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Question 1

Audit professionals have an obligation


under the common law to satisfy
implied or expressed contractual
agreements with their clients. They are
responsible to their clients for
negligence and/or breach of agreement
if they are not able to exercise due care
in their service and are failed to provide
services. As accounting standards are
highly regulated there has been
increased compliance to be followed by
the
Audit
professionals.

Auditing & Assurance Services


(BUACC5935) Assignment

The auditor's liability has increased much more than before in the wake of highly publicized
accounting failures (like WorldCom and Enron) which are due to the auditors negligence,
investor awareness of ability to recover monetary losses from auditors, increasingly complex
accounting standards, joint and several liability, class action suits, and the fact that auditors are
an attractive target for plaintiff attorneys. Sources of auditor liability include common law
(which uses legal precedent to identify responsibility to clients and non-shareholder third
parties). Statutory liability is based on violations of written statutes (for example, Securities Act
of 1933, Securities Exchange Act of 1934) and pertains to shareholders.
There are several types of third parties: primary beneficiaries are known by name to the auditor,
foreseen parties are parties that could be reasonably expected to rely on the auditors' work, and
foreseeable parties are those whose decisions normally rely on audited financial statements and
the
opinions
presented
on
the
financial
statements.
There are four major sources of auditors' legal liability:

S.N
1.
2.
3.

a) Liability to clients (which can result in the client suing the auditor for not discovering a
material fraud during the audit),
b) Liability towards third parties under common law (which can result in the bank suing
SUBMITTED
SUBMITTED
BY a borrower's financial statements are
the auditor for not discovering
materially misstated), TO
c) Civil liability under federal securities laws (combined group of shareholders sues
PROF. SANGEETA KUMAR
auditor for not discovering financial statements were materially misstated),
STUDENT
NAME
STUDENT
IDgovernment prosecuting the auditor for issuing an
d) Criminal
liability (resulting
in federal
MAHESH BHATTA
30308968
incorrect audit report).
UMA PRAJAPATI DHEKE
POOJA SHRESTHA

30308941
30308972

SUBMITTED ON

27 MAY 2016

To protect individual CPAs from legal liability, they must be advised to


exercise professional skepticism, and deal only with clients possessing
integrity. They should also hire qualified personnel to help them and
make sure that they themselves and their assistants follow the standards
of the profession. They must maintain their independence (both in fact
and in appearance), understand the client's business, perform quality
audits, document the work properly, obtain an engagement and a
representation letter, and maintain confidential relations.
This picture is an example of obviously false dogma but in Auditing it
has a great relevance. As the picture shows 2+2 = 5 which is the error of
the company those auditors need to solve. The auditors need to
investigate and find the evidence from the company. Whether the
management is doing ethical business practice and complying with AASB standards needs to be
investigated. As auditors main characteristics is independence of appearance and independence
in mind. Therefore, they should be independent of any biasness even if the company gives them
threats. The auditors should be able to suggest the company what is ethical and what is not. The
auditor should show their professional behavior and transparent ethical practices that makes the
auditing job more respectable and independent of the company and the shareholders values.
Question 2
Auditors are the independent bodies of the organization which job is to determine whether the
economic events of the companies are properly reflected by the recorded information of certain
accounting period or not. Rather than being fully dependent on manager information Auditor
need to perform its auditing activities based on the evidences.

He should be able to use skill and judgment whenever it is required. In Pacific acceptance
case auditor did not apply reasonable skill and care. From the judgment from this case it
is found that auditor need to be independent, should have professional judgment and have
critical assessment.

He cannot depend on the internal staff of the organization as they can provide
information that wont be reliable and be beneficial for them. This can be further
explained properly on the basis of Kingstons cotton mill where auditor relied on the
certificate and document provided by the manager and did not observe stocks physically
and also did not verify the valuation later it was found that manager of the cotton mill has
been overvaluing the companys profit.

The duty of the auditor is to work as a watchdog not as a bloodhound who is just the part
time employees of the organization.

The job of the auditor is to perform auditing duties based on his own experience that
should be capable of understanding and analyzing accounting standards, have technical
knowledge and be able to interpret complex situation and evidences thus, they should not
rely on the manager's explanation.

There are not firms and manager


characteristics and attributes that lead
auditor to perform fewer test and peruse
less reliable type of audit because

auditors performs its duties based


on the rules and regulations they
are required to collect evidences
under which audit report can be
based on. Auditors plan and
design an audit approaches by
obtaining knowledge of the client
business with detailed understanding internal control and assessing control risk.

They perform various tests of controls and substantive tests of the transaction by
evaluating clients recording of the transaction. Similarly, based on the audit procedures,
sample size, items that needs to be selected and timing, auditors take audit decision.

Furthermore, auditors apply professional skepticism while going through the audit
procedures which involve questioning mind that will help auditor to become alert in
certain condition which will help to indicate possible misstatement which has occur due
to error or fraud and a critical assessment of audit evidence.

So, being professional skepticism one of the requirement of auditing standard will help auditor in
recognizing any circumstances that has occurred and has made the financial report to be
materially misstated).

Auditors perform its roles required by AASB standards based on auditor independence which is
the cornerstone of auditing which describe two qualities required for auditors which are
independence of mind and independence of appearance.
-

Independence of mind enables auditor to perform their duties by being unaffected by


the external influences that will compromise professional judgment, allowing an auditor
to act with integrity and exercise objectivity and professional skepticism.

Independence in appearance has the potential to represent (true and fair view) and
provide audit report that is free from material misstatement which will enhance
credibility to a report. Thus manager confidence does not sway auditor opinion.

Question 3
From the very beginning of 21st century, Auditing has been a self-regulated profession. The
validity of self-regulation of an auditor in auditing was an issue when the auditors had to
perform in a complex risk management process. However, we also cannot ignore the fact that the
auditors are the professionals entitled to provide reasonable assurance about true and fair view
of companys financial statement that is free from material misstatement (Islam, n.d.).
It is important for an auditor to follow minimum of the
auditing standards to maintain their independence. Perhaps,
the recent failure of auditors from few corporate companies,
like Enron, WorldCom, Satyam, Lehman Brother, Merrill
Lynch, ZZZZ Best Company Inc. failed the auditor to retain
their independence. In June 2001, Enrons CEO was titled
the No. 1 CEO in the entire country and the company
became Americas most innovative company but just after
five months in December 2001, the company was trailed for
bankruptcy were it was found that the auditor Arthur
Andersen, had a major role in producing the financial
statement (Knapp, 2011). This event caused a bad impression in the entire market including
United Kingdom, Europe and Asia-Pacific. This resulted difficulty to re-establish the confidence
and validity audit and the auditors quality, competence, professionalism. However, selfregulation in auditors completely failed in 21st century.

Generally, it is assumed that the shareholders, customers, creditors expect high level of
absolute assurance as the decision of investment highly depend on the auditors financial
statement of the company and the regulatory body expects the auditor to maintain the
auditing standard. But, the auditors believe that they are responsible only for a reasonable
assurance not absolute assurance. This confirms an expectation gap amongst the
stakeholders and the auditors leading to audit failure.
Another audit failure come from exploiting and mismanaging the Generally Accepted
Auditing Standard (GAAP) which was evident in ZZZZ Best Company v. Ernst &
Whinney (Akst., 1990). Similarly, auditing failure is also caused due to negligence and
due care at audit work. The case of Belgrave Limited, where the company claim the
auditor for negligence in work carrying professional judgment which lead the company
failure in escaping the loss of around $3.8 million by the way of advancing funds (Bell
Gully, 2012).
Personal relationship and familiarity between the auditor and its client is also a reason of
audit failure. It causes an adverse impact on the audit work.

Because of the failure of the audit cases, many regulatory bodies developed stronger guidelines
for the Auditors for their respective countries.

The auditors had to report the audit


committee, not the client management.
The financial statement of the company
must be certified personally by CEO and
CFO.
It was evident in New-Zealand,
establishment of External Reporting
Board (ERB) as auditor regulator.
Implementation of the Auditor Regulation
Act 2011.

Thus, the auditors should always outlook their


work with their code of ethics (Integrity, Objectivity, Professional Competence and Due Care,
Confidentiality, and Professional Behavior). If so there will be less chance of audit failure.

Question 4
Cadbury report (1992) has become benchmark for other corporates regarding the aspects of
corporate governance. The report produced the code of best practices for the listed companies. It

has clearly defined the role of board members and its


compositions, addressing any issues about financial
reporting, role of non-executive directors, dealing with
the remunerations etc. which has contributed in setting
guidelines for other companies. The business practices
done by the companies should be transparent to its
employees, shareholders and other stakeholders.
Corporate Governance by its definition says that it is set
of rules, policies, mechanisms and procedures that
company needs to follow in order to be controlled and
directed. The Cadbury report has the following
components

Clear division of responsibility at the top


The majority of board be comprised of outside directors
The remuneration decision would be made by majority of non-executive directors
The board should appoint an Audit Committee including at least three non-executive
directors.

The provision of the code was given statutory authority and the other companies listed in London
Stock Exchange were given obligation to comply or explain that is to enumerate to what extent
the companies confirm with codes and where they do not they need to state why. The detail of
explanation should be given by the companies which do not adhere to the code.
The report also clearly focused on the role of auditors and audit committee which has relevance
to the auditing professionals. The role of
auditor is to provide shareholders with an
external and objective check on the
directors financial statements which form
the basis for that reporting system. Although
the report of the director is addressed to the
shareholders, they are important to the wider
audience not least to employees whose
interest boards have statutory duty to take
into account. The comply and explain rule
is actually is proven as milestone for the
companies and binds them to purpose and principles of corporate governance while allowing
them to depart from specific provisions. It promotes innovation, proportionality and long term
learning. However, it depends upon the shared value of good governance and supportive
institutional arrangements. When these are lacking and comply and explain does not work as
intended the situation may call for alternatives including regulatory intervention. (Cadbury
Report, 1992)

The UK Corporate Governance Code has evolved from original Cadbury Code of 1992 which is
widely seen as first comply or explain governance code. Comply or explain is not simply about
having no requirements but is always used along with other approaches. It co-exists with code
principles that need to be applied in all circumstances Company law also contains requirements
concerning many aspects of corporate governance.
Therefore, in my opinion, Comply and explain rule has been proven as a corporate governance
guidelines for the companies around the world and helps shape the companys management and
overall organizational structure. The significance of report is so widely accepted and crucial that
it can be termed as a milestone in the making of corporate governance rules and policies.

References

Cadbury. (December 1992). The Cadbury Report. UK: 1992.

Bell Gully. (2012). Auditors liability for failed finance companies. Retrieved from
http://www.bellgully.co.nz/resources/pdfs/Litigation-update-Auditors-Liability-forFailed-Finance-Companies-15Nov2012.pdf
Islam, M. Auditing in 21st Century: Has Self-Regulation Failed? SSRN Electronic
Journal. http://dx.doi.org/10.2139/ssrn.2242217
Knapp, M. C. (2011). Contemporary auditing: Real issues & cases (9th ed.). Oklahoma,
OH: South-Western.
The Financial Aspects of Corporate Governance. (1992). Retrieved 27 May 2016, from
http://www.ecgi.org/codes/documents/cadbury.pdf
http://www.auasb.gov.au/admin/file/content102/c3/Aug12_AUASB_Bulletin_Profession
al_Scepticism_in_an_Audit_of_a_Financial_Report.pdf