As per Section 240 of the APES 110 Code of Ethics for Professional Accountants, accepting of commission or such other fees creates a self-interest threat to objectivity and professionalism as well. The auditor in order to ensure that accepting commission due to referral is under the professional ethics, he should ensure that the client is made aware in writing about such an arrangement, how the fees is being calculated and the identification of the dealers and such other third parties (APESB 2010).
In the said case, it is a violation of the ethical code if the same is not informed to the client by Peter Harmon about the 10% commission that he is entitled to receive from Computer Services Limited. He should give the said intimation in writing. Further since it is not related to the Assurance Engagement the said arrangement does not create any self-interest threat.
David Smith had referred clients to Allied Insurance without letting them know. The said act was in violation of the Accountants Code of Ethics. Until and unless it is the requirement of the law, a professional has no right to disclose the information about the clients to any third party without the permission of the client. Disclosing of information about the client for the personal benefit of the professional or a third party should not be done without the prior consent of the client (ethicsboard, 2012). Thus in the said scenario, David Smith should have taken permission from all his clients before disclosing the data to Allied Insurance.
The said situation is unacceptable and is in violation of the independence of an auditor as per APES 110. An auditor should ensure that the input of data of the client should not be done by the members who will be involved in the audit of the accounts of the clients since it defeats the very purpose of independence of an auditor. However the same can be done only after obtaining permission from the client about the same and even after the permission is obtained in writing the auditor should ensure that the work is overviewed by the other independent member of the audit firm. Thus the staff of the audit section can assist in the input of the data of the audit clients and also be involved in the process of audit but only after due permission. If not then the same would be in contradiction to the code of ethics. Lastly the audit firm should get the work done by the auditor reviewed.
As per Section 250 of APES 110, whenever an auditor or such other professional seeks new task via advertising or such other form of marketing, then there may be a situation of conflict with the essential principles. Thus while conducting such a marketing, he or she should not bring disrespect to the profession or such other harm to the reputation of the profession. He should not make comparisons with the work performed by others. Thus in the said scenario Barry has been sending her firm’s literature on a monthly basis with regards the management capabilities that their firm possesses in order to obtain the said work that William has outsourced to somebody else. The same is being done in an unwanted manner which brings disrepute to the said profession. Thus as per Section 250, Barry should not do such an act without the permission of the client.
As per Section 290.146 of the APES 110, if a partner or employee of the audit firm acts as a director or officer of the same company then it tantamount to creating a self interest threat and self review threat. The threat could be to such a level that it would be difficult for the company to safeguard itself from any issues. Even if the director would be in a honorary position yet the same could create a significant threat on the audit engagement. Thus if Katrina NG is to act as a director also then she would have to resign from the audit firm.
In the said scenario Peter Beattie is performing various other non-audit services as well along with the audit services to the same client. This generally poses a threat to independence, objectivity and integrity as well. First and foremost, Peter should resign from the services as an auditor if he is to perform the other non-audit services of the same client. Secondly if he is to perform both the services, then as per the provisions of the Combined Code of corporate governance, the audit committee which is a representative to the owners of the company should conduct a regular vigilance of the non-audit services. The audit committee should be convinced of the fact that the independence and objectivity of the auditor is maintained and the same is not compromised(icaew.com, 2012). Further Peter should ensure that whenever the owners want they can have an access to the non-audit services being performed by the auditors.
In the said situation there has been a violation of the Accountants Code of Ethics. An auditor cannot solicit work via advertisements which are colourful, containing details of its staffs and showing comparisons with other auditors as well. Also mentioning thins such as “help clients gets higher tax deductions than all others in the district” is also unethical and against the code of ethics. They can give advertisement in the journals and newspapers of the respective institutes for seeking work. Further as per Section 250 of the APES 110, the same also entails to a threat to the compliance with the fundamental principles as well. A self interest threat is said to arise if the professional work is marketed and advertised in a manner which is not in line with the principles. It would also bring disrespect to the profession if the member of the institute or a professional makes exaggerated claims or unsubstantiated comparisons with the work of other members and professionals (cpaaustralia.com, 2014).
As per Section 191 of the AICPA’s Code of Conduct, the auditor is entitled to continue to perform the audit of the current year if the previous year’s fees is unpaid but is not liable to issue the report until and unless the previous dues are cleared. Thus in the present scenario, David Cheadle has not violated the Accountants Code of Ethics by starting the audit of the current year without receiving the dues for the last year (cpa-scribo.com., 2012). However the auditor should ensure that he does not issue the audit report until and unless Nestree Limited clears off all his dues.
The main issue with debtors ledger is whether the balance shown in the books of the client is correct and in confirmation with the said customer or not. Confirmation is often obtained by the auditor from the customers so as to reassure oneself about the accuracy of the amount reflected in the client’s statements. More importantly, the customer confirmation of major customers is a must. However sending or asking for a confirmation is not compulsory and is purely a decision of the professional whether to ask for the same or not depending upon the experience of the auditor with the client.
Mainly an auditor needs to satisfy himself with three main things i.e. the transactions are authentic, the balance is correct and provisioning are correctly done for the amount which seem to be uncollectable. But in case the confirmations could not be obtained by the auditor he can adopt alternative methods so as to gain necessary evidences to the sanctity of the customers balances (PCOAB, 1998). Thus in the present scenario the auditor will not give any adverse opinion since even if he could not obtain confirmations from the major clients, he was able to satisfy himself by adopting various other alternative methodologies to confirm the balances of the major customers. Thus he would give a positive opinion about the balance of the customers accounts in the client’s financial statements that they reflect a true and fair view.
As per ASA 200, an auditor should conduct an audit of the financial statements of a company or a firm independently. It is there duty to conduct audit of the financial statements, especially those items which make up to more than 5% of the total expenses or the assets and liabilities. Further if they find any area of suspicion then they has full authority to probe into that area also. Thus they are to give a positive opinion on the financial statements of a firm only after obtaining reasonable assurance of the fact that the statement of accounts is free from any material misstatement. However in the said scenario the opinion stated by the auditor will be adverse. Simply because the property plant and equipment contribute to 20% of the total assets of the firm and also is a revenue generating asset and the client is not allowing the auditor to observe the said asset physically. Further to this the auditor would need to check the asset for impairment and if there has been any additions. Also if any additions have taken place then they need to check whether these additions are accounted correctly and the assets are not recorded incorrectly in the financial statements of the firm (auasb.gov.au., 2015).
However since the client is not allowing for the same, the auditor can try for other alternatives to satisfy himself before giving his opinion on the same. If he is still not satisfied then the auditor should give an adverse opinion with regards the restrictions imposed on them by the client and how their independence in the conduct of their professional work was hampered due to the same. This would also safeguard them from any kind of legal implications from the institute in case of any bankruptcy of the client.
If there is a contingent liability present then the same becomes a very important item for audit for the auditors. Auditors are required to apply recognition, measurement and disclosure criteria as per the accounting standards codification. The disclosure of contingent liability therefore becomes very important as these are such future expenditure which might occur in future and have a significant impact on the financials of the company. Thus there disclosure would make the shareholders and other readers of the financial statement aware of such an expectation.
Further the audit of the contingent liabilities is also important as it is there report which is relied and trusted by the outsiders. They should be vigilant over the undisclosed contingent liabilities and take necessary steps to correct the said errors and mistakes and thus disclose the data (Ross, 2015). Therefore even if the management is not of the opinion of disclosing the same, the auditor should ensure that the same becomes a part of the notes to the financial statements. If the management does not permit for the same then the auditor should give an adverse opinion about the same.
Even if a significant proportion of sales is in cash, the company or the firm should have maintained adequate records of the same. Without the same it becomes difficult for the accounts to get audited. Since the auditor cannot conduct any kind of audit test to assure about the sanctity of the transactions, he is to give an adverse opinion stating that the audit test could not be conducted in its true sense and hence no opinion can be formed about the performance of the company. Therefore the opinion is as such not adverse but neutral. Therefore in the present scenario the retailer’s accounts cannot be audited.
While taking up audit of a new client, the auditor should verify the opening balances. If the client is not giving the same and the auditor seems to be satisfied that there is no material misstatement even then he should give an adverse opinion that he could not check the opening balances since the same was not made available by the client.
Every company and firm of Australia should prepare their accounts as per the Australian Accounting Standards unless otherwise for some exceptions stated in the standards. However in the said case the auditor should highlight the said issue to the client and request him to prepare the same as per the accounting standards. Even then if the client does not agree to, then he should give an adverse opinion and state the fact that the accounts are not prepared as per the Australian Accounting Standards.
In the particular scenario the auditor should ask the client to value its inventory as per the stated method in the accounting standard before auditing the said inventory. However if the client does not agree to then he should mention the same in the report and thus give a negative opinion.
In the said scenario since the auditor is satisfied that the there is no material misstatement as on the date of audit and that the company had no issues with regards the going concern for the year under audit, yet should ask the client to prepare the accounts on cash basis since as on the date of audit the going concern was questionable. Thus the auditor should give an adverse opinion with this regards.
APESB, (2010), APES 110 Code of Ethics for Professional Accountants, Available at (Accessed 10th January 2017)
auasb.gov.au., (2015), Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with the Australian Auditing Standards, Available at (Accessed 10th January 2017)
cpaaustralia.com., (2014), An Overview of APES 110 Code of Ethics for Professional Accountants, Available at (Accessed 10th January 2017)
cpa-scribo.com., (2012), CPA Independence When Prior Year Fees Have Not been Paid, Available at (Accessed 10th January 2017)
ethicsboard.org., (2012), Revised Code of Ethics – Completed, Available at (Accessed 10th January 2017)
icaew.com., (2012), The provision of non-audit services to audit client, Available at (Accessed 10th January 2017)
PCOAB, (1998), AU Section 330, Available at (Accessed 10th January 2017)
Ross, S., (2015), How important are contingent liabilities in an audit?, Available at (Accessed 10th January 2017)