Audit Opinion and Earnings Management

Question: Discuss about the Audit Opinion and Earnings Management. Answer: Introduction In this report, ethical principle related to the auditing and accounting professional are discussed and applied in the different situations. Accountants Code of Ethics in Australia is discussed to determine the accuracy in the acts of auditor and accountants. Apart from this, the type of auditor opinion is also discussed in this report to develop clear understanding regarding the ethical and legal limitation for the profession of auditor and accounting. In this situation, Accountants Code of Ethics (ACE) has been violated by accepting referral fee or commissions. In practice, accountant acceptance for the referral fee and commission is likely to cause threat of self-interest that violates objectivity and professional competence and due care principle of ethics. Harmon will get commission from the Computer Services Ltd (third party) if he would create sales for this company. In such circumstance, Harman can persuade the clients in wrongful manner for getting the commission fee (Al Momani and Obeidat, 2012). The accountant may likely to practice accountancy in favor of client, which would cause violation of ethical principle. The auditor has been violated the ACE in the given situation by disclosing personal information of the clients to the Allied Insurance. By this practice, David has been violated confidentiality principle of ACE. This principle imposes obligation on the accountants and auditors for avoiding disclosure of clients personal information to the third party without any legal or authentic duty. By disclosing clients information to the other parties without their consent, this auditor has violated the confidentiality ethical principle of accountant professional at the greater extent (APESB, 2010). It could create negative impact on the interest of clients. In the given situation, the accountant and the firm will violate the ethical principle of confidentiality by allowing clients to work on the computer in which it stores and maintains records details of the client. Due to this, any client can access the information of other, which is prohibited in the ACE. This is likely to cause legal obligations for the accountancy firm. The involvement of audit section in the auditing of client will not cause violation of any ethical principle as audit branch is ethically responsible for protecting personal information of the clients and their interest (Kung and Li Huang, 2013). In this way, access of client over the firms computer is likely to violate the ethical principles. Management service work is handled by another public accountant in Williams Pty Ltd, which is an audit client of Stephanie Barry. Barry shares information regarding management services of her firm with the client voluntary on monthly basis. By this act, Barry violated the ethical principle of integrity as due to this, the auditor behaves in dishonest manner in professional. By sharing firms information to the other accountancy firm shows unfair dealings and dishonesty in practice, which is likely to causes violation of ethical principle (Cohen et al., 2013). Thus, Barry will breech the ethics of accountancy profession of ACE. In the given situation, there has been a violation of ACE as Katrina is responsible for playing dual roles in the organizations. She is an audit manger as well as a member of the Board of Directors in a not for profit organization. Due to dual responsibility, objectivity principle of accountancy practice is likely to affect in negative manner. The dual responsibility of Katrina can cause conflict of interest or biasness due to which professional duties and business judgments can be compromised. By playing role of audit manager, she is responsible for depicting actual financial and operational performance of firm, whereas in role of board of directors, the person is accountable to work in interest of the stakeholders. This is likely to cause violation of ethical principle (APESB, 2010). Peter as public accountant provides range of services to the same client on frequently basis. By providing range of services to the client, the objectivity and professional behavior are some ethical principles violated by the accountant. Conflict of interest and biasness are some issues raised in this situation as the accountant would play several roles in a firm at a time. For example: Peter provides management advisory and auditing services to this firm. As a management advisor, public accountant may advice to the firm for avoiding taxes and it will cause biasness in performing the role of auditor (Gaffikin and Lindawati, 2012). This will have negative impact on the objectivity ethical principle of ACE. The Hornsby Auditors has violated professional behavior as the services are marketed in a way, which is quite inconsistent with this principle. In advertisement, the firm has made claims for service quality in exaggerate manner. It is inconsistent with the principle of professional behavior as in this self-interest threat is likely to appear. For attracting clients, it has overstated the service quality and gained experience. Apart from this, it also compared offered services to the other providers of state, which also opposes the ethical principle of professional behavior (). Due to self-interest, this firm has made unproven comparisons with the other. It also clearly shows the violation of professional behavior principle. The auditor fee of David Cheadle is due for a long time and this practice has violated ethical principle of objectivity. In accordance to the ethical principle of ACE, the audit fee should be paid to the auditor before the issue of audit report for the following year. This creates self-interest threat and it should be eliminated or reduced at the accepted level. The auditor has planned to start auditing for the next year without receiving the due payment of the last year, which may affect the quality of auditing due to the self-interest aspect. The ethical principle related to fee-overdue indicates that due payment of auditor for long time is likely to create self-interest threat and to affect the objectivity and integrity in the accounting profession (Avram and ?ogoe, 2012). Thus, the situation clearly indicates breech of ethical principle in the auditing practice. The type of opinion is qualified or except for as in this, the auditor stated that some part of the financial statement lacks adequate evidences. The auditor failed to find confirmation from the clients major customers and thus part related to them in financial statement cannot be true. The remaining part of the financial reports shows true and fair view. The auditor is responsible to follow confidential ethical principle and thus, the inclusion of any client as samples without their consent is likely to create ethical issues for the auditor. In the given situation, the auditor was able to eliminate the legal responsibilities by balancing accounts through the use of auditing procedures (CPA Australia, 2014). But, the use of auditing procedure for self-interest is likely to create ethical issues. The application of auditing procedure to conceal the wrongful act is unethical in the auditing profession. In this situation, the type of opinion is adverse as the client restrict auditor to evaluate the 20% of total assets in the firm balance sheet. Plant, properly and machinery is not evaluated by the auditors due to interference of the client in the auditing procedure. It causes negative opinions for the practices of management, which are used to develop financial reporting framework. In developing financial statement, the firm affects ability of auditor to make a clear opinion in the audit report (Blandn and Bosch, 2013). In this situation, auditor gives adverse opinions due to the lack of management support in developing audit report. Management has taken actions to exclude necessary disclosure from the financial report, which is likely to have material effect on the financial statement. This is adverse type of opinion as it indicates inappropriate tactics of management in terms of development and preparation of financial report (CPA Australia, 2014). The development of financial statement is not developed in accordance to the accounting standards, which indicates managements responsibility to disclose all relevant information of operations that has material effect on the financial statement. The misleading financial reporting framework of this firm shows lack of fairness and thus adverse opinion of auditor indicates that financial statement does not present true and fair view of firm financial and operational state (Tsipouridou and Spathis, 2014). The type of opinion in this situation is disclaimer as in this auditor indicates that they do not have certain view for the retailers sales. Due to the presence of adequate records regarding the cash base sales, it is quite difficult for the auditor to obtain enough evidences and to determine the accuracy of data. The absence of audit test also indicates that auditor has different view in terms of calculating the cash sales of retailer. The auditor founds accuracy problem only in the sales part of this firm and thus, it indicates ability of auditor to make an opinion regarding the fairness and adequacy of a firms financial and operational performance (CPA Australia, 2014). In this situation, adequate evidences are not obtained by the auditor and thus it indicates absence of accurate opinion regarding the fairness of financial statement. In this case, the auditor is asked to audit the financial statement of a new client. The auditor determines that there is no material misstatements found in the financial statement of the current financial year. But, there is absence of information regarding the opening balances of accounts at the start of the financial year. This indicates that expect to the opening balances of accounts, the rest of financial statement presents fair picture of financial and operational performance of the firm. This makes the qualified types of opinion for the financial statement of this firm. In qualified opinion, auditor gives assurance regarding the financial information apart from some part (Hammersley et al., 2012). The same happened in this case as the auditor did not find any misstatement in financial reports but showed concern for the opening balances of accounts. The type of opinion in this situation is adverse as in this auditor concludes that firm did not follow the Australian Accounting Standards from the starting of operations. It has been operating from the last five years. It is an adverse opinions as in this auditor believes that management has used inappropriate accounting standards for preparing and developing financial statement. This shows inaccuracy of the financial reporting framework. Due to this, the auditor believes that financial statement are not adequate in terms of presenting fair and true picture of the financial position of the firm as they are not developed and prepared as per the accounting standard of Australia (Pourheydari et al., 2012). It shows that the auditor has adverse opinion for the financial statement of this firm. Adverse type of opinions is developed in this situation as in this the auditor has different opinion for the calculation of inventory. Firm uses LIFO method of accounting for inventory and it is disallowed in accordance to the accounting standards of Australia. The calculation of inventory is made without the consideration of accounting standards, which may material effect on the financial reports (CPA Australia, 2014). Thus, the adverse opinion is provided by the auditor in this case regarding the financial statement of a firm. The opinion of auditor in this case is disclaimer as in this auditor indicates that there are no material misstatements. But, the clients continuation as going concern is in extreme doubt and thus it causes considerable concern. The effect of this issue on the financial and operational performance of firm is difficult to determine, which limits ability of auditor to make highly clear opinion (Xu et al., 2013). Conclusion It can be concluded on the basis of above answers that objectivity, integrity, professional competence and due care, professional behavior and confidentiality are some of the major ethical principles in accordance to the Australian Accountants Code of Ethics. Apart from this, qualified, disclaimer and adverse are three type of auditors opinion are common in the real world situations. References Gaffikin, M.J.R. and Lindawati, A.S.L. (2012) The moral reasoning of public accountants in the development of a code of ethics: the case of Indonesia. Australasian Accounting Business Finance Journal, 6(1), p.3. Al Momani, M.A. and Obeidat, M.I. (2013) The effect of auditors' ethics on their detection of creative accounting practices: A field study. 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