Audit & Assurance Essay


Discuss about the social and Ethical Understanding ?

Answer :


Businesses have to operate in complex structure today which makes the penetration of frauds easier due to the technological advancement. On one hand, technology has provided a tremendous boost to the growth of the business while opened a variety of route for the conduct of the fraud too. Hence proper planning and execution aids the business in the implementation of its strategies. The strategies need to be undertaken considering various factors that surrounds the business internally as well as externally. A few of the potential areas are discussed hereunder.

Business Risk

Before the commencement of a business, it is essential to list down the business risks. A business risk can be defined as a risk that arises out of events, circumstances, actions, conditions or such other situations that could adversely impact the ability of the company to achieve its objectives and goals (Dezdar & Ainin, 2011). Instances of the same are financial risk like poor credit, going concern and liquidity risk or operational risk like physical disasters, stock shortages or compliance risks like violation of ASX code or incurring fines and penalties, so on and so forth.

Hence the first step would be to identify the extent of damage or loss the risk can cause and whether sufficient internal controls are implemented to reduce the occurrence of the risks.

A broad indication about the likelihood of occurrence of risk is obtained by the management by making inspections, audits and observations in the potential areas.

Internal Controls

Internal controls can be defined as a process or check designed by the management and board of directors to provide reasonable assurance that the entity achieves its objectives. The internal controls should ensure accurate and reliable financial reporting, compliance with laws and regulations, effectiveness and efficiency of operations and safeguarding of assets (David, 2009). Analysis shows that the most important factor causing a fraud is poor internal control.

This control structure should be established by the management that will aid the management in ensuring that the irregularities are prevented, detected and corrected; assets are safeguarded; financial records are accurately reflected; management policies are adhered to and operational efficiencies are promoted that prevents the unnecessary duplication of errors (O'Brien & Marakas, 2009).

Irrespective of the due care taken in the design and implementation of internal controls, there a few inherent limitations of internal controls that management needs to be aware of like recording of an unusual or a non-routine transaction, mistake in judgment, management override of controls, changes in conditions and control breakdowns due to carelessness or collusion with staff (Kimball, 2008).

Thus a perfect understanding of the working of the control will result in performing surprise tests and checks to analyze the effectiveness of the same.

Information Systems

As businesses evolve, there are changes in the operating environment, corporate restructuring, expanded foreign operations, rapid growth and appointment of new personnel. All this growth comes with a set of associated risks and has its own implications and consequences (Olsen, 2012).

The information systems also have to be adequately designed to consist of procedures and records to initiate record and process business transactions and maintain accountability for assets, liabilities and equity. The prime focus should be presentation of financial information in accordance with the accounting standards (Peter et. al, 2013).

The regular updating and maintenance of the information systems is an utmost requirement to capture all the latest business transactions and ensure quality financial reporting.

Segregation of duties

Division of work is a common feature and requirement in a corporate setup. It has to be ensured that individuals should not be allowed to perform such tasks where they are likely to commit an error and can also conceal or hide the same in the normal course of their duties (Fowler, 2010).

There is a chain of activities for instance, executing a transaction, recording a transaction and maintaining custody of assets arising as a result of the transaction. Care needs to be taken that each of these activities should be assigned to different individuals or departments and the same person or department should not be assigned the responsibility in the chain transactions (Porter, 2008).

The various steps in the execution of transactions should be assigned to different departments. In this way the responsibility for executing the accounting transaction should be segregated.

Monitoring and Control

Monitoring is the process by which the quality of internal controls is evaluated. The design and operation of the internal controls is assessed on a regular basis to take corrective actions wherever required.

It includes ongoing monitoring, separate evaluations and reporting of deficiencies to the audit committee. Management review is obtained on the same and the response to customer complaints is discussed (Siraj et. al, 2011).

Apart from this, it is vital for the company to have physical controls and inherent controls. Physical controls may be either direct which restrict the physical access to certain areas or indirect designing the programs and implementation. The access controls should be designed in a way to prevent the unauthorized access and use of data.

Thus these are the few areas of knowledge; advice and recommendations that can help the company function better and execute its strategies in a more efficient manner.

Application of teamwork knowledge and skills to work effectively with others across diverse accounting purposes and contexts.

There was a time when a single person used to carry out all the work from journals, ledgers till finalization of financial statements. But today, with the increasing requirements of specialization in services, there is a specific person appointed for each function who is specialized in performing the same. Such a structure and framework requires a high level of coordination and teamwork among the members of the chain function.

There is a difference between hard skills and soft skills. Hard skills refer to the technical knowledge of performing activities while soft skills are aimed at the manner and mode of communication in a way that is pleasing to deliver.

The dimensions of teamwork that are useful in the accounting profession are coordination, decision making, leadership, interpersonal skills, adaptability and communication. Coordination is the method by which the resources, activities and responses are organized in a way to ensure that the accounting tasks are completed in a synchronized and organized manner within the time constraints. Decision making is the ability of the team to make the most efficient utilization of the available resources (Hanson et. al, 2011). Based on the possible evaluation of the available resources, logical and sound decisions are taken. Leadership is the process of assigning tasks to the team members, organizing and planning the work and creating a positive atmosphere within the team. It provides direction for the team.

Interpersonal skills refer to the ability to understand the behavior of other team members and function in a way to avoid conflict among the team members. Adaptability refers to the ability to create awareness about the factors that are vital to the accounting task and making the team members adjust and deliver their best in the available conditions (Rud, 2009). Communication refers to the exchange of knowledge and resources among the team members about the status of the task or any problems encountered so on and so forth.

Demonstration and application of knowledge of ethical and regulatory perspectives

Accounting is the method of recording business transactions in a systematic and reliable manner and provides financial information to the stakeholders. Ethics is an area that impacts all walks of lives of humans. In order to achieve the objectives of the accounting profession, adherence to fundamental principles is a must (Mehdi, 2006). Accounting ethics has been touched upon by various professional bodies and organizations that have drafted rules, a gist of which is discussed hereunder.

Integrity – An accountant should be honest in performing professional services.

Neutrality – Professional accountants should be neutral and the services offered by them should be free from any prejudice, conflict of interest, bias or such other influences.

Professional Competence & care – There are lot of developments in the regulations of accountancy profession which the professional accountants have to keep themselves updated with. Hence the accountants should keep themselves updated and render services with care, diligence and competence to do so.

Confidentiality – The knowledge of business gained from one client should not be shared with another client or used by the professional accountants for their own benefit. This builds trust in the services rendered by the professional accountants.

Professional behavior – The professional accountants should act in a way that is consistent with the reputation that the profession carries. Actions and words should reflect the credibility that the accountancy profession provides.

Thus the ethical and regulatory perspectives of the accountancy profession require the rendering of high quality services that is in line with the latest amendments of laws and accounting standards (CPA, 2016).


In certain cases, corporate might expect accounting to obtain a favorable result that might require a compromise on the ethical standards. In such cases, for the benefit of the corporate, the accountant should not depart from the ethical standards and continue to render services that are morally valid.

The causes for the same are listed below:

  • Recording and accounting of transactions without proper supporting documents
  • Misuse of internal controls
  • Accounting based on altered or forged documents
  • Incomplete registration or existence of dual offices
  • Lack of compliance with financial and tax laws or regulations
  • Use of dominance on subordinates forcing them to record transactions incorrectly
  • Misappropriation of assets
  • Collusion with internal and external auditors for hiding non-compliance and non-disclosure
  • Adoption of improper accounting practices
  • Window dressing the financial irregularities
  • Making of false statements and claims to auditors or relevant authorities
  • Disclosure of confidential information with third parties or competitors
  • Failure to do physical verification of inventory and report incorrect information
  • Providing of incorrect market information to influence the share prices

Thus it can be seen that accounting is the commencement point for many bigger frauds that have led corporate houses to fail miserably. An audit of all the transactions cannot be done as auditors use sampling techniques. Hence it is highly likely that the accounting errors might escape and led to further financial distress for the stakeholders who are not aware of the true financial position.

Six Step Process to ethical dilemma

Relevant Facts

Charles is appointed in the Graduate position at a large auditing firm, C & B, through the contacts and influence of his father, William, who is a business consultant and a close friend of the audit partner at C & B named Tim. Charles is under the supervision of a chartered accountant named Sebastian who is likely to get promoted as a Senior auditor and an Associate in the near future. The major client of C & B is BrickBlocks Ltd and William provides business consultancy to a company that is a major competitor of BrickBlocks. This competitor is also audited by C & B, but under a different audit partner.

Ethical Issues

Familiarity is the biggest threat to independence. In this case, independence is impacted in more than one area listed below:

  • Charles is appointed in his father’s close friend’s office using his contacts and influence.
  • Sebastian is more concerned about his own career despite knowing the fact that the vouching done by Charles is not complete and in compliance with the requirements.
  • The CFO of BrickBlocks is an ex-girlfriend of Charles who assures Charles that Sales are properly accounted as it impacts her bonus as well.

Affected Party

Always in ethical issues, both parties are at a loss which might or might not be discovered. However in this case, the affected parties are as under:

  • Charles is just using contacts and influences to secure a job and has not obtained it by his own talent, merit and hardwork. Apart from this, Charles has also not taken the initiative to learn the process of auditing sales and accounts receivable which might land him in trouble.
  • Sebastian is affected because he is aware that the quality of audit is not good, yet he is forced to keep quiet for his own personal reasons.

Alternatives available

While performing an audit, it is necessary that the audit is carried out without any bias or influence and in a neutral manner. Over here the alternatives available are listed below:

  • Charles should be appointed to work under a person not familiar to him.
  • Sebastian should point out the mistakes of Charles irrespective of the fact that William is Tim’s friend and that Sebastian himself is expecting a promotion.

Consequences of alternatives

The consequences of the alternatives are discussed below:

  • If Charles works under a third party, his personal knowledge, learning and growth will improve to a great extent.
  • If Sebastian does this, then there are chances his work will be appreciated as it is ethically correct and he will still get the promotion due to him.


In the light of all these requirements under various sections, it can be concluded that there has been a compromise on the expressing of independent opinion in this audit due to conflict of interest and the breach of confidentiality by use of client information for the benefit of its competitor.

It is thus seen how a small appointment can make things worse to a large extent and somehow as more familiar persons join together, the corporate comes to a fall. Hence independence of thoughts and actions are ultimately required to ensure a reasonable quality of audit.


Professional accountants are undoubtedly having the educational qualification to render services but the true and fair application of this knowledge is considered as an essence. With the technological advancements and the increase in the rights of shareholders, it has become all the more essential for accountants and auditors to provide services with integrity.


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