Imperial Contingent Liabilities and Contingent Assets

Question: Discuss about the Imperial Contingent Liabilities and Contingent Assets. Answer: Introduction: As per the APES 110, Code of Ethics for Professional Accountants, the act of Peter is not in consent with the ethical code. Section 240 of the Act states that the auditor in case is in receipt of any commission on referral should inform the client about the same along with the computation of such commission. And the name of the dealer. He should clear the same in writing thus in the present case Peter should inform the client about the commission he is to receive from Computer Services Limited else the same would construe violation of the ethical code of conduct. An auditor is not permitted to reveal the details about any of its client to any third party without the consent of the client except if required by the law. Thus as per the said scenario, Davids action was not in line with the ethical code of conduct. David should have asked the client before disclosing their contacts to the Allied Insurance. Therefore so as to ratify his acts he should take permission from his clients and then forward the contacts. Independence is the crux of the work an auditor performs. Therefore any auditor who performs the work of audit should not perform the other non-audit services as it would contradict the independence of an auditor. However if the auditor or the audit firm has taken due permission from the auditee then he or she can conduct both the work. But even after the same the work performed by the auditor should be duly checked and verified by the audit firm in order to ensure integrity and objectivity in the work conducted by the auditor. Thus, APES 110 defines it clear that the staff of the auditor can help in the data entry work as well as do the audit but only after getting permission in writing from the client. Advertisement of ones own professional work so as to gain work from others may at times lead to such a situation which is in contradiction to the fundamentals of professionalism. Thus comparing the work of one professional with that of the other brings disrespect to the profession which is not the right thing. Thus Barry in the present scenario, has performed a task in contradiction to the fundamental principle of professionalism. Sending management services to the client without his permission just to obtain that work is not acceptable hence the same should be stopped immediately. An auditor in case also acts as a director of the same company then a self interest and a self review threat is said to be created as per Section 290.146 of the APES 110. Honorary director even if is not active in the board or the conduct of the company may pose threat to the integrity and independence of the auditor. Thus in order of Katrina NG to hold the directorship will have to step down from the position of an auditor of the same company. An accounting professional has the capability to perform the work of an audit, management services as well as taxation or such other non audit services as well. However performing both the task of an audit as well as other non-audit services may pose a threat to its independence. Thus in the said case Peter will have to resign from the work of either an auditor or non-audit work. But if Peter is to conduct both the work then as per the provisions of the Combines Code of Corporate Governance, then the audit committee of the company will have to counter check the non-audit work performed by Peter. Any auditor can advertise his work by giving advertisements in the journals and newsletters issued by the institute . However if an auditor solicits work by giving advertisements which are jazzy and colourful mentioning the details of the staff and the employees and comparing the same with others, violation of the ethical code of conduct takes place. This makes it clear that the conduct of Hornsby Auditors were not acceptable as per the Code. Secondly mentioning the fact that they would enable the clients to get higher tax benefits than the others in the district is also a misleading statement which is also not permissible. Therefore if the auditor is to advertise his work then he should do the same only in the journals and newsletters of the institute. Any auditor should issue the current years audit report to the client only upon clearance of the audit fees of the previous year. The AICPAs Code of Conduct does not deter the auditor from conducting the audit work but deters the auditor from issuing the audit report. Thus David Cheadle has not violated the code of conduct by starting the current year audit work however he should at the same time ensure that the report should be given only once previous fees has been cleared. Obtaining confirmation of balances from debtors and creditors is one of the most sought after part of an audit work. Simply because it give double assurance with regards the amount and the fact that the transactions reflect a true and fair view. But if the auditor is unable to get the confirmation from them then he can take the possible steps to verify the same. Thus the auditor should not give any negative or adverse opinion for the same since he had satisfied himself about the correctness of the balances of the customers. An auditor should check all the assets in detail of the audit client especially if the same is a major contributory to the income of the client. But in this scenario the client is not allowing the auditor to check the plant and machinery which contributes to 20% of the asset base and is a major revenue generating asset. Thus he should give a negative opinion on the same. Audit of the contingent liabilities is a must as they form a very vital part of the financial statements. An auditors work is to see that the contingent liability has been measured and recognized correctly so that the investors are aware of the expected future liability of the company. Therefore its disclosure is mandatory[6]. Hence even if the client refuses to disclose the same, the auditor should try to do the same else give an adverse opinion. A retailer should always maintain its books of accounts irrespective of the fact that its major sales and purchases is in cash. Without the same an auditor will not be able to audit the books of accounts. Thus in the present scenario since the auditor will not be able to conduct the audit well, he should give a neutral opinion to the fact that the audit could not be conducted hence no opinion can be formed. Verification of the opening balances of the client is the first step of an auditor. In case the audit client is an old one, the auditor can skip this first step also. But in case the audit client is a new one, this step is a necessity. Thus even if the client refuses to allow checking of the opening balances and th auditor has still been able to satisfy himself about the correctness of the balances, yet he should give an adverse opinion stating the reasons for the same simply to safeguard from any future litigations. Australian Accounting Standards mandates all the companies registered in Australia to maintain its books of accounts. If the same is not done then the auditor should ask the client to maintain the same so that he can conduct his work smoothly. If the client still does not then he should give an adverse opinion. Inventories or stock-in-trade should be valued by using the FIFO or the weighted average method. Therefore if any firm values its inventories using the LIFO method then he should switch over to the FIFO or the weighted average method. Thus in this case the auditor should make clear the details about AASB 102 and if the client does not alter the valuation of inventories even then, he should give an adverse opinion. In the present scenario, the auditor should give an adverse opinion since the clients going concern became questionable during the issue of the audit report due to exit of their main customer. Therefore the client should be asked to prepare the accounts again using the cash basis and give a negative opinion with regards the continuity of the business of the client. References: Albeksh, Hasen Mohamed, Compliance of Auditors to Ethics and Rule of Professional Conduct and Its Impact on Audit Quality (2016) 2(12) Imperial Journal of Interdisciplinary Research https://www.onlinejournal.in/IJIRV2I12/092.pdf APESB, (2010), APES 110 Code of Ethics for Professional Accountants, https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf 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, https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_Compiled_2015.pdf aasb.gov.au., (2015), AASB 102 - Inventories, Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf aasb.gov.au., (2011), AASB 137 -Provisions, Contingent Liabilities and Contingent Assets, https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf aasb.gov.au., (2012), AASB 101- Presentation of Financial Statements, https://www.aasb.gov.au/admin/file/content105/c9/AASB101_09-07_COMPsep11_07-12.pdf cimaglobal.com., (2015), Ethics code at a glance, https://www.cimaglobal.com/Professionalism/Ethics/CIMAs-code-at-a-glance/ Jelic, Milos, The Impact of Ethics on Quality Audit Results (2012) 6(4) International Journal for Quality Results https://www.ijqr.net/journal/v6-n4/4.pdf