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Audit Assignment One

In: Business and Management

Submitted By cullen15
Words 1501
Pages 7
1)
NZICA has set out strong fundamental principles of the code of ethics regarding what an auditor imbody while carrying out an audit. These include XRB PES 110-150; * Integrity * Objectivity and independence * Professional competence and due care * Confidentiality * Professional behavior
If someone’s an auditor from a professional body, he has to follow XRB or his professional bodies’ ethical code. In this case Pearson is part of NZICA and in turn must follow the standards set out by the XRB as NZICA follow XRB standards. NZICA’s has 14 rules of Ethics that is underpinned by the above standards set out by the XRB.
Although NZICA evaluation of Pearson has been through and they have found Pearson in breach of few the above standards their fine/Cost of $38,000 seems on the low side he was also banned from auditing a public issuer years with the exception of four non - specified companies. In review of the charges against Pearson set out by NZICA I find that they met expectations in the following Standards.
The institute found that Pearson was in breach of professional competence in turn in breach of Rule 11 and 9 of the code of ethics.

Professional competence Rule 11 1) Information available indicating collective provision for doubtful debts yet, accepting assertions from SCF management that no collective provision for doubtful debts was required.

2) Failing to assess, evaluate and document uncorrected misstatements relating to provisions required on individual loans

3) Failing to

- Document conclusions relating to the recognition and valuation of a hedging asset of $48 million
- Document conclusions as to whether swap transactions referred to in two letters from the BNZ were appropriately reflected;

- adequately document a basis for concluding that related party transactions did not breach the 35% exposure threshold referred to in SCF’s Trust Deed

4) Failing to satisfy that related party transactions between Hornchurch Limited and SCF were properly disclosed
Due Care Rule 9
Signing an unqualified Audit in turn; 5) Failing to exercise due care and diligence, in particular with regard to the recording of capitalised interest in the interest received of $114.48 million
These five charges all related to the audit of financial statements of SCF for the six months ended Dec 31 2008. Following from this SCF collapsed which trigged a $1.6 billion payout under Crown Retail deposit Guarantee Scheme.
As a professional body considering a membership as a chartered accountant I find that the penalty was on the light side. Becoming a chartered accountant takes at least 5 years with ongoing professional development for the rest of your career. The members of a profession are expected to hold to -highest standards of conduct and competence - the Ethical Standards are what sets them apart as professionals. Although the charges from NZICA are satisfactory the costs to Pearson and the ban I find a bit on the low side. Is this going to encourage a more through audit from the next auditor? Maybe or maybe they might think $38,000 and a five year ban bearable to forgo the ethics.
Auditor members of a professional accounting body are in a privileged position, which they hold in society because of their role as guardians of the public interest. This was one of if not the biggest fraud cases to hit NZ. Maybe if the Pearson had followed the code of ethics this would have been highlighted earlier and maybe the loss would have been a bit on the lighter side.

2)
Auditors take on a significant risk they agree to give an audit opinion. To minimize these risk auditors need to know who their client is and must organize a plan so that any misstatements that are present in accounts, whether it be malicious or human/computer error are detected by the procedures. Good planning ensures that appropriate attention is devoted to the different areas of audit and all potential problems are identified. This will also help work being assigned to the appropriate member of the team with the needed supervision. So where did Pearson go wrong? And if he followed the procedures could it have changed his opinion of an unmodified opinion. Below are some procedures that he could have better paid attention to and in turn having more complete set information to form an opinion.
Substantive Testing
In relation to the related party transactions, he has noted that the there is no systematic method of identifying related parties in both lending and investments. The tribunal has charged Pearson with the failure to satisfy himself that they disclosure properly. I think by using ISA 315.18, substantive testing of the transactions to determine the completeness, accuracy and validity of information contained in the accounting records would have given Pearson the necessary tools to validate the third party transactions. Because if this test produced an error this would have indicated an under or overstated dollar amount in a recorded transaction or account balance this could have lead to a modified opinion on Pearson’s Part.
Analytical Procedures
Under ISA 315.6 (a) using analytical procedures such as projections for loan payments help identify provisions required for coverage on loans. In this instance if used Pearson maybe been able to identify the misstatement of the loans as noted in the tribunal ruling. Also he would be able to to consider the effect of the collectability of the loan and in turn if a negative result from the analytical procedures could have resulted in a modified opinion.
Documentation
ISA 315 32 (b) states The auditor shall include in the audit documentation, Key elements of the understanding obtained regarding each of the aspects of the entity and its environment specified in paragraph 11 and of each of the internal control components specified in paragraphs 14– 24; the sources of information from which the understanding was obtained; and the risk assessment procedures performed; By following this procedure Pearson could have pressed the Management team for more information on the large transaction such as the one stated in 2009 management letter. Pearson has noted that there is a lack of supporting document in relation to investment transactions, however if he followed the procedure where he must include the documentation, it might have identified a transaction he missed that proved misstatement and in turn changing his audit opinion.
And lastly I believe in the acceptance stage of the audit under ISA 220.18, Pearson should have been able to determine whether he could he could exercise professional due care throughout the audit. In this case it is apparent that he could not hence in the decision of the tribunal it was noted that Pearson lacked “professional skepticism and experience”. This could have been avoided if Pearson had done his research on the company to see if he had the relevant skills to provide a true and fair audit.
ISA (315.

3)
We know that an auditor must exercise due care when conducting an audit. Meaning that auditor must be diligent in applying technical and professional standards such as ISA 315, and also document each stage of the audit. If the auditor is found to be negligent i.e. not exercised due care they can be sued by the client or a third party.
In the Pearson case, the institute found him in breach of duty of care by signing an unqualified audit. This in turn tars Pearson with carrying out a negligent audit. Since the Crown is a third party proving that duty of care is owed to them is difficult. We must consider whether his negligent audit caused SCF’s losses and in turn causing the tax payers loss.
When establishing if an auditor has breached their duty of care to their client, negligence, must be proven. In this case it is apparent that duty of care had been breached (as ruled by the tribunal). The client will also need to prove that the auditor did not comply with the ethical standards; again we have the breach of the ethics rules 9 and 11. After the establishment that duty is owed to them the crown will then need to establish that they suffered a loss directly from this breach.
If we look at the second management letter it is specifically stated Board consider the crown deed obligations prior to all transaction approaching 1% of asset value. This indicates that the duty to crown was full filled as Pearson made the recommendation specifically with the crown deed in mind. If we look at the management letters as whole there are not many changes between the recommendations this would indicate SFO didn’t take any measures to prevent the losses incurred.
So it cannot be said that the loss suffered by SFO was reasonably foreseen as a direct relationship of the negligent audit.
However it could be argued that the unmodified opinion gave the crown a false sense of security but proving the loss suffered by crown to be directly related to Pearson would be a hard one to prove.

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