Auditor’s Responsibility: Governance of an Audit Client
You a member of the audit team at Miller Yates Howarth (MYH), an accounting firm with offices throughout the major regional centres of NSW and Queensland. Although a medium sized firm by national standards, MYH is the second largest regional accounting firm in Australia. Most of MYH’s audit clients are in the agriculture, mining, manufacturing and property industries. All those industries are currently under pressure, either from a downturn in commodity prices or fierce competition from overseas competitors. MYH have now been appointed auditors of a community bank. Two audit directors have previous experience auditing in the banking sector and need to raise the awareness of staff with respect to the governance issues that have recently impacted the banking sector.
You have been asked to:
- read audit standard ASA315 focusing on audit responsibility with respect to client governance,
- read the web page on the ASIC report on the Commonwealth bank which details the governance issues raised by ASIC (http://www.apra.gov.au/MediaReleases/Pages/18_17.aspx), and
- prepare a report that:
- summarises and justifies the auditor’s responsibility to review the governance of an audit client, and
- includes a table for use in the audit which explains the impact of each of the ASIC identified Commonwealth Bank governance issues on audit risk. The table should further explain why each of the ASIC recommendations would reduce audit risk. The template below should be used.
|Issue||Impact on raising||Recommendation||Reduction in audit risk|
|audit risk||because of the|
Question 2 (3%)
David Little is a senor working at MYH and is part of a 3-person team working on a client’s material loan application that needs to be finished and delivered to the partner on Monday morning. The team are working all weekend to get it finished. There is a strong incentive for the team members, as a well prepared and successful application will ensure that this major client is retained within the firm and raise the standing of the team members in the firm. On Sunday morning, one of the team, John, calls in sick. The rest of the team work harder and get the job done. When David get home exhausted on Sunday night, his flatmate says, “I saw John and his girlfriend at that new restaurant in town today, I thought he was working in your team.”What should David do? David doesn't think that it is fair if John gets the same kudos as the rest of the team when he did not put in the same amount of effort but he is David's friend. David and John play on the same touch football team and often spend time with each other after work and at weekends. Should David tell the partner or are there other options?
Outline the ethical issues and your decision using the American Accounting Association decision model. Use the following template to guide your answer:
|American Accounting Association Model||Decision making process|
|1.||Determine the facts||The facts are ...|
|2.||Define the ethical issues|
|3. Identify the major principles, rules and values|
|4.||Specify the alternatives|
|5.||Compare values and alternatives|
|6.||Assess the consequences|
|7.||Make your decision|
Question 3 (3%)
Explain the role that incorporation of auditors and a statutory cap on auditors’ liability have on the limitation of auditors’ liability.
This assessment task will work towards assessing the following learning outcomes:
- be able to explain and critically evaluate influences on audit and assurance services including: Australian and international professional standards, statutory and common laws, regulatory bodies, and public expectations within a global market.
- be able to exercise critical and reflective judgement and appreciate the value of ethical practice.
Marking criteria and standards
|Explanation||Clearly explains||Clearly explains||Clearly explains||Clearly explains the|
|and critical||and justifies the||and justifies the||and justifies the||auditor’s|
|evaluation of||auditor’s||auditor’s||auditor’s||responsibility to|
|the influence of||responsibility to||responsibility to||responsibility to||review the|
|Australian and||review the||review the||review the||governance of an|
|international||governance of||governance of an||governance of an||audit client.|
|professional||an audit client.||audit client.||audit client.||Provides a simple|
|standards,||Provides a||Provides an||Provides a||listing of the APRA|
|expectations||synthesis and||with some|
|synthesis and||synthesis and|
|and regulatory||critical||recognition of the|
|critical evaluation||critical evaluation|
|bodies on audit||evaluation of the||impact on audit|
|and assurance||APRA findings||of the APRA||of the APRA||risk.|
|findings and their||findings and their|
|services. (7||and their impact|
|marks)||on audit risk.||impact on audit||impact on audit|
|Use of critical||Complex and||Logical||Substantial||Ethical decision|
|and reflective||detailed||application of the||application of the||guide applied|
|judgment in||application of||ethical decision||ethical decision||demonstrating basic|
|ethical practice||the ethical||guide||guide||thinking in the use|
|in the||decision guide||demonstrating||demonstrating||of the guide.|
|application of||demonstrating||coherent critical||critical or|
|the ethical||strong critical||and reflective||reflective thinking|
|decision guide||and reflective||thinking in the||in the use of the|
|(3 marks).||thinking the use||use of the guide.||guide. .|
|of the guide.|
|Critical||Provides a||Provides an||Provides a||Provides a basic|
|explanation of||comprehensive||advanced||competent||critical evaluation|
|the influence of||synthesis and||synthesis and||synthesis and||of the role that|
|public||critical||critical evaluation||critical evaluation||incorporation and|
|expectations||evaluation of the||of the role that||of the role that||statutory cap on|
|and regulatory||role that||incorporation and||incorporation and||auditors' liability|
|bodies on audit||incorporation||statutory cap on||statutory cap on||have on the|
|and assurance||and statutory cap||auditors' liability||auditors' liability||limitation of|
Summary and appropriate justification of the auditor’s responsibility regarding the governance of an audit client
ASA315 focusses on the requirement establishment and providing guidance as to how the auditor shall proceed to have a better understanding of the client entity and the environment in which the entity is working and how a possible misstatement of fact and otherwise would have a negative impact on the audit report of the entity.
The ASA 315 requires the auditor to undertake procedures for risk assessment for making sure the audit team understands the basic risk involves in the audit work and how the internal control environment is in shape and working to provide adequate and reliable data for audit conformance. The auditor and his tams owe to the client to engage sufficiently in the discussion of the possible susceptibility of the client’s financial statements to fraudulent transactions, item and material misstatements owing the proper internal controls (KNAPP, 2014).
The responsibility lies on the auditor to fully understand the specific aspects of business dealings and financial transactions and the business environment under which operations are taking lace and how the internal control methods were put in place to identify misstatements and frauds etc. Auditor would also be expected to assess the possible impact of the material misstatements if any at the level of assertion. In the situations where only the substantive procedures are not found to be sufficient the auditor would be expected to identify the risks which are significant. The auditor is also expected to ethically communicate to the managers and reams charged with corporate governance the details regarding the possible weaknesses in the internal control procedures and which are identified by the auditor or come to the audit team’s attention during audit process (HOGAN, 2014).
The auditor in all circumstances is expected to understand and analyses the business and economic environment of the clients entity and the same would help the auditor to understand and establish materiality of business transactions for the entity. The understanding of the environment of operation of the client would be expected to help the auditor in finding the appropriateness of the accounting policy selection and also finding the areas in which substantive processes and specific audit consideration would be applicable. The Auditors would also be helping the cause of the client by understanding fully the economic and business environment and finding whether the audit evidence is established with sufficiency and appropriately.
o Table explaining the impact of ASIC identified CB issues of governance and concerned audit risk.
Outlining of the concerned ethical issues & decision by using the American Accounting Association decision model as per the given template.
Auditors liability can arise for the statutory auditors of a company as a result of their negligent behaviors, default , apparent breach of contract or duty and a general breach of trust. The auditor can be held liable for these breaches if proven in a transparent manner. However, in recent times because of the increase in the market capitalization of companies enormously along with increased international exposure as a result of doing business in a number of diverse economies and a general lack of insurance has increased the liability risk of auditors as well. As the risk is increasing all the time and its negative impact on the auditors and client relationships, there has been an trend and also the need to limit the liability of company auditors.
Auditors liability can be limited through any of the methods such as:
Most of the times the agreements use the statutory cap on the auditor’s liability. Incorporation of auditors
Under the provision of section 1279(1) of corporation law the auditors can register as natural persons and as a result of which the auditors can register themselves as either sole proprietors or as partnership firms but not LLCs. Enabling the incorporation would limit the claims towards the assets of the concerned corporations and this includes the insurance claims and amounts as well and thus would protect the innocent partners interests. As per the arguments put forward by analysts the incorporation of the auditors would undermine the audit reports credibility. However there has bene muted support towards the incorporation of the auditors. This view expressed their opinion that incorporation can work even for liability risk covering only if the audit incorporations are bound to maintain certain amount of ( level of minimum amount) net worth.
Statutory cap on auditors’ Liability
The statutory cap involves imposing a limit on the liability which can be imposed on the auditors. The mechanism of estimating the cap on the auditor’s liability can differ vastly in different forms of calculations and generally on the audit fees involved in the case and the equity being held by the auditor in the partnership and also the insurance cover being held. The liability of the auditor can also be linked to the worth of the performed tasks and it has been generally acknowledged that a scheme devised for capping would mean that the auditor charges a lower fee and the same can have a direct impact on the liming of the liability for the auditor even in the face of a varying degree of liability.
Only a few countries have affected fixed caps on audit liability and in most of the countries many auditing firms and its partners are already asking for increase in the cap. Such an act exists in Australia in New south wales and later western Australia also proclaimed such an ordinance to limit the liability. In the case of the New South Wales legislation, the provisions of the ordinance require that any scheme which is proposed to be adopted needs to be approved by the occupational associations. Under the provisions of the act the scheme proposed and adopted would have the power to limit the liability in two methods:
However, the ordinance in force requires that the concerned occupational association which is currently seeking the enforcement of a capping scheme would have to provide a detial of the appropriate risk management strategy to the Professional Standards Council. However most of the liability capping regulations and proposals are criticized for being arbitrary in its provisions and such mechanisms are viewed as to fetter the discretion of the courts in these matters as well. The regulations are also criticized for not accommodating flexibility in its approach and not considering individual circumstances. The capping of the limit of liability is also seen as a way to affect the problem of excessive damages issue and in no way works towards reducing the costs related to litigations etc. and overall undermines the audit reports credibility as well (Markovic & Langton, 2005).