Legal consideration is related to the terms of the contract with the original auditor’s company. The legal consideration varies from Country to Country. In Oman, these considerations are related to the governing body and company. It is an accepted pattern from legal books that the company has been neglected for the job requirement should be informed with the help of positive tenure and time period (Knechel & Salterio, 2016). This will be done either with the help of notice to companies’ management and decision-makers.
Ethical consideration is the mode that affects the concept of ethics in an organization. It happens in all the companies where ethics and social responsibility are connected with the manager’s use of power (Mu & Carroll, 2016). Ethical modes become important for the company because it looks for the right of people working in an organization.
The evidence is important for the audit process as investigated in the second case. The SAS 400 Audit evidence is related to the examination and investigation of the sources of evidence. These methods actually help to change and modify the quality of evidence from key defining areas.
The system of blank cheques is basically understood as accepting the accountant for most of the financial transactions (Mo, et al., 2015). The case basically highlights the loopholes which are present between Ms. Juliet and her accountant. This should be carried out in an appropriate way and monitoring the invoice system forms the basis of checking on the subordinates in a company or system.
The legal and ethical consideration arises from the approach of Mr. Ismail in selecting the firms outside the agreement. One of the legal considerations will be Messers Hannod & Co’s agreement with Al Sharqiya Enterprises because this company can state the violation of the agreement and use an approach that is not defined under the books of law (Bennouri, et al., 2015). The enterprises have not issued any notice prior to removing the company from the auditing specification.
Legal and Ethical Considerations for Al Sharqiya Enterprises Ltd
Legally Al Sharqiya Enterprises Ltd has to look at a number of factors for both the removal of existing and appointment of new auditors. The auditors are to be removed by the shareholders of the company and not by the management on its own. For removal, there is a legal process to be followed according to Commercial Companies Law (OMAN CHAMBER OF COMMERCE AND INDUSTRY, 2010) :
Shareholders/shareholders should serve the notice to the company regarding the removal of auditors. In addition, to convene a general meeting for the said purpose (Kleinman, et al., 2014). The notice must serve before the company meeting is to hold and should address to the company secretary.
- The purpose of the notice of intent is to inform the company of the intention of the shareholder to propose a resolution to remove the company’s auditor.
Mr. Ismail as Managing Director himself cannot remove the auditors; this is to decide upon the happening of the general meeting. The shareholder should send notice to the company for the removal of Messer’s Rolando & Co. and to arrange a general meeting for that.
On receipt of notice by the company, should send one copy of the notice to and Investment Commission as soon as possible and one copy to the auditors informing them about the potential resolution of their removal?
- AL SHARQIYA Enterprises Ltd must serve notice to the commission and to Messer’s Rolando & Co.
- A notice of the meeting must give to persons entitled to receive notice by the company. These include the directors of the company, members/shareholders, and
- An ordinary resolution must have passed to remove the auditor’s majority of those members voting in person at the general meeting, or by proxy if it is allowed.
However, from the given case it is evident that this legal process according to Oman Commercial Company law is not followed (Chambers, 2015). This could result in heavy fines and penalties or disqualification of Mr. Ismail as Managing director.
The legal aspect of appointing Rolando & Co. is as under:
When an auditor is removed, the new auditor must have appointed at a general meeting of the company by passing a resolution to ‘appoint an auditor of the company if a copy of the notice of nomination has been sent to the potential new auditors that are Rolando & Co in the current case (Weirich & Reinstein, 2014. ).
However, this provision of the Commercial Company Law is adhered to by AL SHARQIYA LTD.
Ethical Consequences are as follows:
- Without giving prior notice to the outgoing auditors and appointing new auditors is unethical and unjust as it seems from the case
- Asking the potential new auditors to waive off fifty percent of their first audit fee does not seem to be professional(Hennes, 2014). Although the business has to look after its profits and cash flows but asking auditors to reduce fees and making it contingent on the appointment as auditors are
Audit Evidence from Different Sources
Auditor’s opinion is based on sufficient appropriate audit evidence. Sufficient refers to quantity whereas appropriateness refers to the quality of evidence collected. How much evidence is needed is subjective and is based on the judgment of the auditors (Velte & Freidank, 2015). Strength and sampling method of the internal control system are among the factors that might include but is not exhaustive to materiality, the company has chosen by the auditors.
The auditor obtains audit evidence from different sources such as evidence generated by the auditors themselves, audit evidence from the management of the company, and third-party provided documentation (Downey & Bedard, 2018). Each of these sources has its own significance, however, audit evidence generated by the auditors themselves is of prime importance and the opinion of auditors relies greatly on this as it is more reliable than other sources.
Auditor-generated audit evidence is of more reasonable quality than other sources. Quality depends on how relevant and reliable the audit evidence is.
Auditor generates audit evidence through a number of audit procedures these include:
- Analytical procedures
- External Confirmations
When auditors generate audit evidence, they are much more aware of its basis and authenticity rather than just relying on management representations.
SAS 400 provides provisions for analyzing the quality of audit evidence (Brown-Liburd & Vasarhelyi, 2015). Audit evidence is more reliable when the auditor obtains it from independent sources; internally generated audit evidence is more reliable when internal controls are effective. Audit evidence in documentary form is more reliable than in non-documented form, for example, minutes of the board meeting or written correspondence between the company and its bank is more reliable than the oral declaration of the management of the company.
When Auditor directly obtains audit evidence, it is more reliable than when evidence is obtained indirectly for example recalculation performed by auditors themselves (Asare, et al., 2015). Another example is an observation of a control procedure by the auditor like sales cycle walk-through tasks. The original document provides more reliable audit evidence than photocopies.
Audit evidence is relevant when it is connected with the purpose of the audit procedure. This is to do with the relevant assertion. For example, when testing overstatement of the existence of assets, physically verifying the assets generated audit evidence. However, when testing the understatement of assets, the relevant audit procedure to generate audit evidence is not physically verifying the assets of the company but inspection of the asset register (Sonnier, et al., 2015). Thus, confirming the completeness assertion.
When management provides audit evidence, the auditor’s show assesses the basis and its reasonableness to count it in. Further auditors should assess the efficiency and effectiveness of the internal control systems of the company.
Robust control system
A robust control system would provide audit evidence of reasonable quality. Written representations made by the management of the company should be relied upon if their basis seems to be logical and in good faith (Han, et al., 2015). Another example to be looked upon is the reliance on the work of the internal control department of the company. For that, auditors should assess the reporting lines, qualifications, experience, and appointment of internal control staff to form a thought of objectivity of the internal control department.
Evaluation of Quality auditor
The third party also provides audit evidence. To evaluate its quality auditor has to look at the source. For example, bank balance confirmation provided by the bank is more reliable than the bank balance provided by the management of the company in the cash book (Ettredge, et al., 2014). The auditor should further perform bank reconciliation to confirm the balance.
Another third party could be the expert who provides an opinion regarding his field. For example, a civil engineer engaged to obtain his opinion about the percentage of completion of the ongoing building of the company (Cianci, et al., 2016). The auditor should assess and evaluate the expert’s independence and technical knowledge of the subject matter. Had an expert been non-independent and was in some form of affiliation with the company, his provided opinion or report would not be reliable. Further, the reputation of the expert in his industry and his skills would also be considered to count the audit evidence.
Management of companies from third parties
The third-party can provide the opinion regarding the internal audit functions and they will view the matter from the technology perspective. For example, the manufacturer of the global goods introduced the audit system for evaluating the internal control and the pre-implementation of ERP security. The third party was the expert who assessed the business process control, application security, general computer controls, and data interface controls. These controls are assessed to predict the accurate information by the audit system (Deloitte, 2010).
Possible Consequences Associated with Internal Control System and Corrective Measures
The internal control system is related to the audit functions. In this case, a clear example is described between the accountant and owner in a fashion design business. As an Internal Auditor, I have the responsibility of evaluating the internal controls and taking corrective measures in order to ensure they are robust and effective to protect every asset and subject matter falling under the jurisdiction of the internal control department of the Ms. Juliet’s firm (Keune & Johnstone, 2015). Upon analyzing the given scenario of the firm and the tasks performed by staff, I have pointed out the following consequences of the internal control system of the firm and their corrective measures:
One of the possible consequence is that Abeer, Accountant of Ms. Juliet is performing the job of listing the purchase invoices which needs to be paid, as well as he is also preparing the cheque for Ms. Juliet’s signature. There is a lack of segregation of duties. Performing both tasks creates a risk that the accountant might prepare a cheque for the supplier, which is not the genuine supplier of the firm, and he has listed the purchase invoice in the name of a ghost supplier. There is also a risk that these two tasks could have a lot of burden on Abeer, looking into two tasks, which might also indulge him in making mistakes.
In that case, different standards are violated. First of all the ethical standard of the work is violated here. Ethically, Abeer is responsible for all the blank cheques which are given by Ms.Julliet. She was responsible to manage all the tasks ethically. It was her duty to work with ethics and follow all the working standards. Her ethical standard is that she must utilize all the blank cheques for official purposes and she must investigate the invoice before paying any amount on the behalf of a blank cheque. The professional working standard is also violated there. Ms.Julliet violated the professional working standard. She has a responsibility to manage all its tasks and she is also responsible for not signing any blank cheques.
The corrective measure is that one person should list the purchase invoice and some other employee of the firm should prepare cheques for Ms. Juliet. So, one person can have checked the other person’s work and segregation of duties would reduce the burden on Abeer as well (Dove, et al., 2015). The purchase invoices should be electronically listed thus minimizing the manual input by the Accountant. One method could be of integrating or developing a link between the supplier system and the purchaser system.
The second issue is although Ms. Juliet has a check on the invoices that they are correctly listed for every signed cheque, on the other hand, she leaves a few signed cheques with Abeer (Bennouri, et al., 2015). There is a risk that these signed blank cheques could be filled with any amount exceeding the amount to be paid to the supplier according to the purchase invoices. This might indicate potential fraud or misuse of the signed cheques.
The corrective measure is that in business the policy or the rules can be defined by which these issues can b overcome. In the business code of conduct, the rules can be defined in which no one is allowed to give a blank cheque to the accounting office. From top management to lower hierarchy in business, no one will have permission to sign the blank cheque and give it to an accountant for anything. the second rule is that the accountant will take strict action against that person who will give a blank cheque. In the company code of conduct, strict punishments and penalties can be designed against that person who will give a blank cheque and who will not investigate the reason behind the blank cheque issue (Bennouri, et al., 2015).
This study was based on three different types of cases that involved a practical pattern for the Auditing role. One of the cases represented the ethical and legal considerations for Al Sharqiya company which has appointed a new auditing company violating the ethical and legal considerations. The main part was the legal rules and application of the manager policy of Al Sharqiya Enterprises. There was ethical consideration present for selecting a new company without the formal agreement of company management.
In the second case, the importance of evidence was highlighted in terms of the auditing process. It was focused that SAS 400 can be used appropriately for drawing the audit opinion for the sources of management and the third parties. This can become an important part of recording the evidence and producing a new shape for the complete audit.
The third case was about the internal control system where the owner and accountant relationship was highlighted in regard to the inventory. It was observed that Ms. Juliet has shortcomings with blank cheques and it can affect the nature of the business. Therefore, the most important part was related to disbanding the regular approach and devising a strict portion for regulating the cash invoices. The accountant’s job is basically designed with respect to cash receipts and monitoring. This duty should be monitored with effective implementation of the system.
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