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The present report presents the case of auditing, ethics and code of conduct for Health Care Holdings Group (HCHG), which was audited by Fellowes and Associates Chartered Accountants. The client company has wholly owned subsidiary private hospital groups namely Shady Oaks Hospital, Gardens Nursing Home and Total Cancer Care. The present study covers the regulations of “APES 110 on Code of Ethics for Professional Accountants” to identify and discuss the potential threat on audit independence while performing audit procedures for the client company. The identification of the potential threats will be done as per the given situations along with the recommendation of possible actions to be taken by the Chartered Accountant firm to reduce the probable threats for audit independence.
The present case provides two situations on the analysis conducted by Tania Fellowes for the group of Total Cancer Care and Health Care Holdings Group during the financial year 2014. It stated that the organizational accountant intended to join the team of audit during the year 2014, which owns securities in HCHG. However, the interest of the accountant to join the audit team was not material for the company. Other situation states the previous engagement of Fellow and Associates with the parent company to consider the intellectual property valuation for June 30 2014. Considering the financial information in the annual report the intangible asset valuation involved the amount of $30 million valued by audit firm as on March 1 2014.
According to the principles of APES 110, it is important to maintain the fundamental principles on integrity, confidentiality and professional competence by professional accountants. As per the provision of section 290, auditor should comply audit independence while verifying and examining the financial statements to measure the true and fair view (Oladipupo & Izedonmi, 2013). Considering the first situation of the given case, participation of HCHG’s accountant in the audit team and ownership of securities may create several audit independence threats.
One of the significant threats that the audit firm might face is the limitation on verification and investigation scope to check the relevant accounting books and statutory documents (Chiang & Chiang, 2016). Further, consideration of substantive procedures and test of controls would be difficult to follow as the presence of accountant might influence on transparency and accountability of reported financial information. Involvement of accountant of HCHG might disclose the confidential audit working papers for performing audit procedures (Wright & Charles, 2012).
It is important to measure the fair value of the organizational assets in compliance to the International Financial Reporting Standards to examine the reported financial position. Accordingly, for valuation of intangible assets, compliance of accounting standard on valuation and disclosure of intangible assets is necessary (Fuchs et al., 2015). In the second situation of the given case, intangible asset valuation has been done after the acquirement of Shady Oaks Hospital hence the potential threat on audit independence might appear on correct date and method of acquisition. Availability of correct past years’ profit, investment amount and other financial information is difficult which would not detect the correct and fair valuation of intangible assets (Samsonova-Taddei & Siddiqui, 2015). Accordingly, correct valuation of business and goodwill may not be ascertained as well as the contract details or third party confirmation may not be obtained to verify the correct valuation.
For the purpose of declining the probable threats for both the situations the audit team of Fellowes and Associates should follow the regulations of APES 110 on professional ethics. The team of audit firm should object the participation of the accountant of HCHG because as per professional ethics and fundamental principles an organizational employee cannot get involved in auditing (Libby, Rennekamp & Seybert, 2015). Further, the audit team should take action by forming better communication with the management and governance of the company to reduce the scope of limitation on examining the accounting books and statutory documents.
Considering the second situation, the audit team should review self- interest and self-review threat for as well as formation of proper communication with the management of the subsidiary companies to consider the asset verification (Roy, 2015). The audit team may take action on performing verification and examination of financial performance of the subsidiary company for previous years in order to check the factors for business and goodwill valuation.
Therefore, to reduce the future risk on audit independence, the audit team is suggested to include various safeguards within the firm as well as within the client company. In view of the safeguards within the audit firm, the audit team should consider the appropriate knowledge and professional skills among the audit assistants (Quick & Warming?Rasmussen, 2015). The audit team is suggested to for communication with the previous auditor before accepting the company’s audit engagement. The Fellowes and Associates may also consider the external review along with the communication from third parties to form unbiased judgment on the audit procedures of the company. The audit team is also recommended to prohibit the involvement of individuals who are not associated with the audit engagement to avoid the influence on audit outcome.
The independence of audit is an important principle required to be following by the auditor while performing audit procedures to verify the true and fairness of the financial statements and other financial information. Accordingly, compliance of regulations and legislations of auditing standards is essential which include the compliance of code of conduct and professional ethics. Therefore, it can be concluded that the engagement of an individual related the audit client is against the fundamental principles of professional ethics that affect the professional integrity, objectivity and confidentiality. Similarly, valuation of intangible assets is critical and requires appropriate details to examine its correct valuation. Hence, it is essential to follow the principles and regulations of relevant IFRS and APES so that the correctness of business value can be ascertained. Accordingly, it is essential to maintain the requisite safeguards and take necessary actions to eliminate the risk on audit independence potential threats.
Chiang, C., & Chiang, C. (2016). Conceptualising the linkage between professional scepticism and auditor independence. Pacific Accounting Review, 28(2), 180-200.
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.
Libby, R., Rennekamp, K. M., & Seybert, N. (2015). Regulation and the interdependent roles of managers, auditors, and directors in earnings management and accounting choice. Accounting, Organizations and Society, 47, 25-42.
Oladipupo, A. O., & Izedonmi, F. I. O. (2013). Propensity of Unqualified Audit Reports and Auditors’ Independence in Nigeria. African Research Review, 7(3), 34-46.
Quick, R., & Warming?Rasmussen, B. (2015). An Experimental Analysis of the Effects of Non?audit Services on Auditor Independence in Appearance in the European Union: Evidence from Germany. Journal of International Financial Management & Accounting, 26(2), 150-187.
Roy, M. N. (2015). Statutory Auditors' Independence in the Context of Corporate Accounting Scandal: A Comparative Study of Enron and Satyam. IUP Journal of Accounting Research & Audit Practices, 14(2), 7.
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Wright, M. K., & Charles, J. (2012). Auditor independence and internal information systems audit quality. Business Studies Journal, 4(2), 63-84.
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