Auditing in Australia
An auditor is a professional who is responsible for evaluation of various business aspects. His or her independent opinion is important for business owners since it helps determine the efficiency they run a business. Thus, an auditor is to conduct themselves in due course promoting good relations and cooperation between auditors and the management of an inspected object.
The main objective of an auditor, when inspecting an entity, is to express an independent opinion regarding the quality of a financial report and compliance with existing accounting standards. Also, an auditor is expected to help improve the credibility of financial reports and make appropriate recommendations.
Accounting professionals must abide professional, accounting and ethics standards. The rules for professional and ethical behavior are described in APES 110 Code of Ethics for Professional Accountants. The general principles, objectives and responsibilities of an independent auditor should obey are described in ASA 200 Objective and General Principles Governing an Audit of a Financial Report. Relationships with clients with relevant ethical requirements can be found in ASA 220 Quality Control for Audits of Historical Financial Information.
CPA in Australia must be responsible for acting in public interest and compliance with the fundamental principles of objectivity, integrity, confidentiality, due car, professional competence and behavior in their practice (ASA 202, 2002).
The Code of Ethics is set by The Accounting Professional and Ethical Standards Board (APESB). It is mandatory for CPA Australia members. The standards APES 200 are applicable for CPA Australia members and the standards APES 300 are applicable for CPA Australia members involved in public practice.
An auditor must be ethical in order to abide the fundamental principles of audit. Besides, ethical auditing helps measure external and internal consistency of an entity based on value estimation. It also incorporates accountability for the results and a stakeholder approach. In addition, it allows making business profile of an entity. Ethical auditing is important for developing clarity of the actual values of the company, providing necessary information for future improvement, giving the opportunity to stakeholders to get more clarification on the state of the company, identification of bottlenecks in the company processes, making conclusions regarding employees’ motivation, and identification of vulnerable areas of the company connected with the lack of openness.
A professional auditor must follow the regulation of APES and ASA series in order to become a good professional in auditing.
The first situation addresses the issue of accepting a commission from an insurance company for recommending the company to one of the clients.
Accepting commissions and referral fees is regulated by the sections 240.5-240.7 of APES 110.
Under the terms of the section 240.5 a member in public practice may receive referral fees and commissions in some cases, for example, when referring loyal clients to another expert or another member in public practice. Also, he or she may accept a commission or other referral fees from third parties in case when the goods or services are sold to a Client. However, accepting such a commission is fraught with threats to objectivity, professional competence and due care connected with self-interest. Thus, the member in public practice should establish safeguards aiming to eliminate potential threats described above. Otherwise an independent auditor should not receive any commissions or fees.
There are three ways to establish safeguards and reduce the threats: an auditor must inform the client about the existence of an arrangement with insurance company; inform the client about other parties’ identity; inform the client regarding the method of calculating a commission, fee or other benefit related a particular arrangement (APES 110, section 240.7, 2007).
Purchasing a part of another firm is not considered a commission or referral fee for the purposes of sections 240.5-240.7.
Duty of care of an independent auditor relates the information provided upon request and contract relationships between parties. In this case the auditor breach of the duty of care is associated with failing to deliver the information regarding the arrangement between an auditor and insurance company or the information related calculation of a commission that was not disclosed to a client. Thus, a breach of duty and a breach of contract occurred in this particular case. A breach of contract takes place when one of the parties fails to perform its commitments to the clients under the terms of the contract. A breach of duty occurs when auditor has a duty of care towards his or her client but fails to adhere to the standards of auditing process. An auditor may be liable for negligence when failing to disclose regarding the existing arrangement with insurance company or the amount of the commission to be paid. The breach of duty may cause unwanted consequences for the client of the auditor who commits violation. For example, a client may incur financial losses when following the advice of the auditor (Legal Library, n.d.).
Before accepting a commission or a referral fee an auditor should consult the rules regarding confidentiality, professional judgment, objectivity, conflict of interest, independence, and competence set by the Board (AUS 202, section .04, 2002).
The second issue is connected with receiving contingent fees by independent auditors. In conjunction with APES 110, receiving contingent fees is described in the sections 240.1-240.4.
Contingent fees are in some types of engagements. For example, such fees are typical for non-assurance engagements.
According to the section 240.1 an auditor may quote any fee that is appropriate in the situation that occurred. Offering comparatively lower level of fee is not considered unethical. However, there are several threats of compliance that may arise in this situation. The threat of self-interest to professional competence is an example of the threats that may occur. According to this section of APES 110, a due care is developed if the fee is significantly lower that may hamper the performance of the engagement according to standards set for the fee quoted. The threats can be measured by the following factors: the level of the quoted fee and the services that are applicable to the quoted fee.
In this context, there are safeguards that could eliminate this problem or reduce the effect of potential threats when applied. These safeguards are as follows: substantiate the level of fee quoted and explain which services are covered by the fee quoted; assign qualified staff to complete the assignment and allocate appropriate time for it.
Contingent fees may be a reason of arise of threats to compliance to the fundamental auditing principles under certain circumstances. For example, contingent fees may provoke threat to objectivity. It is very important to identify whether threats are significant. There are several factors that help identify whether breaches of duty constitute significant threats to fundamental principles of conducting audit. Thus, to identify significance of threats an auditor must consider the nature of an engagement, identify and explain the client the basis for determining the amount of fee supposed to be paid, declare the range of possible fee amounts for each type of services supposed to be delivered by an auditor, suggest the availability and necessity of reviewing outcomes by an independent third parties (APES 110, 240.3, 2007). After evaluation of threats a decision regarding safeguards should be made. If threats are not considered insignificant according to a definition, then safeguards should be applied to eliminate the consequences of threats or to reduce them to an acceptable level. Application of safeguards in this case include following actions: an agreement signed by the client determining the basis for fees and remuneration for the services provided; implementation of quality control procedures and policies; review of work performed by the public auditor by the third party which is supposed to be objective in a particular situation; disclosure of public auditor regarding remuneration basis (APES 110, 240.4, 2007).
Applying contingent fees directly relates the quality of audit services conducted. According ASA 220, an audit should be conducted following engagement quality control review. Quality of audit is controlled by the terms of ASA 220, 40 (a-c), 2007.
The third issue relates accepting a Christmas gift from an audit client. This situation in described in the section 260 of APES 110. A member in public practice, as well as his or her family members, may be offered gifts from audit clients. As well as in two previous cases accepting such gifts may result in threat of compliance to fundamental principles. In the case if a gift is accepted, threats to objectivity may arise. Also, intimidation threats to objectivity may be created in this case. Like in two previous cases the significance of threats depends on their value, nature, and intent. The gifts or hospitality can be offered without a hidden intention to influence decision making. The gift can be accepted by the member in public practice if threat it may arise is defined as clearly insignificant and if the third party has all relevant information. When accepting gifts from the clients, a member in public practice should be certain that there is no threat to compliance with the fundamental principles (APES 110, section 260.2, 2007).
According to Auditing Standard ASA 200 (a) an auditor should comply with ethical requirements that relate a particular auditing engagement. Also, an auditor has to perform audit exercising professional judgment (ASA 200 (e), 2007). Offering a gift to an auditor or to the members of his or her family may be given with hidden intentions in mind. An auditor must keep this in mind and be able to evaluate the situation in order not to breach fundamental principles of conducting audit. The only safeguard that is possible in this case is not to accept the gifts that may provoke significant threat to objectivity and may influence decision making. In order to identify if a duty of care was breached, an auditor must ask himself or herself whether duty of care is reasonable is based on professional liability. Also, an auditor must be confident in offering the client the same amount of reasonable care that should have been offered by any other person in his or position aiming at delivering appropriate auditing services for the clients. An auditor must aim to prevent any harm that might be caused to the clients and reasonably foresee the possibility of any harm not to breach the duty of care by conducting low quality audit. Besides, an auditor must evaluate possible alternative actions to prevent the harm caused by the breach of due care and estimate the burden of applying alternative actions and the risk of not using them (ASA 220, 29 (a-g), 2006). In the current paper there were three issues regarding auditing practice considered. A detailed analysis of the cases contains the information of the section of APES and ASA that should be consulted in each particular case. Also, threats in each case were identified and safeguards that should be applied were described. A significant attention was paid to the breaches of duty issues. A definition of breaches of due care was given in each case and described in detail. Auditing standards ASA 200-220 were applied to resolve the issues suggested and to develop appropriate recommendations of how to avoid the situations when duty of care can be breached. The legislation of APES 110 was used to give a detailed explanation of actions that should be done in each particular situation. All of suggestion are supported with appropriate conclusions and are properly referenced to Australian legislation. The objectives of audit and fundamental principles of auditing activity were outlined. Australian professional ethical standards were discussed and analyzed where appropriate with conclusions made in every case supposed for consideration.
References
Auditing and Assurance Standards Board, 2006. Auditing Standard ASA 200. Objective and General Principles Governing an Audit of a Financial Report. Australian Government: AASB.
Auditing and Assurance Standards Board, 2002. Auditing Standard 202. Objectives and General Principles Governing an Audit of a Financial Report. Australian Government: AASB.
Auditing and Assurance Standards Board, 2007. Code of Ethics for Professional Accountants.
Australian Government: AASB [online] Available at:
Auditing and Assurance Standards Board, 2006. Auditing Standard ASA 220. Quality Control for Audits of Historical Financial Information. Australian Government: AASB.
Auditing and Assurance Standards Board, 2007.APES 110. Australian Government: AASB.
Legal Library, n.d. What is “breach of duty”? [online] Available at:
