Auditing and Ethical Assurance Services

Question: Discuss about the Auditing and Ethical Assurance Services. Answer: Introduction The accounting professionals do not owe duty to the individual client only, but to the entire society and public at large. Therefore, it becomes very important and essential for them to maintain the highest standards of ethics in their work (Marley Pedersen, 2009). The CPA Australia has issued the code of ethics for the professional accountants known as APES 110 (APESB, 2010). The professional accountants are under obligation to comply with the provisions of this code while discharging their duties. It is of paramount importance for the professional accountants to ensure that the proposed audit engagement is acceptable. Therefore, before accepting the audit engagement, the accountant should identify the issues that may give rise to threats to the independence (Gay Simnett, 2015). In this context, the report presented here addresses the ethical concerns and issues in accepting an audit engagement. Ethical Provision of APES 110 The provisions of the code of ethics entail that the professional accountants have to comply with the fundamental principles of ethics such as integrity, objectivity, professional and due care, confidentiality, and professional behavior (Gay Simnett, 2015). The code further provides that the professional accountants should refrain from engaging in such activities which affect the fundamental principles of ethics adversely. The professional accountants are duty bound to indentify the events and circumstances which may have potential adverse impact on the fundamental principles. The independence of the accountant from the client is crucial in achieving the objectives of the engagement ethically (APESB, 2010). It is customary for the professional accountant engaged in the attest functions like auditing and assurance services to stay away from the critical situations which prejudicially affect independence (MacClancy Fuentes, 2013). The potential threats to the fundamental principles of ethics lie in the areas such as self interest, self review, advocacy, familiarity, and intimidation. The most crucial among these areas are the two such as self interest and self review. Self interest implies taking financial or other interest by the accountant in the client to be audited. In this area, the potential circumstances that may pose threat to the fundamental principles of ethics are direct financial interest in client, dependence on client fee, interest in management, and indirect interest in client (APESB, 2010). Further, the self review implies taking other assignment of the same client in past before accepting audit engagement. This means that if one accounting firm takes up an assignment of designing internal controls for a company and then the same firm is offered an engagement to report on the effectiveness of the internal controls. In this case, the accounting firms duties will be jeopardized in respect of later assignment (APESB, 2010). Thus, these are the threats that an accountant should continuously identify to maintain high standards of ethics in their work. Analysis of the Case In the current case, Fellowes and Associates Chartered Accountant, a firm, has been considered for appointment as auditor of HCHG, the group of healthcare companies. Prior to appointment of the firm as auditor, accountant Tania identifies that one of the members of the audit team holds shares in HCHG. As per the guidance provided in APES 100, holding shares in the company which is to be audited by the accountant causes prejudice to the independence of the auditor (APESB, 2010). It is an eminent threat to the principles of ethics. It is presumed that the accountant controlling shares in the client company can not perform duties as auditor independently. Holding shares in the client company falls under the category of self interest threat (APESB, 2010). Further, in the second situation, the accountant Tania identified that Fellowes and Associates had already undertook an assignment of valuation of intellectual property of HCHG before considering the assignment of auditing. This situation gives rise to threat to the independence because the auditor has already certified intellectual property which is one of the major items of financial auditing. Thus, if during auditing assignment, the auditor finds out something contradicting with earlier examination in respect of intellectual property, he might try to conceal it. Therefore, in this situation, the auditors work in relation to certification of balance sheet might not be independent. This type of threat to independence falls under the category of self review (APESB, 2010). The code of ethics provides that the member in practice is under obligation to identify and evaluate such circumstances which pose threat to the independence of the auditor. Further, the members need to take all safeguards so as to eliminate the threats to independence. The code classifies such safeguards into two broad categories such as safeguards provided under the laws and regulations and safeguards created in the work environment. In the first case, the members are required to follow the laws and regulations to safeguard independence while in the second case, the members need to create such an environment or work culture that provides safeguard to the independence automatically (APESB, 2010). Further, it has been provided in the ethical code APES 100 that the members in practice should determine the acceptance level of threats to independence and treat all those threats that exceeds the acceptance level (APESB, 2010). In the current case, as far as the question of acquiring the shares by accountant in the client company is concerned, the accounting firms can create rules to make the accountant holding shares in the company or group companies ineligible for appointment as auditor of such companies. Further, for the second situation, the regulators should make provisions that the firms taking any other related assignment for a company in the same year can not take up auditing assignment. Apart from that the accounting firms should take care while allocating audit staff so that any accountant related or connected in any manner with the client is not assigned (APESB, 2010). Conclusion The discussion in this paper revolves around the issues of ethics for the accounting firms. In this regard, the CPA Australia has issued code of ethics known as APES 100. This paper addresses the ethical issues encountered by the accounting firms and the resolution of those ethical issues with the help of a case study. The code of ethics provides that the members in practice owes responsibility towards the client as well as public at large. Therefore, they should perform their duties with responsibility and unbiased manner. References APESB. 2010. APES 110 Code of Ethics for Professional Accountants. Retrieved December 27, 2016, from https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf Gay, G. Simnett, R. 2015. Auditing and Assurance Services in Australia, Sixth Edition. McGraw-Hill Education Australia. MacClancy, J. Fuentes, A. 2013. Ethics in the Field: Contemporary Challenges. Berghahn Books. Marley, S. Pedersen, J. 2009. Accounting for Business: An Introduction. Pearson Higher Education AU.