ACC305- Auditing and Professional Practice Assignment Help
List two threats to compliance with the fundamental principles that may exist resulting from your discussion with the CFO, and identify the fundamental principles at risk of being breached.
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Scenario 1
Acquisition is one of the basic modes of business expansion. Most of the times, it can be noted that the large multinational firms acquire small and medium sized companies or a loss making companies to gain future benefits. Christensen et al., (2018) believed that acquisition is the way through which a company can easily enhance its customer base. However, in this context, it is important to note that at the time of acquiring any business the most important factor that the company must evaluate is the financial state of the business that is going to be acquired. Though there are several instances where it is noticed that companies acquire a firm that is generating loss in the market; in this case it must be noticed whether there is any future possible benefits associated with the company or not (Kruseman et al., 2018). While analyzing the financial viability of the acquired firm, the acquiring firm must evaluate the profitability, liquidity, stability, efficiency and investment opportunity of the business. It is obvious that all of these matters will not be very good, but there should be any prospect and transparency in the financial activities of the company.
If the particular scenario of Bolts Ltd. is considered, it will be noted that the CFO of the company has suggested avoiding the cash flow statement or cash flow performance of Steel Ltd and at the same time, the CEO has also suggested to emphasize on the sales and profitability of the Steel Ltd. In this context, it is important to be mentioned that sales and profitability are the two major factors that indicates the financial position of a firm in a specific time span and due to this factor the company must check the profitability and sales of the other company that will be acquired. However, it is also true that cash flow is the another big factor behind the financial position of the company. Cash flow indicates the cash inflow and outflow of the business during a particular year (Elahi and Ebrahimnejad, 2018). It indicates the liquidity position of the firm. Therefore, if the cash flow statement is not analyzed or avoided there will be risk of liquidity in the acquisition. Managing and evaluating the liquidity position is the fundamental principle of financial investment and this will be hampered if Bolts Ltd. avoids cash flow review.
At the same time, this decision of the CFO is also creating the risk of hampering the fundamental principle of cash flow management. As per the fundamental principle more cash flow in the earlier period is more preferable than more cash flow in later period. In this particular case it can be noted that Steel Ltd has a problem with cash flow, which Bolt is trying to avoid, but this will cause high risk to the business.
Fundamental principles at risk of being breached –
Principle of integrity – As per this principle, if anyone cannot be honest during analysis, he or she must ensure that the necessary information must not omit from the document if the information omission cause misleading.
Principle of competency and due care – The competency of the acquisition must be accessed through determining it’s impact on the cash flow.
Principle of objectivity – Objectivity of the takeover is hampered if anyone allows self-interest to influence the information.
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Section 2
a.
American Accounting Associated Model provides the basic guidance in the context of ethical decision making (Christensen et al., 2018). As per this particular model there are seven basic factors or questions that must be answered while making an ethical decision. These seven factors or questions are as follows:
• Establishment of the facts associated with the case scenario
• Identification of the ethical problems or issues associated with the case
• Identification of the principles, values and norms associated with the case scenario
• Different possible alternative activities that might be taken
• Matching the alternatives with the principle, norms and values
• Consideration of the possible outcomes and their consequences
• Final decision making (Cheng and Flasher, 2018)
Therefore, if the given case scenario of Luke and Zane is considered, it can be noted that the situation is very complicated, but the problem can be solved if the scenario is analyzed with AAA model. The analysis is done below:
Answer to first question or factor – The facts are that Zane and Luke are equally talented and serious about their work, but they are competitors at workplace. Both of them have personal reasons that motivate them for promotion. Luke is aware that Zane has done the audit properly and small mistakes are there which Zane can solve easily; however, due to the need for promotion Luke cannot inform Zane about this matter.
Answer to second question or factor – The main ethical issue is that Luke knows that Zane is perfect for the task and she has done the task better than Luke, but the promotion is very important to him.
Answer to third question or factor – In this context, it must be said that principle of cooperation and coordination suggests helping the co-workers by informing them about their mistakes. Principle of integrity also suggests the same. The professional values state that there should be ethical mindset and no breach of trust among the staffs at an workplace. Norms also suggest maintaining professional ethics at\workplace.
Answer to fourth question or factor – In this case Luke can discuss the matter with his senior and ask him to give a chance to Zane and inform Zane about the problem of the client.
Answer to fifth question or factor – The alternative suggestion or step is matching with the principle, values and norms at the workplace.
Answer to sixth question or factor – If this alternative step is taken by Luke, Zane will be aware of the her mistakes and can improve the same and at the same time, she will be grateful to Luke and will give him opportunity to prove himself in the next opportunity.
Final decision – Luke should discuss the matter with his senior and inform Zane about the matter.
Therefore, considering the American Accounting Association for ethical decision making model, it can be stated that Luke needs to talk to his senior about the actual matter and transfer the work to Zane as she had done the task initially with proper expertise.
b.
Mary Guy’s decision making model suggests making ethical decision based on five factors – honesty, accountability, caring, loyalty and respect (Larson, 2018). It means while making any ethical decision an individual must take care of these five factors. Therefore, if the given case scenario of Luke and Zane is considered, it must be stated that the scenario needs to be analyzed using these five factors. The analysis is done below:
Honesty – This is the first factor in which Luke needs to think what he should do from an honest point of view. Considering the case scenario, it must be stated that Luke needs to discuss the matter with his senior and honestly accept the excellence of Zane in the audit work.
Accountability – This is the second factor, in which Luke needs to understand that he is accountable to his colleague Zane for his activity. If he does not tell Zane about this matter, in future his accountability towards professional ethics will be questionable. Hence, Luke must show his accountability.
Caring – This factor suggests that the person must show care to the other people. In the case of Luke, it must be stated that as he is aware of the excellence of Zane, he must care about her position within the organization. As Zane did not breach him at any matter, Luke must show proper care to her.
Loyalty – Loyalty is a big factor in the professional field. Considering the scenario of Luke, it must be mentioned that Luke needs to show his loyalty towards his organization and inform the senior about Zane’s work. Showing his loyalty, Luke must disclose the fact and his understanding about client’s behaviour and try to identify alternative solution for the problem.
Respect – This factor suggests that one person should show proper respect to the other person while making any ethical decision. In the case of Luke and Zane, it must be stated that Luke needs to show proper respect to the work that Zane has done as he is aware of the actual situation and the quality of Zane’s work. Showing proper respect to Zane Luke must disclose the fact to his senior and provide an opportunity to Zane.
Therefore, if the scenario of Luke and Zane is analysed using the Mary Gay’s model, then also the decision will be same as before. As a decision, it must say that Luke must admit the fact and the quality of work that Zane has done to his senior and ask the senior to give another chance to Zane and at the same time, ask the senior to convince the client for this matter.
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Section 3
a.
In the case of Peak Sawmill Limited, it can be noted that the company especially the accountant of the company is facing difficulties because of the new changes in the price range of timber of the company. The major mistake that the company has done is that the company did not inform the suppliers of the timber about this change in the price range. Due to this the invoices that the suppliers have prepared and sent to the company are as per the old price range of the timbers. This has created major differences in the actual amount and the amount in the invoices of the suppliers. This has created the need for a detailed audit procedure through which the financial statements of the company can be verified properly and the actual mistakes can be detected.
The two assertions, which are at risk, are as follows:
• Accuracy assertion - Unprocessed invoices of the creditors, which are due for the changes in the price level of the timber
• Occurrence assertion – Timing differences between the date at which the transaction or invoices have been recorded and the date at which the payment has been, made by the company.
b.
If the first assertion that is accuracy assertion is considered, it must be stated that as there are several invoices pending in the company, which are not processed, it will be difficult for the company’s personnel to match those old invoices with the new level of price. The calculations will be difficult because the suppliers or the creditors are not completely aware of the changed scenario within the company. They are unaware that the price of the timbers has increased and due to that there will be changes in their old invoices. At the same time, the amount of cash inflow of the company will not matched with the cash outflow, which will show negative cash inflow and hamper the liquidity of the company in the short run. Therefore, there will problem in the context of stakeholders’ satisfaction, which will hamper the business progress of the company. At the same time, it can also be stated that accounting or calculation errors may also take place in this case because changing or improving all the pending invoices according to the new price range will be a huge burden on the accountant and this will hamper the entire accounting process of the company.
In the context of the second assertion that is occurrence assertion, it must be stated that as the company is taking much time to inform the suppliers about the changes in the price level of the timber, it is obvious that the suppliers will make or prepare their invoices of the current period again by considering the old price range. In this context, it is required to be mentioned that as there are differences between the date of recording and date of payment there will be differences between the amount that the suppliers or creditors have claimed and the amount that the company has paid. This will create major difficulties for the company as the suppliers are unaware about the changes made in the price level of the timbers. Due to this misunderstandings will be created and at the same time, the books of accounts of the company will not show the accurate income and expense level of the business. As a result the true financial state of the company will not be disclosed.
c.
Considering the given scenario of Peak Sawmill Limited, it must be stated that there are two major assertions of risks associated with the activities of the company and the financial statements of the company. However, in order to improve the scenario and for obtaining sufficient evidences for audit, substantive test details are required to be prepared by the auditors of the company. The substantive test details are developed below:
Substantive test detail for the first assertion – In order to collect sufficient evidences for the audit of the financial state of the company, the auditor needs to collect the invoices of the suppliers that the company has already received from the suppliers. At the same time, the auditor also needs to collect the records that the company has made at the time of recording the payment to each supplier of the business (Simon et al., 2018). This will help the auditor identifying the discrepancies that have taken place in the company in terms of payment to the creditors. In the other words, it can be stated that this will help the auditor to review the calculations done by the company while making payment to the suppliers.
Substantive test detail for the second assertion – The second assertion at risk has been created due to the timing difference between the record of invoices and payment done by the company. In this case, the company again needs to check all the details of recording and at the same time the auditor also needs to check the record of acceptance of the order made by the company (Mubako and O'Donnell, 2018). As per the rule based on the acceptance date the payment should be made by the company. Therefore, in this case proper checking of the dates along with the amounts paid will help the auditor understanding the discrepancies and at the same time, will help to collect the evidences for performing audit.
Therefore, considering the above substantive test for detail, it can be stated that with the help of proper evidences the auditors will be capable of identifying the mistakes in the books of accounts of the company that is Peak Sawmill Limited.
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