ACCT300: Auditing And Assurance Services - Ethical Issues - Assessment Answer

Auditing and Assurance Services Assignment

Assignment Task

Demonstrate an understanding of ethical issues encountered by auditors anddescribe the role of auditors in enhancing common good. (GA3, GA4)

Describe the procedures to appraise clients, evaluate evidence, do a risk analysis, do a materiality assessment and investigate fraud and possible reasons that outlie irregularities in reporting.

Explain how to assess the effectiveness of internal controls (GA5)

Determine appropriateness of different types of audit reports (GA5, GA8)

Identify auditor’s responsibilities relative to subsequent events, and recommend, and justify the appropriate auditing treatment.

Introduction

The reporter measures the pressure on auditors from management. Different articles are used to investigate the effects of management pressure on auditor’s decision making about aggressive perspective of accounting. The auditor would employ in negotiating strategies with to measure the accounting process. Generally, auditors resist from explicit management pressure, but mostly auditors agree for such aggressive accounting system of company when company’s management pressure is subtle (Seminogovas, 2012). Auditors can resist for pressure through use of customer relationship management tool and explicit the conflicts of interest between company and shareholders. The reporter defines ethical issues that concern with management pressure on auditors, identifies stakeholders, and financial and non-financial consequences on stakeholder’s decision. After analyzing the problem, the reporter develops a link between problem and relevant ethical theories and agency theory. In the last, the reporter gives conclusion and makes recommendation to ensure a similar incidence does not persist.

Main Body

Auditor based accounting issue

Pressure has been recognized on auditors from management both academically and professionally. According to Hsu and Zhu, (2005), pressures on the auditor can increase from client’s management or from management control system of auditing firm. It is examined that highly experienced auditors’ evaluate acceptability of proposed aggressive policy of management (Deegan, Pratt and Hicks, 1994). Auditors resist in accepting client management’s aggressive accounting policy and following right policy of accounting. Professional auditors has specific standards of auditing, ethical standards, and quality control process that adopt while doing audit and reject explicit client challenge. The auditors recognize explicit challenges when management makes pressure on them about facts (Hsu and Zhu, 2005). The auditor would employ in negotiating strategies with to measure the accounting process. Generally, auditors resist from explicit management pressure, but mostly auditors agree for such aggressive accounting system of company when company’s management pressure is subtle. Auditors can resist for pressure through use of customer relationship management tool and explicit the conflicts of interest between company and shareholders.

The auditor is motivated to resist for explicit pressure by client management. If management does not follow accounting rules, the auditor would interpret in system and declare fact of the situation that is more consistent with management. The auditors manipulate data if management makes pressure on them (Jones, 1994).

Identify Ethical issues, stakeholders, and their financial and non-finance consequences

The concept of explicit client management pressure on auditor creates a negative impact on auditing process. Auditor is ethically liable to resist the pressure and follow the rules and regulation to declare the financial statements clearly. The ethical issue for the auditor is to maintain true report based on finance statements without giving into the pressure placed by client management. If anyone follows the aggressive accounting structure they will be held liable against fraud they do. Investors, creditors and shareholders are main stakeholders that have been influenced by wrong decision of auditors. Auditor manipulates the financial statements that effect on decisions of stakeholders. Stakeholder may loss the investment or profit that they want from investment. Non-financial consequences of manipulated decision are loss of trust, volatile market value, and others.

Related ethical theory and agency theory

Ethicaltheory

Virtue based ethical theory is linked with this case where management pressure on the auditors. This ethical theory defines as judgment is implemented not through rules and regulations as the result of which stakeholders unable to develop productive choices for managing financial and non-financial consequences. Virtue based ethics emphasizes specific qualities that depends on behavior and right actions of auditors. This ethical theory does not establish the set of criteria to evaluate the potential decision and want to develop relationship for trust. The purpose of this theory is to develop right thing at right place in right time in right way (Doviak, 2010).

Agency theory

Agency conflict is the adverse relationship of stakeholders with management of company. Agency theory develops a strong ethics to evaluate and organize the strong relationship of management with shareholders. Principals of agency theory are shareholders of client company that delegating to management of company to perform task on behalf of them. The auditor’s wrong statement creates conflict between shareholders and management (Erratum: Ethics and Agency Theory, 1995).

Conclusion

Thus, Management pressure on auditor creates negative impact on stakeholders of company. Auditors ethically and legally are responsible to resist for pressure and maintain a clear picture of financial statements. Adverse picture of financial statements stated as fraud according to Securities and Exchange Commission. Highly experience auditors do not accept the proposed pressure of client management and declare a clear picture to obtain a set of account that is wrongly maintained. The reporter defines ethical issues that concern with management pressure on auditors, identifies stakeholders, and financial and non-financial consequences on stakeholder’s decision. After analyzing the problem, the reporter develops a link between problem and relevant ethical theories and agency theory. In the last, the reporter gives conclusion and makes recommendation to ensure a similar incidence does not persist.

Virtue based ethical theory is linked with this case where management pressure on the auditors. This ethical theory defines as judgment is implemented not through rules and regulations as the result of which stakeholders unable to develop productive choices for managing financial and non-financial consequences. Virtue based ethics emphasizes specific qualities that depends on behavior and right actions of auditors. This ethical theory does not establish the set of criteria to evaluate the potential decision and want to develop relationship for trust. The purpose of this theory is to develop right thing at right place in right time in right way Agency conflict is the adverse relationship of stakeholders with management of company. Agency theory develops a strong ethics to evaluate and organize the strong relationship of management with shareholders.

Recommendations

It is recommended that

• Auditors should present clear picture of financial statement and resist for pressure from client management
• Auditors should be motivated by audit firms that will help them to do work honestly
• Auditors should take ethical and professional audit education and setting effective decisions for financial statement.

Auditors should develop resistance for pressure from management and develop a clear report.