Introduction of Financial Accounting

Question: Discuss about the Introduction of Financial Accounting. Answer: Introduction This study deals with discussion on communication and leadership based on given ethical dilemmas. The case study on Auditing hidden agendas provides an insight of accounting profession in compliance with fundamental principles as mentioned in APES 110 code of ethics (Sexton 2009). The current segment elucidates a scenario whereby member of an audit committee is working for a company and has experienced some volatility as a result financial crisis. In accordance to first principle, it is essential for the auditors to remain straightforward as well honest in maintaining business relationships. As a member of Audit committee for a company, it is necessary to evaluate with the agenda items aligning with impact of financial crisis (Alles, Kogan and Vasarhelyi 2012). It is predicted by the member of audit committee that the company is at default risk in case of debt covenants. In the audit compliance report, it is essential to mention regarding the loan portfolio before passing it to lende rs and this aspect is nowhere mentioned in the agenda items. After approaching the Chair of Audit Committee, the answer given was not convincing as it has been discussed with CEO previously. This study explains the underlying reason behind massaged and misrepresented figures by the company head (Zadek, Evans and Pruzan 2013). Ethical Dilemma- Auditing Hidden Agendas Summary of the case study In this case study, it is mentioned regarding all members of the accounting profession for complying it with APES 110 Code of Ethics especially for professional accountants (Boynton and Johnson 2015). This case study elucidates problem statement where member of the audit committee gets doubt and surprise on not finding the agenda items in relation that affects financial crisis. It is the responsibility of the audit committee to completely review the future loan compliance reports before providing it to lenders. This particular case study takes into consideration the responsibility of audit committee, chair of audit committee and the CEO of a given company. It has been noticed from the case study that agenda items are missing and figures has massages according to one of the member of audit committee (Furnham and Gunter 2015). In response to financial crisis, it has been noted that regulators as well as legislators codifies much of audit committees responsibilities and regulators (Leung, Coram and Cooper 2014). This has been scrutinizing audit committee for working and examining by external management and external auditors. Audit Committees should be more focus on auditor inspection results for translating into proper audit quality. In other words, securities regulators should be looking into an aspect whereby audit committees should make things happen in case of making new agenda for taking into consideration financial crisis. It requires turning dynamic into proper quality improvement results concerning with audit committee agenda (Porter, Simon and Hatherly 2014). Absence of agenda items of the company surprised the audit committee members and seeks assistance from the head of audit committee team For the company, the intrinsic question on disruption as well as risk needs to be discussed by the audit committee for making the audit compliance on loan before the company provides support to lenders (Simnett, Vanstraelen and Chua 2014). Audit Committees of a company as well as Board should deal with large-scale disruption of economic and given financial models. Identification of Problem in the case study It has been found that as per the provided case study, the problems associated with the process of auditing include the violation of the codes and principles of ethics. From detailed study, it has been noted that due to the global financial crisis in the year 2008, every company including the specified one have experienced a certain level of volatility in their economic condition. However, as per the agenda for the first meeting of the particular firm i.e. in the year 2009, there were no agenda items that were related to negative influence of the 2008 global financial crisis on the firm (Knechel, Salterio and Ballou 2013). This action indicates that the particular organization might be at risks and the auditors by not following the codes of ethics have misrepresented the report of the firm. Moreover, the quarterly compliance audit regarding the loan portfolio of the firm that is considered as the part of performance reporting to the lenders was also not included. From this, it can be said that within the particular firm, the loan portfolio was not audited and reviewed and thus, it might resulted into misrepresentation of the report. In addition to this, the CEO of any firm is not responsible for auditing and making any audit report and thus, here in this specified company, the CEO advised the audit committee to sign off on the loan compliance audits. However, this decision might result into massaged figures as misunderstanding between the debt providers and the audit committee could take place. The reason behind this is that the debt providers will assume that the audit committee has already reviewed the loan compliance audits of the firm and vice-versa (Louwers et al. 2013). Therefore, it can be said that there is negligence and lack of responsibility within the firm. Principles of the auditors (APES 110) According to the ICAEW, there are some codes of ethics that are comprised of five fundamental principles and should be followed by an auditor. The reason behind this is that these fundamental principles will help an organization to run systematically, ethically and also successfully. On the basis of detailed study, it can be said that the code of ethics is considered as a statement of principles and the expectations of the governing behavior of the organizations and individuals in the conduct of auditing (internal). The five fundamental principles that an auditor should follow include Integrity, Objectivity, Confidentiality, Professional competence and due care and Professional behavior (Icaew.com. 2016). It has been found that all these principles comply with the principles that are involved in the IFAC Code of Ethics (Ricchiute 2014). Firstly, the principle of integrity compels a compulsion on every professional accountant to remain honest as well as straightforward in the busines s and professional associations. This principle also includes emphasis on truthfulness and fair dealing. Secondly, the principle of objectivity compels a commitment on the professional accountants regarding not to cooperate the judgment regarding business or professional due to any biasness, undue impact of others and conflict of interest. Thirdly, the principle of confidentiality among internal auditors represents the ownership and value of information that they obtain, but do not disclose them without the permission of the accurate authority. Fourthly, the principle of professional competence and due care compels mainly two obligations. These include maintenance of professional knowledge as well as skills at the required level for ensuring the employers or clients have received the knowledgeable professional service (Sharbatoghlie and Sepehri 2014). It also involves the diligent according to the professional and technical standards at the time of giving professional services. Las tly, the principle of professional behavior puts importance on obligation for complying with the pertinent regulations and laws. However, the objective of APES 110 Code of ethics is to serve a general idea regarding the framework and also to help the members (auditors) in accessing the pertinent sections of the particular Code more effectively. It can be said that the overview of this APES 110 Code of Ethics is not considered as the replacement of the Code, rather it is used as a conjunction with the Code of ethics (Cpaaustralia.com.au 2016). The APES 110 Code of ethics are divided into three parts Part A, part B and Part C. Part A is applied to all the members, where as Part B is applied to those members only who are in public practice. Lastly, Part C is applied to those members who are associated with business; however, this part is also considered as relevant for those members in public practice. The Part A illustrates the overarching responsibility for acting in the fundamental codes of principles and public interest. It covers the threats that are related to compliance with the elementary principles and safeguards and along with the conceptual framework. The Part B highlights the process, which have described the conceptual framework in the Part A and the method by which it is implemented among the members. Lastly, the Part C puts emphasis on the process by which both the conceptual framework and Part A have been applied to the members within the business. Importance of auditing hidden agendas The hidden agendas should be audited because this helps the firm as well as the auditors of the firm to determine whether the particular company is running ethically and effectively. The auditing of the hidden agendas help to protect the particular firm from making any financial misstatements and thus, it presents a reliable health of the firm (Whittington and Pany 2015). Moreover, this also helps the firms to provide protection from fraudulent activities. In addition to these, the auditing of the hidden agendas also help the firm to determine its objectives, risk of misstatement can be avoided and cost of capital can be maintained. Principles not followed in the case study The case study mentions that the company has experienced volatility due to the current financial, crisis. However, as per the case study, it can be hereby ascertained that the financial declarations of the mentioned company do not contain any information regarding the impact of the financial crisis. Accordingly, it can be inferred that the company might possibly face risk of defaulting on certain debt agreement (Arens et al. 2013). Furthermore, the financial announcements of the business concern also do not contain the scheduled quarterly compliance reports on the entire loan portfolio of the firm that forms a necessary part of the portfolio financial performance reporting of the firm. Thus, it can be hereby inferred that the company breaches certain principles of auditing. As per the AUASB standards as explicated under ASA 100 Preamble to the AUASB Standards and ASA 101 Preamble to Australian Auditing Standards as well as the Foreword to AUASB Pronouncements declared by the AUASB, f inancial reports of the firm needs to follow a structured format (DeFond and Zhang 2014). This also needs to represent the historical information in an appropriate format counting connected notes, communicating economic resources of a business entity or else obligations at different points of time or else the alterations therein for a particular period as per the financial reporting outline. The financial announcements need to have related notes that normally contain a summary of the significant accounting strategies as well as explanatory evidence. As per the section 110 of the APES code of ethics, maintenance of integrity refers to definite principles where members related to the reports or else other company information need not knowingly be related to materially false information, misleading information, furnish vague information or else omit information that needs to be included (Eilifsenet al. 2013). Again, as per this code of conduct, it is important to furnish the historical financial information related to the company deciphered mainly from the accounting system of the business entity, different economic events that took place in the past or else economic conditions or else circumstances that occurred in the past. Therefore, it can be said that the management of the company violates the principle of professional behavior as mentioned under section 150 of APES Co de of Conduct. As per 150.1APES Code of Conduct, it is important to conform to different relevant regulations as well as directives and avoid any activity or exclusion that particular members know can adversely affect or discredit the overall profession (Elderet al. 2012). Again, as per the ethical code of conduct, it is imperative to furnish special purpose financial statements that need to meet financial information requirements of particular users of the financial information of the business concern. As per section 290.500 Introduction to restrictions on diverse uses as well as distribution, it is important to assess the special purpose financial reports as per the applicable financial statement framework that includes fair presentation of the report (Gayand Simnett2013). Therefore, missing information regarding the impact of the financial crisis in the macro environment of the business in the report violates this principle of special purpose financial reports. The financial statements also do not present the requisite notes that contain explanations of the financial fluctuations, changes in the final accounts, guidance notes in the reports. As per the AAS 10 and the Companies Act, it is important to mention unqualified opinion that is also missing in case of the present company (Gendron and Power 2015). Again, there is a breach of the principle AAS 21 that refers to the act of non-compliance and indicates towards actions of omission as well as commission by the particular business entity that is audited that can be either intentional or else unintentional that are also contrary to the prevailing regulations or else directives. As a member of the audit committee of the business company, it can be inferred that the company has failed to meet the compli ance requirements. In addition to this, the business entity has failed to meet the principles of the AUST (291.113 to 291.118) loans and guarantees. In addition to this, the lack of documentation in the financial reports leads to adverse influences on the financial interests of different related parties including the people in the governance. The company also violates the Principle of Documentation as per section 290.29 of APES that calls for the need of producing evidences of the judgments of different members regarding the threats and the acceptable limits of different threats to the business (Hayeset al. 2014). Audit Compliance on the loan portfolio As per the standard AASB 9 B4.10, there are different contractual provisions that can allow the issuer to pay the debt instruments or else allow the holder to put a specific debt instrument back to the specific issuer before the period of maturity. There are audit compliance of the loan portfolio of the particular business firm mentioned in the present case study as this can help the management of the firm in better management of risk as well as proactive management of the entire portfolio. In addition to this, the audit of the loan portfolio can help the management of the firm in immediate recognition of specific anomalies as well as errors that are not as per the regulatory policies, namely, the limits of approval, schedules, process of refinancing and many others. Furthermore, the audit of the loan portfolio can also assist the process of recognition of loans in different arrears or else improper disbursements for prevention of negative influences on the balance sheet. Explanation on missing agenda items As per the present case study, the audit committee needs to investigate the profile of the corporation as well as the significant risks faced by the business concern that mainly includes the economic conditions in the market. The missing agenda items that can be detected in the present case includes the lack of the expanded disclosure as per SEC of different business activities during the financial crisis. This in turn has affected the financial condition of the firm. The financial announcements of the business concern also do not contain the scheduled quarterly compliance reports on the entire loan portfolio of the firm that forms a necessary part of the portfolio financial performance reporting of the firm. In addition to this, as per the regulations of the PCAOB, the missing agenda items also include lack of proper communication of the principle considerations of different audit matters that can affect the judgment of the auditor. The presentation of the performance audit reports to the lenders also missing that was supposed to be present in the agenda. Importance of reviewing loan compliance audits Compliance audits considers as the comprehensive review dependent upon organization adherence to given regulatory guidelines (William, Glover and Prawitt 2016). This includes independent accounting as well as security and IT consultants for evaluating the strength and thoroughness in accordance with compliance preparations. In other words, auditors are responsible to review the security policies as well as user access controls and risk management procedures within the potential course of compliance audit (Alles, Kogan and Vasarhelyi 2012). It is essential for testing the credit quality by way of sampling loan portfolio by reviewing the parameters. It is necessary for gaining understanding on potential problem loans in the given portfolio for identification purpose. From the given case study, audit committee failed in identifying the actual cause of loan compliance and debt covenants borne by the particular company (Arens, Elder and Beasley 2012). From the case study on auditing of hidden agendas, it can be reviewed that credit administration assessment involves attributes such as loan policies as well as procedures for future analysis purpose (Simnett, Vanstraelen and Chua 2014). It requires getting loan authorities into action by the audit committee before providing loan to the lenders. Loan underwriting as well as credit analysis function are the given areas that needs to be reviewed by the audit committee and solve the case study issue on loan compliance. In other words, loan documentation standards as well as standards help in analyzing audit compliance function as followed by the audit committee (Alles, Kogan and Vasarhelyi 2012). Conclusion and Recommendations At the end of the study, it is concluded that the company mentioned in the case study has no agenda items in relation to impact of financial crisis. This means the company has some massaged figures that need to taken into consideration by the audit committee before providing loan compliance to the lenders. All professional accountants should follow the code of ethics diligently whereby member of audit committee should be straightforward as well as honest in maintaining cordial relationships. Entire assignment takes into loan compliance activities and debt covenants. In other words, importance of auditing hidden agenda is mentioned whereby it can be seen that audit committee should not misinterpret any figures of the company. Audit committee should find the potential causes behind the absence of agenda items as analyzed at the time of meeting. According to APES 110, there should not be any of omission, alteration of financial information of any form. In the case study, there was misre presented figures found by the member of audit committee. As per 150 of APES conduct, principle of professional behavior is violated in the case study that should be avoided because it adversely affect the auditing profession. References Alles, M.G., Kogan, A. and Vasarhelyi, M.A., 2012. Feasibility and economics of continuous assurance. Auditing: A Journal of Practice Theory, 21(1), pp.125-138. Arens, A., Best, P., Shailer, G., Fiedler, B., Elder, R. and Beasley, M., 2013.Auditing, assurance services and ethics in Australia: an integrated approach. 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