BA313 Discussing Legal Responsibilities of Auditor: Case of LM Assessment Answer
Audit is referred to as the systematic examination of the (FS) Financial statements of the entity with an aim to express an opinion about the truth and fairness over the subject matter. The management of the entity or business is responsible to prepare the financial statements which are subject to be audited by the qualified personnel that are known as Auditor. Auditing board of Australia is held responsible to oversee the process and quality of the audit that are required to be performed by the Auditors. Auditors are required to follow a set of procedures and principles in executing their duties so that a confidence may be developed in the users of the financial reports of the business. In this report, case of LM is discussed to throw light over the responsibilities of the auditor and the consequences that arise when auditor fails to meet the requirements as per the standards that are set up by the Australian Auditing Board (Helms, & Mancino, 2019)
There are some guidelines issued for all the auditors to follow ethical misconduct and work program. In case of the financial statement, Auditor, needs to set up proper ethical code of conduct and set of working practice. The code of ethics of the program is established with a view to strengthen the ethics divided into principles and rules (Arens, Elder, & Mark, 2012).
1) Responsibilities: In implying their professional duties, the AUDITORs must exercise delicate professional and moral judgements in all their projects.
2) Public Interest: The AUDITOR must perform in a way that they also serve public interest, honor public trust and keep up to commitment to their professionalism.
3) Integrity: To maintain and increase the public confidence, the AUDITORs must execute their duties with highest sense of integrity (Mock, Ragothaman, & Srivastava, 2018).
4) Objectivity and Independence: Auditor must maintain objectivity and stay away from the conflicts of interest in their professional performance. In case when auditor in public practice should be independent in the appearance and provide auditing and attestation service program (Arens, Elder, & Mark, 2012).
5) Due Care: The Auditor should observe the technical and ethical standards of the profession, continually keep working to improve competence and the service quality and perform professional responsibilities at their best.
6) Scope and Nature: The Auditor should attempt to prevent operating losses that may result from dysfunctional corporate system and ineffective controls.
- Getting assurance financial statements which are free from the material statements.
- Maintain professional scepticism and audit set program.
- Identify the risk of non-detection of the fraudulent materials misstatement found in errors.
Consequences on Auditor
Material Misstatement due to fraud: According to SA 330, the auditor has to determine all the responses to address the risk through-
1) Supervise and assign staff up holding significant responsibilities.
2) Evaluation of accounting policies should be indicative of fraud financial reporting
3) Assimilate audit procedures to be carried out to include unpredictability (Whittington, & Pany, 2010).
4) Predict risk of fraud in the recognition of revenue & overriding of management controls.
Overriding Management Controls: To minimize the risk of overriding management controls, the auditor must follow the procedure given-
1) Check the relevance of the journal entries in the general ledger.
2) Asses the estimates of accounts for any biases
3) Asses rationale of business for particular transaction
4) Perform some other audit procedure.
Case Study of LM
LM was not actually registered with any of the authorised bodies in the Australia. The business in which it was dealing is Investment scheme. Also, it was not required for LM to get registered with ASIC as the scheme of the entity was primarily for the foreign investors and majority of the contributors to the scheme were foreigners. Moreover, there was no statutory requirement over LM to get their financial statements audited. However, LM has appointed WPIAS as their auditor and got their financial statements audited (Barr-Pulliam, et al. 2020).
Key elements in financial affairs of LM
- Net assets of LM = $353156353
- Loans and receivables = $ 299570308
- Significant amount was owed to Madison that amounts to $ 201187254
- Net assets = 57% of Loan to Madison
- Loans & receivable = 67% of Loan to Madison
- Going Concern of LM was suspected to be compromised
The financial position of LM was not in good state. The assets that were shown in the financial statements were majorly represented by the loans & receivable. Additionally the loans & receivables were owed by the related party (Bitter, 2011).
In short, the affairs of LM were not properly managed and were subject to be audited more carefully. The auditors in this case should have delivered their responsibilities with due care and without any negligence to serve the purpose of the Audit as per the provisions of the Auditing standards (Schmidt, Wood, & Grabski, 2016).
According to the provisions of the Auditing Standards, the auditor shall follow professional scepticism and he/she shall gain reasonable assurance about the matters that belongs to related party so that the opinion of the Auditor shall stand reasonable at all aspects. However, there are certain inherent limitations related to Audit which restrain the auditor to express a true and correct opinion (Ajao, Olamide, & AyodejiTemitope, 2016).
The contention of ASIC was correct and the registration of the WPIAS should have been cancelled as they failed to deliver their duties as per the requirements of the relevant Auditing Standards. Also, the auditor failed to provide a reasonable assurance over the financial affairs of LM. Auditors should have reported in their Audit Report about the financial position of LM as majority of the net assets were represented by the loans & receivables that were owed by the related party. Hence, those loans & receivables were not actually realisable. Also, the appointment of the WPIAS as auditor was not in accordance with the legal requirements. At last along with considering the above facts, it may be concluded that the appointment of auditors for LM was not as per the legal requirements and the auditors did not deliver their duties with due care.