Kingsley Read failed to exercise ‘due care’ in the audit of Plummet Travel
Plummet Travel is guilty of contributory negligence
Kingsley Read owes a duty of care to the New Zealand parent company.
This particular section deals with the case on Plummet Travel Limited and the auditor Kingsley Read. In this particular section, emphasis has been given on providing recommendations on whether Kingsley Read was following the audit function with due care. Addition to that, it requires recommending on whether Plummet Travel Limited had been involved in contributory negligence of any types (Gay & Simnett, 2015). According to the Auditing Standard; Due Care is to be exercised in the planning as well as planning and performance of the audit and preparing the report. This standard requires the independent auditor for planning and performing his or her work with due professional care. This reveals the fact that due professional care mainly imposes responsibility on each professional for acting as per independent auditor who is responsible for observing the standards of flied work as well as reporting.
1. Kingsley Read failed to exercise “due care” in the audit of Plummet Travel
The above statement is completely not true as Kingsley Read had tried every possible ways to audit for the company named as Plummet Travel. Plummet Travel had upgraded its accounting software system to a computer database (Gay & Simnett, 2015). Due to this upgradation, Kingsley Read does not have the proficiency to review as well as evaluate the database management system. As he was not aware of how to review the upgraded the system used in the company, he took the assistance of an independent expert who will undertake the role. The independent expert is of the opinion that the system appears to be reliable and that the change of latest accounting system database was correctly carried out by Plummet Travel Limited.
The above fact explains that Kingsley Read has tried every possible ways for auditing the new form of systems by attending courses that can familiarize with the features of the upgraded accounting systems to a computer database. Addition to that, Board of Directors was happy to see that Plummet Travel Limited is performing well after upgrading the computer database. Therefore, Kingsley Read was acting with due care as the auditor had carried his work in a professional way. Kingsley Read had acted with professional due care while auditing for Plummet Travel Limited. This has been done by exercising the planning as well as performance at each step in the audit report preparation. Kingsley Read had audited for the company Plummet Travel Limited whereby he plans and performs his work with due professional care. It is noted from the case as Kingsley Read had made attempts for auditing the new accounting computer database that was used by Plummet Travel Limited. Despite having little knowledge on the new forms of accounting computer database, he took advice from an independent expert and relies upon his conclusion that change had been a positive aspect for the company.
Plummet Travel is guilty of contributory negligence
The above statement is not true as Plummet Travel Limited has trusted the wordings of their appointed auditors who quarterly audit for each financial year. Plummet Travel Limited was not found guilty of any contributory negligence as the company had review the auditor statement and happy with the figures (Bobek, Hageman & Radtke, 2015). Contributory negligence in auditing means purposely neglecting or contributing towards unfair practices that is taking place in the business organization. It is not the case as Plummet Travel Limited Board of Directors had personally reviewed the statement of auditors at the time of Board Meetings. The company had found out that the new system had been in place for 6 months that made the directors happy with the way that was operating. Therefore, it is understood that Plummet Travel Limited was unaware of any unfair misstatement in their financial statements and they are not liable for contributory negligence.
Kingsley Read owes a duty of care to the New Zealand Parent Company
Kingsley Read acts with due professional due care and are not obliged to pay for negligence to the New Zealand Company. This is because all the necessary actions was undertaken by Kingsley Read starting from taking expert advice, gaining knowledge on new systems by undertaking courses. These are the actions that make Kingsley Read acting with due care and working for the benefits of Plummet Travel in every means (Bobek, Hageman & Radtke, 2015).
American Accounting Association Model
Decision making process
The fact from the case is that Jimmy was of the opinion that Engines International Limited was using a questionable method for revenue recognition that cannot be considered as the appropriate method to use in the upcoming financial years.
Jimmy discussed the matter with the Senior audit partner but the answer given to him was that the method had been used for 10 years and is appropriate
Jimmy wants to include a disserting statement in the audit working papers but the audit partner refuses to permit such kind of statement. Rather, she showed willingness in writing a letter to Jimmy acknowledging full responsibility for the audit.
Finally, the audit partner refuses to make Jimmy her audit partner for the company.
Therefore, the fact that is identified from the case is that there is issue with the revenue treatment that is adopted by EI in their business operations
Defining the ethical issues
Ethical issue that is identified in the case is that there was disagreement between the statement made by Jimmy and the Senior Auditor.
Ethical issue identified in this case whether Jimmy has listened to the Senior Auditor or not. Addition to that, whether actually Jimmy should listen to the Senior Auditor in the particular situation where both the auditors disagreed regarding the unquestionable revenue treatment that has been investigated by ASIC.
Identification of major principles, rules and values
Code of Ethics is statement of principles as well as expectations that governs individual behavior organizational behavior in the conduct of internal auditing (Bobek, Hageman & Radtke, 2015).
The purpose of the Code of Ethics is to promote the ethical culture in the profession of internal auditing.
Code of ethics is essential as well as appropriate for the profession of internal auditing as it is on the trust placed in its objective assurance in relation with risk management, governance and control. Code of Ethics provides four principles as well as rules of conduct under the category named as: Integrity, Objectivity, Confidentiality and competency (Cameron & O'Leary, 2015).
The rules of conduct mainly describe the behavior norms as expected from the internal auditors. Some rules help in interpreting the principles into practical implications as well as intended to guide the ethical conduct of internal auditors. The Code of Ethics mainly provides guidance to the internal auditors who serve others. Internal auditors refer to Institute members for providing internal auditing services within the definition of internal auditing.
Applicability and Enforcement- Code of Ethics is applied to both individuals as well as entities those provide internal auditing services (Cockrell, Stone and Wier, 2017). In case of Institute members, breaches of the code of ethics will be evaluated as well as administered in accordance to the Institute Disciplinary Procedures. If a particular conduct is not mentioned in the Rules of Conduct, it does not prevent it from being unacceptable or discreditable where member is liable to disciplinary action.
American Accounting Association Model
This model comes from a report for the AAA that is written by Langenderfer and Rockness in the year 1990.
Scenario for the AAA Model
An auditor uncovers an irregular cash payment as well as receives an unsatisfactory explanation for it that comes from client finance director. This model suggests a logical seven step process for conducting the decisions as it takes ethical issues into account (Gay & Simnett, 2015).
The first step is to establish the facts of the case by ensuring that there is no ambiguity about what is under consideration.
The second step is to identify the ethical issue in the case by asking what are the issues at stake
The third step requires identifying the norms by placing the decisions in its social, ethical as well as professional behavior context. In this, professional code of ethics are taken into consideration by discussing on the norms, principles and values
The forth step is to identify the alternative course of action by stating each consideration of the norms
The fifth step is to select the best course of action
The sixth step is to consider the consequences of the outcomes
The final step is take the decisions
According to American Accounting Association (AAA) Model, it is noted that acting in the public interest takes into consideration where accountants need to have legitimate interest of clients, financial institutions, employers, business, employees as well as financial community that relies upon the integrity and objectivity of the accounting profession (Gay& Simnett, 2015). This is to support the proprietary as well as orderly function of business. The dependence actually imposes public interest accountability on the accounting occupation. It is responsibility of the professional accountants for acting according to the public interest, reasonable and informed public perception at the time of deciding whether to believe with the appointment or meeting that bears in mind to the stage of public interest of business entities.
Professional Accountants has to comply with the basic principles that includes:
Integrity- This principle means professional accountants needs to be straightforward as well as honest in all the professional and business relations.
Objectivity- This principle means that professional accountants cannot be bias in any particular situation, give rise to conflicts of interest as well as undue authority of others that will override specialized or commerce judgment in any case.
Professional competence and due care- This particular principle means that professional accountants has to maintain essential professional skills as well as knowledge to that level where they can guarantee that a client or employer receives the experienced professional services. The services depend upon the current developmental practices, techniques and legislation as well as act that are diligently followed in accordance with the applied technical as well as professional standards.
Confidentiality- This particular principle means that the professional accountants need to admiration the privacy of information that is acquired as a consequence of maintaining qualified as well as trade relationships. They cannot reveal any information to the third parties without proper and special power unless there is a legal or proficient right or duty for disclosing the information or using the information for personal benefit of the professional accountants or third parties.
Professional behavior- This particular principle means that the professional accountants should obey with the pertinent laws as well as policy so that they can avoid any accomplishment that discredits the accounting occupation in the near future.
From the above fundamental principles, the ethical case on Jimmy would comply with the:
Objectivity- In this case, conflict of interest is taking place between Senior Audit Partner and Jimmy that is actually hampering the professional or business judgment for the company EI.
Professional competence and due care- In this case, there is disagreement between the Senior Audit Partner and Jimmy. This means the Senior Audit partner do not have the essential professional attitude and skills in handling the matters as it is negatively affecting the company for which they are auditing and they cannot get required professional services in this type of conflict. They should understand the technical and professional standards of handling matters of audit where company relies upon their professional advices and services.
Professional behavior- Senior Audit partner lacks the professional behavior and failed to comply with the laws and system at the same time.
Specifying the alternatives
After reading the Code of Ethics for Professional Accountants, it can be understood that the given case on ethics has two alternative options that needs to taken into consideration by Jimmy before getting into final course of action.
The first option that Jimmy will have is agreeing with what Senior Auditor argued, that is, there is no issue with the method adopted by EI in terms of revenue treatment.
The second option that Jimmy will have is not agreeing with the Senior Auditor and stick to the point as found out at the time of audit that is there is questionable method of recognizing revenues as investigated by ASIC.
Comparing values and alternatives
After evaluating the alternatives, Jimmy should compare the values of both the alternatives and decide over the best option that needs to be adopted for future activities. Jimmy should select the second alternative that state not agreeing with the matter pointed out by the Senior Auditor.
Assessing the consequences
If Jimmy selected the first option, then he would have charged legal actions by the Senior Auditor of the firm.
As Jimmy has selected the second option, he can now convey his issue to the Senior Management of Fitzgerald & Milhouse Chartered Accountants. If guidance is not provided by the Senior management, then further Jimmy can convey his matter to Corporate Governance. Jimmy can even go to shareholders and then to the regulatory bodies to get his matter solved and takes legal action on the Senior Audit partner.
Making the final decision
Jimmy made the final decision that he will not agree to the statement of Senior Audit Partner and take the corrective course of action.
At the end of the report, it is analyzed that Kingsley, the legal advisor had acted with due care in carrying out the auditing for the company named as Plummet Travel Limited. On the contrary, Plummet Travel Limited was not involved in any contributory negligence as the company had involve in auditing their financial statement and found out that upgrading to the new systems actually help the company for better operations. Therefore, both the legal advisor and the company are not to found guilty in this case as they were constantly concerned with the actions undertaken and the consequences thereafter. This reveals the fact that the company does not have to be concerned or pay to the New Zealand Company because of any kind of obligatory negligence.
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