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Question: Background You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting f...

Background

You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with offices in Orange, Wagga Wagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba in Queensland and Ballarat in Victoria. In the next 18 months, you hope to be promoted to partner at the Orange office. Although a medium-sized firm by national standards, SBF includes Australia’s largest regionally-based auditing practice. Most of SBF’s audit clients are in the mining, manufacturing and agriculture industries. For various reasons all of those industries are currently under pressure: mining from a downturn in commodity prices, manufacturing from fierce overseas competition, and agriculture from a devastating drought that continues to grip Eastern Australia.

It is a cold Thursday evening in July 2019 and you are meeting with your audit team to finalise the 30 June 2019 year-end audit for Far Faraway Pastoral Limited (FFA), a major agricultural company based in Orange, listed on the Australian Stock Exchange (ASX), and one of SBF’s largest clients by fee revenue. During the meeting, three of your audit seniors each bring a potential issue to your attention.

Samantha Gabrielle was responsible for reviewing FFA’s corporate governance arrangements and reports that ‘at 30 June 2019 the board of FFA comprises: CEO Bruce Blanch, the CFO Alexandra Rose and three non-executive directors: Kevin Oliver (a former executive at Macquarie Bank who has an 11 percent shareholding in FFA and is Chair of the Board), Matthew James (a retired farmer who was a major supplier to FFA), and Jacqueline Grace (an Orange-based orthopaedic surgeon).’

Steve Barker was responsible for reviewing the revenue cycle and argues that ‘an ASIC report on their recent review of the financial statements of some major agricultural companies now means that FFA’s method for recognising revenues on its sale of cattle is very questionable’. In the 30 June 2019 financial year just ended, cattle sales constituted nearly 50% of all revenue recorded by FFA. Steve reports that he has already discussed the matter with the senior partner on the FFA audit, Skye Martin, who said that the method has been used for 10 years and that no adjustments to the 30 June 2019 financial statements were to be made. Steve reports that he then told Skye Martin he accepted her decision but wanted to include a dissenting statement in the audit working papers. She refused to permit such a statement in the working papers but offered to write a letter to you as the FFA audit manager acknowledging full responsibility for the 30 June 2019 audit. Steve alleges that as he left his meeting with Skye Martin, she made some negative comments about your chances of being promoted to partner in the near future.

Kate Hammond was responsible for reviewing the operations of an FFA subsidiary based in Western Australia (WA), called TRC, that sells rural and farm supplies. You are aware that whilst TRC is the market leader in WA and has a strong balance sheet, it was making losses for the past two years. During the previous financial year ended 30 June 2018, TRC significantly upgraded its accounting information system to more effectively manage inventory sales. TRC hired a well-regarded IT consultant to undertake the upgrade which was completed on 31 March 2018.

As SBF did not have offices in WA, you organised an independent expert based in Perth to review and evaluate the accounting information system. The independent expert concluded that the system appeared reliable and that the changeover was correctly carried out. At 30 June 2018 year-end, this new system had been in place for 3 months, and TRC management reported that they were happy with the way it was operating. In early 2019, given drought pressures on its core business in Eastern Australia, FFA accepted an offer from WA-based agricultural company McCarran Pastoral, who already owned 15% of TRC, to sell their remaining 85% interest to them. The agreed sale price was $45.8m, equivalent to FFA’s 85% share of TRC’s net assets. The sale was finalised on 15 April 2019, but half the sale price is not due to be paid until 15 August 2019, after the 30 June 2019 audit of FFA has been completed.

Kate reports that significant errors in the changeover of the accounting information system back in March 2018 have only just been discovered in July 2019, more than 15 months later. The errors resulted in the inventory at TRC stores being misstated by $16.6m and net assets by the same amount. As a result McCarran Pastoral is planning to withhold most of its remaining settlement payment to FFA, and FFA is planning to sue SBF for negligence for its loss of that payment.

Required:

Question  

What should you do in response to the information provided by Steve Barker? With reference to the Code of Ethics for Professional Accountants, use the following American Accounting Association (AAA) Model template to guide your answer:

American Accounting Association Model	Decision-making process
1. Determine the facts	The facts are ...
2. Define the ethical issues
3. Identify the major principles, rules, and values
4. Specify the alternatives
5. Compare values and alternatives
6. Assess the consequences
7. Make your decision

Answer 1

Facts of the case:- Samway Baker Fitzgerald (SBF), an accounting firm is auditor of Faraway Pastoral Limited (FFA), a major agricultural company based in Orange, listed on the Australian Stock Exchange (ASX). Whiel finalising, one of the auditor called Steve Barker wants to quote his opinion and findings in Audit Working Papers but senior auditor is not allowing the same. In such case, wheather the action taken by senior auditor (Skye Martin) was justifiable by not allowing Steve Barker to mention his findings.

Ethical Issues regarding the case:- Auditor should work in independent manner i.e. he should not have any financial interest in clients's business. If auditor is having such financial interest, he should not accept audit and if so accepted, he is guilty professional misconduct.

Major principles, rules, and values:- Auditor's job is to form an opinion on wheather the financial statements are free from material misstatements and provide true and fair view. The auditor has to be honest while auditing, he cannot be favoring the organization. He must remain objective throughout the whole process, his integrity must not allow any malpractice. Another important principle is independence.

Alternative course of action:- Steve Barker should inform the management of FFA the internal issues regarding revenues from sale of cattle. Either he should form modified opinion or leave the audit work.

Comparing values and alternatives:-   If above alternative is choosen, it is totally according to the code of conduct and thereby should be followed by SBF.

Assessing the consequences:- As soon as FFA came to know the findings of Steve Barker, shall immediately withhold the balance investment in TRC. FFA shall file a case on TRC for misleading their financial statements and thereby raising their funds. FFA shall also demand the already paid amount from TRC i.e. the amount paid on 15/04/2019.

Decision:- Apparently it appears from the facts of the case that, Skye Martin did not exercise proper skills and care and that he perform his work in a disultory and haphazard manner. Skye Martin has made a professional misconduct by not allowing Steve Barker to do his audit in independent way. SBF shall inform to FFA regarding irregularities done by Martin and thereby allowing us to investigate whole financial statements with required access to information. SBF shall request FFA to give opportunity of being heard once before filing a case.