Auditing & Assurance Auditors Professional Ethics †Free Samples

Question: Discuss about the Auditing Assurance Auditor's Professional Ethics. Answer: Evaluation Of Risks In Business Of Hih Insurance Limited The prospects of incident of the losses more than the expected profits or occurrence of proceeds lower than expected in any business are called Business risks. These risks generally happen where the nature of business is very complex and management is not able to follow the generally accepted accounting principles it their true manner. These risks in any organization are pressurized by the various factors of business like management knowledge, management decision making power, the financials events of the organization related to sales, purchase, inventory, expenses, income, economic conditions, market forces, rules and regulation laid down by the government of the countryside in which business works. Business risks present in the given situation are Operational Business Risk. These risks generally occur due to the failure of management of organization in day to day business operations. In the present case of HIH Insurance Limited, the operations of the company in relation to investme nt creates the risk for the company as the company is investing in high risk profile stocks. The writing off whole investments in FAI shares in year 2000 by company creates huge losses in the income statements of the company results in presenting the operational financial losses to company. These risk can be assessed by the possibility of not achieving the company's objective of high returns. Along with operational risk reputational risk is also present in HIH Insurance and this can enumerated with demerger of Winterthur and change of name of company to HIH Winterthur to HIH Insurance Limited in 1998. This risk can evaluated by the degree of losing faith by third party in company's policies and procedures and the loss of revenue that company was facing causes slow death of HIH Insurance Company in March 1999. (Brumfield, 2010 and Jiangbo, 2003). Involvement And Recognition Of Inherent Risk Factor In Reporing Following are the inherent risk features that would increase the inherent risk assessment in HIH Insurance Company: Character of business of company- The insurance business in which company operates is highly risky business and involves lot of assessments in relation to claims and investment. The dependence of the insurance business is the re-insurance and investments and the company made wrong decision due to incompetency of the top level management while making investment decisions. Audit Observations of the previous year audits- In HIH company the auditor of the company is not able to clearly identifies the investment and change in management risks. The error is continues in subsequent years as well and the substantive measure are not taken by the company in order to lower the risk in company investment and management. Even after demerger with Winterthur, the company has purchased FAI shares, Marine Fire Insurance. Transaction with related parties- The company has purchased FAI shares from one of the Non Executive Director at a price more than the arm's length price and this fact is intentionally misstated in the financial statements of the company. Repeated engagement of Auditor- Even after the huge losses the company has paid $ 1.7 million and $1.631 million in the year 2000 to the auditor of the company and the risk of not identifying the problem at start level is not considered in the plan of audit by the auditor. Embezzlement of Assets- The company has written off the investment of $ 400 million which the company invested in FAI shares at zero value in September 2000 makes it high loss company. The CEO and other officers makes very unrealistic approach while making investment in volatile risk stocks. (Colbert, 2014). Complex nature of transactions of the company- The insurance business contains complex transactions like claims made to and by the company, insurance and reinsurance, investments and their returns as per need of the company to pay the insurance maturity are not considered by the people running the company. Rules and Regulations and government decisions increase the audit and business risks as the closure of the industry in California increases the claims of Works men resulting huge liability standing for the company. Deficiencies in Internal Control Policies increases the level of risk and thus the need of assessment of risks to mitigate the risks are high (World Bank, 2006). Accountability Towards Company And Creditors Of Auditor Significant Case Conclusion The auditor accountability arises if the auditor does not apply the all the audit procedures and ethical principles and laid down by Australian Auditing Standard Board. The auditor has liability towards all the users of the financial statements whether they are internal and external and also towards the company as whole and its management along with those charged with governance. The auditor responsibilities towards the Client are listed in the audit engagement letter and are generally related to methods the auditor adopts in finding the frauds and error and material misstatements in the financial statements. The auditor is accountable in terms of making true opinion about the affairs of the client and not sharing any confidential information of the business of the client. The auditor responsibilities towards the creditor arises by the rules and regulation governing the audit and reporting of the auditor. The auditor are bound to accountable to creditors in relation to credit worthin ess and ability to pay due of the company in his reporting. Following are the significant case laws which help in ascertaining the level of accountability of the auditor towards client and creditor: Touche Vs. Ultramares. This is the landmark of the year 1932, in which the accountability of the auditor is establish by the courts of law. The New courts held the auditor liable towards the company as the auditor has not fulfill all his responsibilities while doing audit of the client and before giving reporting about the client. Donoghue Vs. Stevenson 1932. The court held auditor accountable towards the creditors of the company as the auditor is not able find the frauds and not fulfill the requirements laid in international auditing standard relation to auditors responsibility to identify the frauds in the company. The auditor inability to report the inefficiency of the company in payment to creditor make his liability towards the creditor and they can claim damages from auditor as per order of courts. Daniels Vs. AWA Limited. It is the major case of the year 1995, where the auditor has not fulfill his primary responsibilities towards the company as already discussed in the engagement letter before taking up the audit. The failure of reporting to management of the company about weakness of internal control system give born to the claim of damges on auditor by the client (Tata, 2010). Circumstances Of Total Carelessness Of The Auditor Any audit cannot be done without using proper professional values and principles by the auditor. The users of financial reporting also have edge about credibility and consistency of the company if the auditor gives his true and fair opinion about the financial statements of the company. The below are the circumstances where the auditor shows carelessness in comply with his roles and duties: Review of Work- the audit reporting is done without proper review by the partner of audit firm then there seems that auditor is not interested in complying with his duty of giving fair opinion Unreasonable Sampling- the auditor has not done 100% audit due the complex nature of the business of client and also not follow the scientific methods for choosing the samples for auditing Improper Audit Evidence- The auditor is not able take proper documentation in form permanent and temporary audit file which shows that he has not done proper audit. More dependence on the Internal Control system of the company for assessment of correctness of the procedures of the company Non Compliance of AASB principles- where the audit does not act according the rules and regulations governed him in relation to his independence Inadequacy in reporting to the management and those charged with corporate governance about the frauds and errors identified during the audit. Situation in which auditor is professionally uncertain of his acts (Brumfield, 2010) Sign Up Of Previous Person From External Audit Team The performance of the auditor in respect of applicable rules and regulations is called independent external audit and such auditor is not related to the entity under audit. The entity also have edge in signing up with the previous external audit team member and benefits to an entity are listed as follows: Relevant Experience and Knowledge- the previous auditor has necessary experience and knowledge about the policies and procedures of the entity and can easily ascertain the quantum of audit methods to be applied according to the complexity of business of an entity. Better Relationship with employees of an entity- the good relation with employees of the entity helps the employees to report materials facts related to frauds and errors with hesitation to the audit team member. Less cost - As the auditor understand the key areas for which the knowledge is require to be given to audit staff, the cost of training of audit staff is less to an entity. Reward In Including Auditing And Non Auditing Services The Scope Of One Audit Firm To have the increased level of objectivity and reducing the occurrence of situation of self review threat and to main the independence of the auditor it is recommended by the Australian government regulations not to have the audit and non audit service from one audit firm. But increases number of audit and inclusion of professional behavior in the working of audit firm encourages the audit firm to perform both audit and non audit service to have financial security and reducing material misstatements in financial reporting. The following are the rewards for doing so to an entity : Better Knowledge about client- The audit firm will have good knowledge about the affairs of the company and helps in early finding of mistakes in any of the policies and methods of the company Speedy system of Reporting- The audit reporting about the financial and non financial matters can be done in rapid as the auditor need to check in depth about each and every aspect as the audit risk in low. Effective Compliance- If the professional services are taken at lower level only that is accounting level then the entity can effectively comply with the laws related taxation and timely filing in relation different authorities can be done (Verschoor, 2012). Situations Showing Contravention Of Ethical Standards The following are the situations which shows that the Ethical standards has not been properly followed : Employing Same firm for doing Audit and non Audit services- If the same firm performs both the services then the auditor is under situation of checking of his own work, judgment and opinion which is the contravention of Independence of auditor by the having possibility of danger of self review. Extra Assumptions- The same auditor always assumes that the policies on which reporting has been done in previous audit period need not to review this year and his extra assumptions on working of client some time lead to false reporting Better relationship among the audit staff and employees of client results in hurting the integrity of auditor as sometime auditor may do favor to employee by not reporting the mistakes of the employee. Self Interest of auditor and effect in reporting- continuous engagement of audit firm both all the services creates personal interest of auditor in the financial matters of the company which may hamper the reliability and relevance of reporting of the auditor. Suggestions Of Ramsay Report And Clerp 9 The Australian Corporate Law and Economic Reforms 9 which take Ramsay Report as a base for its finding gives the following suggestions for auditor which he has to follow as his moral duty: Inclusion of Remuneration Report in the annual report of the company by the board of directors of the company which shows the policies relating the benefits in financial and non financial terms given to key managerial personnel Increase the involvement of the those charged with corporate governance along with the top level management which helps in having the check on the decision making of top level management Reporting after certain period of time and the gap between to two time intervals will depend on the nature, size and complexity of business of an entity that is full and continuous disclosures by both management and auditor. Quality control review by the regularity bodies in relation to the working of an auditor and audit staff in terms to ensure that the auditor shall follow all the audit procedures in true fair spirit (Robinson, 2003). References: Brumfield, C.A., (2010) Business risk and the audit process.Journal of Accountancy,155(4), pp.60-68. Colbert, J.L., (2014). Inherent risk: An investigation of auditors' judgments.Accounting, Organizations and society,13(2), pp.111-121. Jiangbo X, (2003), HIH Insurance Limited: Corporate Governance and Corporate Excesses, available at https://www.seiofbluemountain.com/upload /product/201010/2010jjfzh05a8.pdf accessed on 04/05/2017. Robinson A, (2003), HIH Report and CLERP 9, available at https://www.allens.com.au/pubs/pdf/ma/focgmay03.pdf accessed on 04/05/2017. Tata MC, (2010), Legal Liability of CPAs, available at https://www.google.co.in/url?sa=trct=jq=esrc=ssource=webcd=1cad=rjauact=8ved=0ahUKEwjK0NmumajTAhUExLwKHWGmBq0QFgghMAAurl=http%3A%2F%2Fwww.wou.edu%2F~beebej%2FBA%2520451%2FChap004.pptusg=AFQjCNGebMKLW15csyn2X3G5e-qmyqHjEAbvm=bv.152479541,d.dGc accessed on 04/05/2017. Verschoor C, (2012), Pros and Cons of using External Auditors for Internal Auditing and Other Services available at https://www.financepractitioner.com/auditing-best-practice/pros-and-cons-of-using-external-auditors-for-internal-auditing-and-other-services?full accessed on 04/05/2017. World Bank, (2006), HIH Case Study on Corporate Governance, available at https://www.iaisweb.org/modules/cciais/assets/files/pdf/061004_C1-9_hih_corpgov_round01.pdf accessed on 04/05/2017.