Auditing & Professional Practice

Taking the above threats in consideration, the fundamental principles of Professional competence and due care along with the principle of integrity is at risk of being breached. If the auditor goes with what the CFO requires and in case the proposal of merger goes wrong then it would raise questions on the integrity of the auditor. Also, the auditor would be considered to have been failed in order to implement professional competence and due care in his work. Therefore, the auditor should do his job in the most honest way possible, even if it includes any threats, so that none of the fundamental principles are breached (Parker et. al, 2011).

When an auditor is given the responsibility to evaluate a merger proposal, it is his duty to do so with professional scepticism and due diligence. He should abide by all rules and principles which are laid down for the auditors to follow. In the given case we see that. An auditor was given with the task of evaluating a merger proposal. In order to his task, the auditor decides to check the completeness and accuracy of the report on which the whole decision of the merger was placed. When such act was bought to the attention of the CFO of the acquiring company, he was not very happy with the auditor meddling into the accuracy checks of the report. Also, the CFO stated of likelihood of such projects being allotted to the auditor.  The threats to compliance with fundamental principles which were noticed in the discussion between the CFO and auditor were, firstly, it was the duty of the auditor to check all the aspects of the company in order to evaluate the proposal, in case any discrepancies were found, the whole execution of the plan may lead to losses for the acquiring company (Baldwin, 2010). Secondly, the threat which was noticed was the prospects of the auditors being denied from a similar engagement in future.

The auditors are required to follow certain fundamental principles when they engage themselves in some professional work. These fundamental principles are:

Integrity- it requires the auditors to be straightforward and show honesty in their professional work and business relationships.

Objectivity – this requires the auditors to avoid conflict of interest, undue influence, etc in order to make discreet business judgements (2012)

Professional competence and due care – this requires the auditors to apply their professional knowledge and skill in their work in order to make sure that the client receives quality services, which are in accordance with updated laws and provisions (Baldwin, 2010). They should apply the recommended standards in their work.

Confidentiality – when an auditor is undertaking a task, he should make sure to maintain confidentiality (Prakashan, 2012). This is so, because this information relate directly to the share price or financial performance of the company, in case any sensitive information is leaked, it would affect the company value and would also breach one of the fundamental principles (Gilbert et. al, 2005).

Professional behaviour – the auditor should maintain his professional attitude and not take any action which may be considered inappropriate or unprofessional. 

The business decisions involve a lot of ethical elements. These elements have huge impact on the decisions which are to be made, which are likely to affect the other aspects of the organisation along with its financial performance and its image. To solve these issues an AAA model was introduced by Langenderfer and Rockness in 1990. This model involves seven steps of ethical decision making. These questions in this model cover all the aspects and effect of the decision which is to be made.

Identify the Facts of the Case.

In the given case, Luke finds out that the project assigned to him earlier belonged to Zane. Both Luke and Zane were not disclosed the original reason for Zane’s removal from the project. When Luke proceeds with work he comes to know the original reason for Zane’s removal, which was client’s dissatisfaction from Zane’s work.  But Luke finds out that Zane’s work was a quality work. He now knows that client’s dissatisfaction was due to personality conflict and not quality of work. Luke knows that the audit manager is unaware of this and the client’s reason is likely to affect Zane’s promotion.

Identify the Ethical Issues of the Case.

Ethical issues in this case involved are that if Luke should inform the audit manger about the facts of the case or he should inform Zane about the actual reason for his removal from the assignment (Roach, 2010).

What are the norms, principles, and values related to the case?

The norms, principles and values related to the case are if Luke informs the manger and mangers fails to take appropriate action then he would be guilty on part o f not bringing the whole matter to Zane’s attention. If he takes the course and informs Zane first about the whole matter, then it would be wrong not to have trust in the manager.

Identify the Alternative Courses of Action.

The alternative courses of action that can be taken are, Luke informs the manger first and wait for the manger to take the correct step. In case the manager fails to do so, he should inform Zane  so that Zane can make the matter clear himself.

Identify the Best Course of Action that is Consistent with the Norms, Principles, and Values Identified in Step 3.

The best course of action that would be appropriate is to go with the manger and present to him all the facts of the case.

Identify the Consequences of each Possible course of action

The consequences of first action will be the manager either takes action and does not let the client’s wrong reasons for Zane’s dismissal to affect Zane’s growth or the manger refuses to take any action related to the above case.

Make the Appropriate Decision.

The appropriate course of action for Luke shall be to have trust in his manger and inform him all the facts. He should then wait for the manger to take the correct action and make things right. If the manager fails to do so, then he should tell Zane about the whole case.

The day to day business activities involve a lot of decision making which involve ethical issues. Just like the AAA decision making model, Mary Guy decision making model helps to take decisions in cases where there are ethical issues involved. The Mary Guy model involves ten steps:

Define the problem

The problem involved in this case is whether Luke should inform about the main reason for dismissal of Zane from the assignment to the audit manager, or he should talk to Zane directly about the whole issue.

Identify the goal to be achieved

The goal to be achieved is to clear the main reason behind the client not wanting Zane to take up the assignment. Luke wants to bring to the attention of manager that Zane had done his work in the most satisfying manner, and work quality was not the reason behind Zane’s dismissal from the assignment.

Specifying all dimensions of the problem

The problem here involves that even if Luke is successful to inform the manager, whether the manager will now bring the whole issue to the attention of the client and Zane’s performance will not be affected by this.

listing all possible solution to the problem

As discussed, the solution to the problem is either to inform the manager about the whole truth behind the client not agreeing Zane to continue with the assignment. Or Luke could even bring the whole matter to attention of Zane so that he can clear any misunderstandings with the manager (Sawyer, 2003)

Evaluating each alternative

If Luke decides to inform about the whole issue to the audit manager then all the issues will be solved. Zane’s performance will not be harmed and also he will have complied with the ethics of the workplace. Also, completing the assignment in good faith will increase his chances of promotion. If Luke informs Zane about the real reason behind his dismissal from the assignment then, this may complicate things and also, the manager is not likely to believe Zane because of the client’s reason behind his dismissal.

Eliminating too costly Alternative

In this case this question is not much relevant

Ranking feasible alternatives

Option one that is option to inform audit manager will be the ranked as the first option which shall be considered as feasible option. The option to inform Zane will be ranked as second as this involves a little complications and risk.

Choosing the Alternative to Maximize Values

Option one which has also been ranked as one would be considered as the best alternative to maximize values.

Developing an overall solution

The overall solution for the whole issue will be clear out all the doubts in the mind of the manager so that the real reasons and facts of the cases are all before the manger and Zane’s performance is unharmed.

Committing to the choice made

The final step is for Luke to go the audit manager and present before him the truth behind client not in favour of Zane taking the assignment.

The major part of accounts payable constitutes of trade creditors. These creditors are re related to payables for inventories, other purchases, wages, etc. As soon as the company places its order for raw material, an obligation for the company to pay such transaction is created. Also the payables include expenses which are incurred in the normal course of business such as outstanding electricity charges, professional charges, etc. These expenses are majorly categorized as other creditors. It is the auditor’s responsibility to check for completeness in the accounts payables. He needs to analyse the assertions and apply substantive procedures in order to determine the correct balance of the accounts. He needs to check this with the other accounts with which the payables are related.

The major assertions which are identified while audit of accounts payable are Completeness and measurement as suited to the given case.  Other assertions related to accounts payable are existence, rights and obligations, occurrence, valuation and disclosure (Hoffelder, 2012).

In order to carry out the audit of the accounts payable the auditor needs to follow a series of steps and checks. The auditor needs to obtain confirmation for the account balances from the respective creditors for the balances they are owed at the end of the year. These are mainly taken from the creditors which have a lot of transactions with the firm (Mock et. al, 2013). The auditor needs to vouch for the transactions which constitute the payable for the specific creditor. The auditor needs to check for the unrecorded liabilities he should check for at the end year transactions and make sure that they are recorded for the correct reporting year (Hoffelder, 2012).  Also, comparison of budgets, level of activity, etc may be compared with the last year data. All these methods form part of analytical procedures. For example, commission to be paid on expense can easily be calculated on the sales figure, this way the liability recorded in the books may be cross checked.  The part of liabilities which do not form part of the reporting period should be recorded; auditor needs to keep a check on the timing of the transaction.

As discussed the main assertions in the given case for accounts payable are completeness and measurement.

The accounts payable of the company includes all its obligations and liabilities which are due at the end of the year. In order to determine the correct figure for expenses of the current year it is necessary to check all the accounts belonging to every type of creditor. In case any substantial transaction is missed it not only affects the balance sheet it also effects the income statement of the company (Livne, 2015). The profits of the company can easily be manipulated by showing excess or less expenses. In order to determine the actual and true profit of the company the expenses need to be properly calculated.

In the given case study we see that the as a part of internal control the invoice sent by the suppliers are first checked and valued properly, and in case of any discrepancies a credit note for the difference amount is issued. Keeping this mind, we should check that the bills which are recorded in the books are based on the actual invoice figures net of credit note. The effect of credit should be recorded in the books as and when they are utilised. Elimination of such facts may affect the completeness of the transactions (Kalpan & Williams, 2013).

Secondly, in the given case we see that variances arise in the books of company and creditors ledger. These differences mainly arise due to pricing differences, timing differences, credit notes or discount disallowed. All these factors have affected on the ledger balances (Livne, 2015). Also, the invoice which are send and received sometimes have differences in value, therefore it is important to determine the correct value of goods and services so that they can be recorded in the books, this creates an assertion on the measurement of the transactions in the books of the company (Sawyer, 2009).

Also the other factors such as existence of the transaction, occurrence, valuation, disclosure, etc, should be asserted on. The value of a liability should be correctly and properly recorded in the books of accounts (Heeler, 2009).

The audits procedures for a particular part include various steps. The auditor first needs to pick up a certain item. Then he needs to analyse the nature of transactions which are recorded in that particular account (Wood, 2012). He needs to find out the key assertions in that account. Then he needs to check if they are properly implemented. In case he finds any irregularity in the accounts he needs to find the solution and its effect on the accounts (Cappelleto, 2010). He needs to apply substantive and analytical procedures in order to determine the correctness of the accounts.

In order to obtain sufficient audit evidence for the completeness of the transactions and balance of the accounts payable, the auditor should check for transactions which are not related to the current reporting period (Kalpan & Williams, 2013). He should check for invoices and dates mentioned on them. The data should be compared with other recorded such that inventory received date, inventory movement records, etc. He should apply other general procedures in order to determine the completeness of the transactions in the accounts payable (Christensen, 2011).

The case here involves differences in accounts payable due to differences in invoice values. The auditor should check for the clerical accuracy while going through such transactions, specially focussing on the invoices which have different values (Vause, 2009). The value of any goods which are imported should be correctly recorded using the appropriate exchange rates. The auditor needs to make use of the account confirmations and data from other sources in order to determine the correct measure of the transaction (Heeler, 2009).

Keeping the above points in mind and applying other general procedures of audit the auditor can easily determine the correctness of the balances of the accounts payable recorded in the books.

References-

Prakashan, N 2012,  Practical Auditing, Nepal

Vause, B 2009, Guide to Analysing Companies, Bloomberg Press

Sawyer, L 2003, Sawyer's Internal Auditing,  Institute of Internal Auditors.

Wood, D A 2011.  ‘The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor's Reliance Decision,’. The Accounting Review. Vol. 86. No. 6

 Wood, A. A 2012,’ Turkish Studies. Vol. 14, no. 4

Baldwin, S 2010, Doing a content audit or inventory, Pearson Press.

Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne

Christensen, J. 2011, ‘Good analytical research,’ European Accounting Review, vol. 20, no. 1, pp. 41-51

Gilbert, W. Joseph J and Terry J. E 2005, ‘The Use of Control Self-Assessment by Independent Auditors’, The CPA Journal, vol.3, pp. 66-92

Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press

Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.

Kaplan, S. & Williams, D 2013, ‘Do going concern audit reports protect auditors from litigation?’ A simultaneous equations approach. The Accounting Review, 88(1), 199-232.

Livne, G 2015, Threats to Auditor Independence and Possible Remedies, viewed 12 August 2016, http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full.

Mock, T. J., Bédard, J., Coram, P., Davis, S.,  Espahbodi, R. & Warne, R 2013, ‘The audit reporting model: Current research synthesis and implications’, Auditing: A Journal of Practice and Theory. 32, 323-351.

Parker, L, Guthrie, J & Linacre, S 2011, The relationship between academic accounting research and professional practice, Accounting, Auditing & Accountability Journal, vol. 24, no. 1, pp. 5-14.

Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson. 

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