Accounting Ethics and Audit Quality Nigeria - MyAssignmenthelp.com

Question: 1. The following cover various ethical situations .For each you need to state whether there has been violation or no violation of a general ethical principle and if there is a violation which ethical principleis violated.You need to also to briefly outline the reason for your answer in each situation . (a) The Berowra Accountants are advertising a special in the local paper that they guarantee to provide their clients with a tax refund . (b) Jamie Harvey ,Auditor,is an auditor for a chartered accounting firm during the day and has just been asked to be the treasurer of the local athletics club .The athletics club is a not for profit institution and Jamies firm only does audits of large public companies. (c) The Pymble Accountants carried out the Audit of Monlec Ltd from July 7th to the 2nd September2017 and Monlec have advised Pymble Accountants that the final payment is dependent upon receiving an appropriate final report. (d) The Winton Accountants have just completed their audit of the Motoring Services Company and have provided all the working papers to the staff of Chadwick Chartered Accountants who have been asked by the Institute of Chartered Accountants to carry out a Quality Review of the Audit work carried out by Winton Accountants during a recent audit. 2. The following are separate situations where the independence of the Auditor is subject to threat.You are asked to identify the name of the threat to the Auditors independence and briefly explain why it is a threat (a) Leona Ng ,the Senior Accounts Manager ,from Jenkins Ltd has fallen ill and will need replacing for the next four months.Your accounting firm,Thornleigh Accountants has been asked to supply a staff member on secondment until Leona Ng returns. Your firm has supplied Jane Davis and she finished up after four months in mid May . Your firm is going to do the audit of Jenkins Ltdfrom mid July and intend to use Jane Davis as part of the audit team. (b)John Darrow ,the Audit Manager of the Darrow Associates Accountants ,has just received the accounts from Winmalee Ltd .This has taken an optimistic approach to the valuation of development expenditure capitalised in intangible assets .The senior staff bonuses are all related to the firms profit performance and Winmalee have provided paper copies of details taken from various accounting standards,as well as computer files with reports which are sympathetic to their approach to valuation of these assets . ( c) The Chocolate company has asked your firm to carry out the audit of its financial statements. It also has invited your firm to visit its seconds chocolate shop where defective chocolates are sold at a considerable discount prior to completing the audit .The Chocolate company has invited members of your firm to join the Chocolate companys social club. 3. The following independent situations cover different situations which Auditors may encounter.You are asked to state which Audit opinion should be given and briefly explain why. (a)The Connor company has been having increasing difficulty paying its debts during the last financial year and has been relying on its bank overdraft to pay debts . It has just been advised that the bank want repayment of the bank overdraft within one month. All other efforts to obtain finance have been unsuccessful .You have found no material misstatements in the companys financial statements (b)A local company has an American parent company and so it uses the same inventory valuation method of LIFO instead of FIFO. The difference between LIFO and FIFO has been calculated and its effects calculated and while it has lead to a material misstatement the effects are limited to their effect on the Inventory and do not have a material effect on the rest of the financial statements. (c)The Victorian Manufacturing company manufactures prefabricated concrete in its factories It includes its factories in the balance sheet at market value accumulated depreciation.The Factory in Melbourne is included in the balance sheet based on a valuation carried out five years ago .The directors have not asked for another valuation because they have believed that the market values have remained fairly stable over the past five years. Answer: Answer1 (a). According to CPA (2016) Section 250 Marketing Professional Services of the Code of Ethics for Professional Accountants, when a professional accountant in public practice obtains his work through advertising his expertise, there may be a risk of noncompliance with the basic principles of ethics. A professional accountant in public practice should not bring his profession into disgrace while marketing his qualification or expertise. He should be truthful and sincere .He should not compare his performance with others and should not downgrade the work of his fellow mates into disgrace. He should not overstate the statements regarding the services offered to him, his qualifications and expertise. If a professional accountant in practice is in doubt regarding the appropriateness of any of the forms of advertising or marketing, he shall consult with the related specialized organization (Gramling, Johnstone Rittenberg, 2012). According to the details mentioned in this case, the Berowra Accountants are advertising a special case in the newspaper that they can guarantee tax refund. It is a wrong practice to guarantee tax refunds. They are misguiding their clients. They are eligible to plan tax savings and its planning. So, in this case, there is a violation of section 250 in the mentioned case. Answer1 (b) As per Section 210 Professional Appointment of the Code of Ethics for Professional Accountants ,the professional accountant in public practice shall examine the prospective customers before accepting the proposal to offer his expertise and services. The threat to non-compliance of the basic principles of the code of ethics may arise due to doubtful issues relating to the client. He should evaluate if the client is involved in some illegitimate activities. The professional accountant should obtain full knowledge of his client and understand him completely. He should examine the owners, managerial personnel, administration and commercial activities. He must secure the clients surety pertaining to the up gradation of the corporate governance services and internal control processes (KPMG, 2015). As per Section 220 Conflict of Interest of the Code of Ethics for Professional Accountants , a professional accountant should recognize the situations which could pose a risk of Conflict of Interest. Where it is impossible to decrease the threat, the professional accountant in public practice must decline the offer of the client. So, in the given case, when Jamie Harvey, the auditor who audits only large public companies has been offered to be the treasurer of the local athletics club which is a not for profit organization. He should decline the offer keeping in mind the Codes of Professional Appointment and Conflict of Interest (Patrick, Vitalis Mdoom, 2017). Answer1 (c). As per Section 290 Independence?Audit and Review Engagement of the Code of Ethics for Professional Accountants ,the professional accountants must ensure the independent requirements of the execution of audit and review .It focuses that the professional accountant in public practice must independently conduct the audit without any influence of the management . It is specifically stated in the code that the members of the audit team, firms, and the network firms shall be indifferent from the influence of the client. This approach to Independence of Mind and Independence in Appearance analyses the risk to independence of the auditors. It also assesses the risks and safeguards the auditors by removing or reducing the threats up to the acceptable level. A professional accountant in public practice shall implement his professional judgment to apply the conceptual framework of the code of ethics. However it is impossible to define every single situation which poses a threat to the independence of the auditors. The conceptual framework guides the professional accountants to follow the ethical requirements of the code (Cameran, Ditillo Pettinicchio, 2017). So, as per the details given in the case, where the Pymble Accountants carried the audit of Mole Ltd and the company has advised the auditors that the final payment would be dependent on the appropriate final report. It is against the code of ethics and the professional accountant should decline the offer of the client. They should produce a true and fair report of the books of accounts and should conduct their audit independently of the influence of the client. Answer 1 (d). As per Section 230 Second Opinion of the Code of Ethics for Professional Accountants , circumstances where a professional accountant is asked to provide second opinion on the accounting ,auditing ,reporting and other principles or guidelines to the financial statements of the company which is not an existing client of the auditors. It may pose a threat to the professional expertise of the accountants providing second opinions as it is not necessary that the same set of facts or accounts have been provided to the auditors providing second opinion. So, as a result their opinion may differ or can be inappropriate based on insufficient evidences (Rusmanto, 2017). Whenever the auditors have been asked for second opinion ,they must first analyze whether there are any threats and if there are any ,they must attempt to decrease or remove it .They must also apply safeguards to remove the risk to the compliance with the code of ethics (Porter, Simson Hatherly, 2014). So, in the given case, where the Winton Accountants have just completed the audit of the Motoring Services Company and immediately provided their papers to the staff of Chadwick Chartered Accountants who have been specifically asked by the Institute of Chartered Accountants to carry out review of the audit carried out by the former accountants. As per Section 230, they should first assess the possibility of the risk and apply the safeguards to minimize or reduce them up to the acceptable level (Malaysian Institute of Accountants, 2017). Answer 2 (a). The auditors should independently conduct the proceedings of audit and the audit firm must not be put in a position to assess the matter for which the firm or individual auditor was earlier accountable .If it is so, it is known as Self review threat to the auditors independence. The situation which may create such a threat includes: A member of the audit team has been recently a director, officer and employee of the company in which the auditors are conducting audit .So; they can face the threat of self review if the member is having impact on the key audit matters. Performing auditing services in relation to the client which can affect the subject matter of the audit. Preparation of the data or audit records which create an impact on the audit proceedings. So, in the given case, where Leona Ng, the senior accounts manager ,from Jenkins Ltd has fallen ill and Jane Davis has replaced him. She should not be allowed to participate in the audit procedures of the said entity as she has been the employee of the firm. It will create self -review threat to the independence of auditors (PCAOB, 2015). Answer 2 (b). Management Threat occurs to the independence to the auditors when they find themselves in the shoes of the management. The job of the management is being requested to be done by the auditor. It occurs when the audit firm performs the work regarding the judgments and decision making which should be the responsibility of the management. In the given case, where John Darrow, the audit manager of Darrow Associates Accountants has received the accounts of Winmalee Ltd. which has adopted the optimistic approach regarding the development expenditure of the capitalization of the intangible assets. The management should adopt the pessimistic approach while evaluating the values of the assets. Also the accountants are facing the Threat to Integrity which states that the organization should adopt not only fair dealings with the clients but also communicate fairly while executing the audit proceedings. So, in this case the auditors are facing the Management Threat as well as Threat to Integrity (Khaddash, Nawas Ramadan, 2013). Answer2 (c). Self Interest threat occurs when the audit firm or auditors in public practice could take advantage of the financial or non-financial interest from the client .Examples are: Deriving an expressed financial interest or substantial non-financial interest from the audit client. Visiting the stores of the client to purchase goods or services at the concessional rates. Having business connections with the client. Possible employment with the client. So, according to the details provided in the given case, the chocolate company has asked the auditors to conduct their audit. Before its completion ,they have invited to visist their chocolate store where the defected chocolates are sold at a discounted price. Also, the company has invited the members of the audit firm to join its social club. In the given case the auditors are facing the Self Interest threat where they are induced to purchase the clients products and join their club, so that they can produce a clean auditing report. So, they should deny this offer (Arowoshegb, Uniamikogbo Atu, 2017). Answer 3 (a). Qualified Opinion is conveyed when auditors cant express their unqualified opinions regarding the materiality of any accounting transaction or the financial reports of the company. They also express their qualified opinions when the impact of disagreements on the management is not so immense as to require adverse opinions or disclaimer of opinions. It is expressed when the auditors consider the matter as an exception to the accounting application and are incapable to reduce the risk of substantial misstatements by their auditing procedures. So, in this case, where the Connor Company has been facing the difficulty to pay its debts during the last financial year and has been relying on its bank overdraft to pay its debts. But now the bank has asked it to repay its overdraft within a month and it is left with no financial recourse from which it can repay. Although the company does not have any material misstatement in its reports, the auditors will state their Qualified Opinions in the additional paragraph and the reasons of their opinion (OECD, 2015). Answer3 (b). Where the local company of an American parent company has adopted LIFO method instead of FIFO and its difference has created a material misstatement which are limited to their effects on the inventory and do not have any other impact on the rest of the financial statements. As per Australian Auditing Standard ASA 405 Evaluation of Misstatements Identified during Audit, it deals with the auditors accountability to state the effect of material misstatement on the audit of the financial statements (Auditing and Assurance Standards Board, 2015).So the auditor should analyze the material misstatements during the audit. He should also evaluate whether the overall auditing plan and strategy should be reviewed with regards to the significant material mismanagement found in the financial statements. So, in the given case, with reference to ASA 405, the auditors shall state Adverse Opinion regarding the material misstatements found as a result of difference between the calculation of LIFO and FIFO methods of inventory accounting. An adverse opinion is a professional opinion expressed by the auditors in the independent auditing report .It states that the companys financial statements are misinterpreted and do not appropriately state the true picture of the books of accounts. Thereby, the accounts do not reflect the fair picture of the financial health and performance of the company (Mironiuc, Chersan Robu, 2013). Answer 3(c). A Qualified Opinion is a statement issued by the auditor after the audit proceedings have been completed .It states that the information provided was not as per the requirements or it was inadequate. Also when it is not according to GAAP accounting standards, it is stated in the independent auditors report. It states that the financial statements are properly presented with exception to a specific area .The important feature of qualified opinion is that it bears no impact on the financial position or the efficiency of the organization. A qualified opinion is stated in the final section of the audit report. It is stated regarding the companys internal control measures and accounting statements. In the given case, the factory located in Melbourne and it was valued five years ago. The same amount is included in the balance sheet, assuming that the market values have remained same during the past five years. So, the auditors will give a Qualified Opinion regarding the financial reports of the Victorian Manufacturing company. They shall mention the qualifications in the final section of the report (Nasution, 2013). References Arowoshegb ,A.O.,Uniamikogbo, E. Atu, G.(2017) Accounting Ethics and Audit Quality in Nigeria. Asian Journal of Economics, Business and Accounting. 4(2). Auditing and Assurance Standards Board (2015) Auditing Standard ASA 450 Evaluation of Misstatements Identified during the Audit [online]. Available from: https://www.auasb.gov.au/admin/file/content102/c3/ASA_450_Compiled_2015.pdf [Accessed 25th January, 2018]. Cameran, M., Ditillo, A. Pettinicchio, A. (2017) Auditing Teams: Dynamics and Efficiency. Taylor Francis. CPA (2016) Code of Ethics for Professional Accountants [online]. Available from: https://app1.hkicpa.org.hk/hksaebk/HKSA_Members_Handbook_Master/volumeI/COErevised.pdf [Accessed 25th January, 2018]. Gramling, A.A., Johnstone, K.M. Rittenberg, L.E.(2012) Auditing .Cengage Learning. Khaddash, H. A., Nawas, R. A. Ramadan, A.( 2013) Factors affecting the quality of Auditing: The Case of Jordanian Commercial Banks. International Journal of Business and Social Science.4(11). KPMG (2015) The New Auditors Report: Greater Transparency, More Relevant[online]. Available from: https://assets.kpmg.com/content/dam/kpmg/cn/pdf/en/2016/12/the-new-auditor-report.pdf [Accessed 25th January, 2018]. Malaysian Institute of Accountants (2017) By-Laws (On Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants [online]. Available from: https://www.mia.org.my/v1/downloads/handbook/bylaws/2017/03/15/MIA_By-Laws_Revised_Jan_2011_Updated_15_March_2017.pdf [Accessed 25th January, 2018]. Mironiuc, M., Chersan , L. C. Robu, L. B.(2013) The Influence of the Clients Background on the Auditors Decision in Acceptance the Audit Engagement. Communications of the IBIMA.2013. Nasution, D.(2013) Essays on Auditor Independence [online]. Available from: https://www.doria.fi/bitstream/handle/10024/91419/nasution_damai.pdf?sequence=2 [Accessed 25th January, 2018]. OECD ( 2015) G20/OECD Principles of Corporate Governance [online]. Available from: https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf [Accessed 25th January, 2018]. Patrick , Z., Vitalis, K. Mdoom,I.(2017) Effect of Auditor Independence on Audit Quality: A Review of Quality: A Review of Literature. International Journal of Business and Management Invention.6(3). PCAOB(2015) Disclosures About the Engagement Partner [online]. Available from: https://pcaobus.org/Rulemaking/Docket029/Release-2015-008.pdf [Accessed 25th January, 2018]. Porter, B., Simson, J. Hatherly, D.( 2014) Principles of External Auditing. Wiley. Rusmanto, T.( 2017) The Effects of Clients Characteristics on Auditor Independence: A Perceptual Study. International Journal of Economics and Financial Issues.7(2).