might have over Zane for the upcoming promotion. This then would mean that Luke and Zane would go back to their competitive nature with uncertainty as to who will have the promotion. What is the decision? (May, 1990) The ethical decision is option 2. Luke should tell the manager of the personality mismatch between Zane and the client. Mary Guy Model This model was developed in line with several values including; caring, honesty, excellence, integrity, loyalty, respect, fairness, accountability and responsible citizenship (Guy, 1990). The Mary Guy put forth five rules as guides while making the ethical decision. In analysis of Scenario 2 using this model; Rule 1: You should consider the wellbeing of other people (Guy, 1990). Luke should look at the situation and consider the welfare of Zane. Luke would by this show respect and care. However, Luke should also consider the welfare of his family too. Rule 2: Act as a member of a community (Guy, 1990). As a member of the audit firm and working together with Zane and with the account manager, Luke should work in a manner that expresses loyalty, integrity, and respect. As such Luke should approach the manager and inform his of his discoveries. Even if the manager does not contact Zane with the issue, the manager will at least get to know that is was not Zane’s fault as to how the job turned out. Rule 3: Obey the law (Guy, 1990). This rule does not necessarily apply in this case, but however Luke should make the ethical decision which is to approach the manager instead of unfair gaining an advantage over Zane. Rule 4: Ask ‘what sort of person would do such a thing?’(Guy, 1990) The kind of person who does this is a self-centered person with little to no regards for others. Rule 5: Respect the customs of others(Guy, 1990). In regards to this, Luke should not approach the client with his discovered truth. This is because the customer has his or her beliefs. However, Luke should contact the manager and trust that he will make the right decision. There are fundamental differences between the two models; however, the two models seem to drive to the same conclusion. Luke should approach the manager inform his of what he found out during the audit and trust that the manager will make the right decision. If Luke is meant to be an audit supervisor he should get to be one ethically and not at the expense of Zane’s career. Assertions and substantive tests in Scenario 3 Audit procedures are carried out on certain assertions. In Scenario 3, assertions made in payables for Peak Sawmill Limited (Peak) are, particularly of interests. The audit objectives that are mostly addressed when analyzing this company’s payables are the completeness, the accuracy and the valuation of liabilities. Since the queries are raised during the planning stage of the audit while checking the accuracy, it is then clear that only two assertions are at risk, that is, completeness and valuation of liabilities(Leung, 2007). The completeness assertion means that Transactions, events, and accounts that should be presented in the financial statement are included. The auditor would then, in such a scenario, make sure that the payments made under payables are recorded. Valuation of liabilities, on the other hand, means that the asset, liability, components have been included in the financial statements at the appropriate amounts (Leung, 2007). The records made for the payables for Peak Sawmill Limited are not complete. This is because from the analysis at the planning and preparation stage of the audit, found that there were unprocessed invoices due to the pricing differences. These unprocessed invoices where not entered. The timings differences in the recorded dates of the payments made also does not help much though explained as a clerical error due to change in procedures. On the other hand, there are discrepancies between the value of liability due. This is because of three reasons. First, there are unprocessed invoices because of disagreements in prices, second, the amount of credit requested and lastly the disallowed for the settlement discounts. All these bring an inconsistency between the recorded value of liability and the actual value of the debt. Accounts payable is usually the largest current liability in a balance sheet and a significant factor in the evaluation of an entity’s short-term solvency. Is affected by a high volume of transactions and thus is susceptible to misstatements. The auditor is always concerned with the understatement of payables or entries not made. There are two primary tests of details an auditor can carry out. These include substantive tests of transactions and tests of details of account balances and disclosures. Substantive tests of transactions test for discrepancies or fraud that can be found in individual transactions. On the other hand, tests of details of accounts balances and disclosures are focused in amounts that can be found in financial instruments (Leung, 2007). As already stated above, there are two assertions that are at risk, these are, completeness and valuation of liabilities. For completeness, the tests of details of transactions are done by the auditor while for the cost of liabilities tests of balances are done. When doing tests of details for operations the auditor's procedures followed by the auditor involve vouching for the services made to ensure that all transactions are captured and covered in the financial statements. Some methods used include confirming for a sample of recorded creditor transactions to supporting documentation attesting for credits to supporting suppliers’ invoices, receiving reports and purchase orders or other evidence and verifying for debits to payments. For the case provided in Scenario three the auditor receive and “process” the invoices with the current prices since they are already being received. Reconciliation of the dates recorded for payments made is also another thing the auditor could do to ensure that there are correct entries made even though payments are made at the end of each month. When doing tests of details for balances and disclosure, the auditor may follow several procedures. When considering payables, there are three methods used including reconciling payables to monthly statements received by the entity from suppliers, confirming accounts payable and searching for unrecorded liabilities. For Scenario three, going through unregistered entries due to unprocessed invoices would be the first action taken. After that, analysis of the amounts requested for credit and the discounts that were disallowed. References Gay, G.E. and Simnett, R., 2000. Auditing and assurance services in Australia. Mcgraw-hill. Fisher, J., Gunz, S. and McCutcheon, J., 2001. Private/public interest and the enforcement of a code of professional conduct. Journal of Business Ethics, 31(3), pp.191-207. Moore, D.A., Tetlock, P.E., Tanlu, L. and Bazerman, M.H., 2006. Conflicts of interest and the case of auditor independence: Moral seduction and strategic issue cycling. Academy of Management Review, 31(1), pp.10-29. Leung, P., Coram, P. and Cooper, B., 2007. Modern auditing & assurance services. John Wiley & Sons Australia. Ethics in the Accounting Curriculum: Cases and Readings, in May 1990. Guy, M.E., 1990. Ethical decision making in everyday work situations. Greenwood Publishing Group. http://www.accaglobal.com/zm/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles/assertions.html http://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles/audit-procedures.html http://www.accaglobal.com/uk/en/member/professional-standards/ethics/rulebook.html Read More