Feedback for Text PAQ 12.33 Misstatements and the audit report

Required

(a) Discuss the ethical issues Meg faces and explain what she needs to do to comply with APES 110.

(b) Explain Meg’s audit report options.

(c) Recommend a course of action for Meg.

(a) Meg has a duty under APES 110 to comply with the fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. As per Section 100 of APES 110 (pre and post 2018), compliance with the fundamental principles may potentially be threatened by a broad range of circumstances and may fall into categories like self-interest threat, self-review threat, advocacy threat, familiarity threat and intimidation threat.

As with Meg’s case, the threats to these principles include:

• self-interest threat, where Meg may not wish to upset the CEO any further in case the audit firm loses the audit work with Champion Securities.
• intimidation threat, where the CEO appears to be intimidating Meg in an effort to get her to agree to his valuations. The CEO’s statement ‘I think we need an auditor who is a bit more realistic’, could be interpreted as a threat to replace Meg, and her firm, with another auditor who would agree with his valuations.

These threats could result in Meg losing her objectivity and complying with the CEO’s request.

Meg must consider the seriousness of the threats and how she can safeguard the principles. Possibilities include:

• Ensuring all audit documentation is complete and referring it to her audit firm’s ethical committee with a request for guidance
• Asking another partner at the audit firm to review the case and join her in dealing with the CEO
• Referring the matter formally to the client’s board and/or audit committee
• Requesting another independent valuation of the assets in question from an expert
• Asking to be heard at the client’s AGM to explain the problem to the company’s shareholders
• Referring the matter to ASIC
• Resigning from the audit

(b) Meg’s report options are:

• Unqualified Report if she is able to reach an agreement with the CEO on the appropriate valuation of assets (ASA 700.16)
• Unqualified Report With Material Uncertainty Related to Going Concern explanatory paragraph (ASA 570.22) if an agreement on the asset valuations is reached and as a result a significant going concern uncertainty is raised which is adequately disclosed
• Qualified Report if the misstated valuations do not have a pervasive effect on the financial reports (ASA 700.17 and 705.7(a)). This is unlikely because of the given information about the critical nature of the valuations to the assessment of profitability and solvency of the company
• Adverse Report if the misstatement in the valuations have a pervasive effect on the financial reports (ASA 700.17 and 705.8). This is particularly likely given when the misstatement in the valuation of assets will cast significant doubt that the company will continue as going concern

(c) Meg should attempt to resolve the issue, with the help of the client’s board and other partners at her audit firm, and ensure that correct valuations for these assets are disclosed in the financial report. The second reporting option in (b) is then most likely. Issuing an adverse report, reporting the matter to ASIC and resigning from the audit are last resort options if the relationship breakdown between the auditor and the client. Meg should not comply with the CEO’s ‘request’ to overvalue the assets because this would appear to be against professional ethics.