Earnings Management and Audit Opinion †Free Samples to Students

Question: Discuss about the Earnings Management and Audit Opinion. Answer: Introduction: The ethical requirements of APES 110 have been breached in this scenario as the professional ethics does not allow the practicing firm to disclose the information collected during the audit and assurance procedure about the client without taking prior permission from him. Mortdale accounting firm has conducted audit of several public companies from where he has collected working papers of the client. He has shared the information collected during the assurance procedure to peer reviewer Penshurst accountants for carrying out the assurance activity of mortdale. Although the information given was to conduct the working procedure of the firm and to check that all the procedure necessary for carrying out audit is being fulfilled but it should not be shared without the permission of the clients. Therefore mortdale should have taken prior permission from his clients before providing the working papers to his peer reviewer. Yes, the ethical requirements of APES 110 have been breached by the CPA as well as by the accounting firm. The accounting firm should not wholly rely on the words of the candidate applying to the entity rather should try to collect information about his past engagements. It is also important to know whether his interests are not in conflict with the objectives of the organization. In this scenario the local accounting firm should have made research about Jan Dungog, a CPA before providing him job in the organization. The firm should have tried of taking information from his previous employer for the reasons about leaving his past job. By collecting this information the firm should have been able to get information about the true reasons for the dissociation of the person with his previous job and get to know about the strength and weakness. So, the firm should have contacted the previous employer before employing Jan for the position. The practicing accountant has breached the ethical requirements of the standards as he is not allowed to solicit its clients about his other engagements and advertising about the other form of services he is providing. A professional accountant should be independent of his objectives and opinions. He should not be influenced by any factors while conducting his audit and assurance services. This can lead to biased opinion on the true position of the entity towards its stakeholders. In this case wendal sailor contacted the firm in which he was providing audit and assurance services for considering about the other services which he provides apart from providing audit opinion before giving his final audit opinion for the entity. This was against the ethical standards of the professional accountant because this will affect the independent opinion formation about the actual picture of the engaging firm in exchange of other benefits of the accountant. The professional standards are not affected in this case as the partner who is performing the audit procedure of the respective Non Profit Organization. He is not performing any management function rather holds only honorary position in that organization. As he is not in the management function and is not involved in decision making powers so it can be said that he is at independent position in the organization. Judith Durham is at the honorary position of the respective Non Profit organization which is not at anywhere related to the decision making position and can form independent view while providing audit opinion. Honorary position is where a person occupies a position for giving him honor but he does not have any power in making decision. So from the above discussion it is proved that he can perform audit procedure in the organization as he is not in any way affecting his independence. The accountant should not disclose the information of his clients without taking prior permission for the documents which he had collected during his engagements. Here the accountant has breached the ethical and professional standards as specified by APES 110 by transferring all the working papers to the acquiring audit firm. He does not have the permission to provide the information of his clients to the acquiring firm before taking permission from them about the related acquisition and if the client wants to continue with the acquiring firm then only he should provide the documents On acquisition of the firm, Ernie Dengate should have taken permission of his clients about the transfer of the working papers related to the audit procedure. Although he has taken permission before transfer of taxation working papers, he should also sought permission for the audit documents also. Therefore it can be said that the ethical requirements were breached. In this scenario the standard provided by APES 110 under section 290 which provides that the professional accountant should be independent in his views and should not be influenced while providing audit opinion. He can provide management services, taxation services and auditing services but is not allowed to provide all the related services to the same client. If he is providing management services to his client and is anyway related to the decisions of the organization then he should not provide audit procedure to the same organization. In this scenario Fred provides management services along with taxation and audit procedures and if providing management services affects the independence while providing audit and taxation services then it will be against the professional standards. Therefore a professional accountant should not provide management services along with taxation and auditing engagement. Hence we can say he has breached the standard. The professional standard is not breached in this scenario as the accounting firm can maintain the accounts of the organization in which it does not provide audit opinion on accounts. The accounting firm can provide the book keeping services. In this scenario all good chartered accounting firm has provided assistance in maintaining accounting records of the branch company. The branch company has inadequate computer facilities because of which proper records are not prepared. Therefore accounting firm has taken the services of maintaining the records of Branch Company. As the firm is not providing the assurance services to the branch company so the firm can provide the services for maintaining the accounting records for the same. If the firm was providing book keeping services along with auditing engagements then it affects the independence if the accountant. Professional accountant has breached the standards as per APES 110 under section 150. Where the professional accountant indulges in illegal activities by which he brings disrepute to his profession it will be said that the person has adversely affects the reputation of the profession. In this the public accountant James Jameson is involved in fight and has assaulted a person in the drunken state. Also he has acted in disorderly behavior while attempting drive off. Because of this behavior he was convicted and been sentenced for three months and his licensed has been suspended for 1 year. Therefore it can be said that the accountant has breached the standard of professional behavior by which we can say that he had not act diligently has brought the profession into disrepute. Hence we can conclude that there has been breach of professional standard by the accountant. Upon looking into the case we can say that the auditor can form a non qualified opinion on the issue as he has taken all the necessary steps in order to grab the information about the consumer position reflecting in the accounts where he was unable to take confirmations from them on the same. He has undertaken other audit procedure in order to confirm the consumer position that was in included in the sample. Undergoing the procedure he was satisfied about the true and fair position of the accounts. So we can say that a non qualified opinion can be expressed in this situation. The auditor should express a qualified opinion on this issue as the client is not providing assistance in verifying the position of property, plant and equipment. Where the accountant finds that he is not able to generate information on the true position of the accounts he should share the same with those charged with governance and where no satisfactory reply is not received and he is not able to form a suitable opinion on the same he should give a qualified opinion. Also the plant and property on which confirmation is not received comprises the major part comprising of 35%. So necessary disclosure should be made along with qualified opinion. The auditor should form a qualified opinion where the client has not disclosed about the presence of a contingent liability and which if takes the form of actual liability can harm the financial position of the client. The auditor should discuss the matter with the management and if the management does not discloses the contingent liability in its books then he should provide a qualified opinion on the same as it has the potential of affecting the financial position of the client and the information for the same should be provided to its stakeholders. Ann adverse audit opinion should be formed on this issue as the client organization does not have proper and inadequate internal control procedure for recording its cash sales which affects the true financial position of the client. Also the auditor cannot perform necessary audit test on the same which make the situation worse because of which the auditor is not able to form audit opinion on the true and fair position of the sales made by the client. Where the auditor is unable in collecting the information and finds that the defects are persistent in nature then he should form an adverse audit opinion. The auditor should form a qualified opinion where he finds that the he is unable to collect appropriate information on the balances and where it is difficult to ascertain the true and fair position of the financial statements. In this scenario the accountant could not confirm the opening balances as he was not engaged with the organization in previous financial year. Where he is unable to collect information about the opening balances with the previous auditor or with the management then he should provide the information for the same in his report. Not adhering to the accounting standards has the potential to affect the financial position as well as true position of the client position so adverse opinion should be expressed while reporting the issue in his report. It is unable to form audit opinion on the accounts where the client has not prepared the financial statements as per the standards prescribed. The auditor should state the matter with the management and if the rectifications are not made then he should form adverse opinion. The auditor should form a qualified opinion on this issue as the client is not following the appropriate accounting principles and following the principle which is not allowed by the Australian accounting standard. The client should have prepared the valuation of inventory as per the allowed accounting principle in order to disclose true position of the inventory at the year end. As the there is no proper disclosure of the valuation of inventory on which the auditor could express opinion on the same. If management does not change the method of inventory valuation the auditor should report the same in the report giving qualified opinion. Where the going concern position of the entity is not appropriate in the organization and client entity position in the financial statements states that its survival is difficult then the auditor should report the same in his report along with necessary facts and figures and reasons and circumstances stating a qualified opinion. As the major customer of the entity has gone into liquidation and also because of producing specialized product it is difficult that new customers will take their position so it can be seen that the going concern position is affected so providing qualified opinion is necessary. References Rahman, A. R. (2013). The Australian Accounting Standards Review Board (RLE Accounting): The Establishment Of Its Participative Review Process. Routledge. Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J., Janson, P. (2014). Accounting: Business Reporting For Decision Making 5e. Chen, J., Cumming, D., Hou, W., Lee, E. (2013). 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