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Fundamental principles are the ethical codes that business organizations need to conduct to operate their business activities and functions. The management of the companies is required to follow the business policies legally and with best business practices to safeguard the interest of the stakeholders (Arens, Elder & Beasley, 2012). In the given scenario, review of the cash flow statement of a company Steel Pty Ltd. has been conducted for the purpose of the acquisition. However, the CFO of acquiring company Bolts Ltd required the review of sales and profitability for the Steel Company rather than the cash flow statement. According to the contention of CFO the acquisition would be beneficial for the Bolt Company hence cash flow reporting would not be required.
Consequently, reviewing and reporting of sales and profitability of the Steel Company would lead to certain threats to compliance with the fundamental principles. Two of these threats are discussed as under:
Self- review threats occur previous judgment or review report is to be re- analyzed and examined to form a judgment the financial information of an organization for the purpose of a business decisions. To form a re-opinion may lead the auditor to be biased for the interest of the client company that may harm the professional ethical issues of the auditor (Lewis, 2015). In the given case, the CEO of the client company required the auditor to review and report the sales and profitability of the acquiring Steel Company instead of the cash flow statement. The review on sales and profitability does not reflect the complete picture on the company’s financial position accordingly, it can a threat on the professional code of conduct.
Advocacy threats occur when the auditor is required to promote a position or opinion of the client company to an extent that it may result in compromising the objectivity of the professional auditor. Therefore, in the given situation, contention of CFO to review the Steel Company’s sales and profitability statement instead of cash flow statement might hamper the professional ethics and objectives of the auditor. It is because the cash flow statement reflects the true picture of company’s operating results and financial performance (Kumar & Mohan, 2016).
On the other hand, the risk on fundamental principles of being breached may occur in the given case of Bolts Ltd and Steel Ltd. One such risk is inherent risk that occurs when the susceptibility of material misstatements on the subject matter on the assumption that there are no related internal controls. Another risk that can be experienced is Control risk, which states that the material misstatements would occur but would not be detected or rectified. In the given situation, it is likely the auditor may face these risks on fundamental principles.
Auditing is an examination of books of accounts to review the correctness and transparency of the financial information to evaluate the performance of the company for the benefit and use of stakeholders. In order to perform the auditing, the auditor is required to plan and perform the audit actions with respect to the business functions of the client company (Filimon, 2016). In the given scenario, Luke had undertaken audit work for the client company of his competitor Zane for the purpose of resolving the issues and obtaining good reviews. The actions Luke would take as per American Accounting Association decision- making model are as follows:
In the first place, Luke is required to find and state the facts of the case. On reviewing the books of accounts, ledgers and other business documents of the company should be examined and verified to find out discrepancies, bribes or conflicts in the accounting records. The second step would be determining the ethical issues regarding the performance of his audit work. Luke is required to frame and establish his ethical issues for performing the verification of accounting records and placing his opinion in the audit report. Further, the auditor is required to identify the principles and values to place the issues and opinions regarding the discrepancies and issues arising in the books of accounts (Filimon, 2016). Thereafter, Luke is required to find alternative course of action to resolve the issues and present the company’s books o accounts at true and fair view. Luke is required to provide the alternative suggestions and present the issues along with the explanations to form the audit opinion on the financial reports of the client company.
In case the Mary Guy decision- making model is followed then the there will be some difference in the course of action of audit. As per this model, there are ten core values that have been identified for the purpose of principles and values (Fuchs et al. 2015). Luke is required to follow the values of caring and honesty while performing the audit procedures with dignity and truthfulness and maintain the reputation. Another value that Luke is required to maintain is the accountability in performing the auditing for the client company. It is the consequences and responsibility of actions to avoid the occurrence of impropriety. Further, the audit work also requires to be performed by maintaining the excellence of knowledge and loyalty toward the planning and examining the accounting records and documents. Luke should perform his audit process with fairness, integrity and maintain the code of ethics to review the accounting evidence, examining the financial information and maintaining the details of clients business confidential.
It is likely the auditor might face certain conflicts and disputes while performing the audit work for checking and examining the business documents, invoices for cash transactions and other financial results. Therefore, Luke is required to evaluate these possible situations and manage the audit procedures to reflect and form unbiased opinion on the financial statements of the client company.
Accounts payable is the payment owed by the business organizations to the suppliers, which is recorded as liability in the books of accounts during the accounting period. It is essential to record and recognize the accounts payable amounts correctly to present the true and fair view of the company’s financial reports. Hence, several key assertions are followed by the auditors for auditing the accounts payables and its correctness (Whittington & Pany, 2011). Audit assertions are inherent and unambiguous claims and presentations prepared by the management of the organization responsible to prepare and present the financial statements. Hence, the two key assertions at risk that are required to be followed in relation to accounts payable are as follows:
Completeness is one of the significant assertions risk for recording and recognizing the account payable transactions. Sometimes, the accountant of the company tends to omit the record of suppliers value transactions especially when the transaction consists of small amounts (Filimon, 2016). To present the correctness of the financial statements it is important to record all the transactions with respect to the payment made, payment due and interest amount. In the given case, the verification of invoices with that of logbook and payments cleared to the suppliers should be properly checked to review the completeness.
Another key assertion at risk is accuracy in recording the accounts payable in the accounting statements for the Peak Sawmill Limited during the year. At times, it happens that the recognition of account balance with respect to the outstanding payments differ from the actual amount paid and the amount recorded (Boolaky & Omoteso, 2016). Such errors reflect serious and material misstatements in the books of accounts of the company. Therefore, all the necessary adjustments on discounts received, advance payments, credit period and amounts due to be paid should be examined and verified with the related invoices. Accordingly, in the given case the auditing process of Peak Sawmill Ltd. any discrepancy between the supplier’s invoice and the actual value charged should be communicated to the management to form an unbiased audit opinion.
During the process of auditing for the company, Peak Sawmill on performing the analytical procedures it has been identified that the credit period significantly declined compared to past financial years. On further investigation, it has been revealed that the logbooks of suppliers contain more than 90% of the accounts payable. Therefore, the completeness of recording the transactions is essential to check for the correct determination of financial position of the company.
On the other hand, accuracy in recording the accounting transactions for liabilities and outstanding payments are relevant because certain discrepancies between the actual amount recorded and invoice amount has been noticed. It is important to reconcile the balance of accounts payable with that of the creditor’s general ledger at the end of the month. It is also essential to verify the amount of actual discount received with that of recorded amount along with the payment date recorded in the books. Accuracy is important to check with respect to the unprocessed invoices, credit amount and timing differences for the payments made.
Substantive test is a procedure of auditing to check the possible errors in the financial statements by examining the supporting documents for each transaction. In the first assertion of completeness, the auditor is required to perform substantive test to attain sufficient audit evidence by examining the suppliers’ ledger, invoices and final books of accounts (Arens, Elder, & Beasley, 2012). Further, the auditor is required to verify the completeness of the accounts payable transactions checking the suppliers name register as well as communication with the management.
On the other hand, substantive test for obtaining the evidences on accuracy of the accounts payable by examining the details of the payment terms and conditions. The verification with respect to the rates of discount, pricing details and payment mode for the supplies is to done with that of recorded amounts. Auditor can also obtain third party confirmation to form the verification on accuracy of the accounts payable transaction.
Arens, A. A., Elder, R. J., & Beasley, M. S. (2012). Auditing and assurance services: an integrated approach. Prentice Hall.
Boolaky, P., & Omoteso, K. (2016). International Standards on Auditing in the International Financial Services Centres: What matters?. Managerial Auditing Journal, 31(6/7).
Filimon, F. (2016) THE ROLE OF THE INTERNAL AUDIT OF THE EU FINANCED PROJECTS FOR THE MILITARY SCIENCE DEVELOPMENT. In International Scientific Conference" Strategies XXI"(Vol. 1, p. 284). " Carol I" National Defence University.
Fuchs, S., Bergmann, A., Rauskala, I., & Schmitt, A. (2015). Public Sector Accounting and Auditing in Switzerland. In Public Sector Accounting and Auditing in Europe (pp. 204-218). Palgrave Macmillan UK.
Kumar, E. P., & Mohan, B. (2016). Origin And Development of Auditing.PARIPEX-Indian Journal of Research, 4(9).
Lewis, I. (2015). The role of internal auditing in providing combined Assurance: assessing internal financial controls.
Rezaee, Z., Sharbatoghlie, A., Elam, R., & McMickle, P. L. (2012). Continuous auditing: Building automated auditing capability. Auditing: A Journal of Practice & Theory, 21(1), 147-163.
Whittington, R., & Pany, K. (2011). Principles of auditing and other assurance services. Irwin/McGraw-Hill.
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