American Accounting Association Model-Free-Samples for Students

Questions: 1.Using the American Accounting Association (AAA) Ethical decision model explain the Ethical Issues involved here and recommend a course of action for Jacqui. 2.With reference to relevant case law, prepare a report for the Managing Partners of MYH on the strength of any negligence case that Oasis might bring against MYH. Answers: 1.American Accounting Association (AAA) model The American Accounting Association (AAA) model established from the report for AAA that was written by Rockness and Langender during 1990. Under the report, it was suggested by them the seven-step procedure for the purpose of decision making, that takes into consideration the ethical issues (Abernathy et al., 2015). The AAA model starts with Step 1 through establishment of the cases facts. This step indicates when the process of making the decision initiates and there is no uncertainty exists regarding what is to be taken under consideration. Step 2 identifies ethical issues of the case. This step includes the identification of the cases facts and find out the ethical issues under stake (Kothari, Mizik Roychowdhury, 2015). The 3rd step involves recognition of values, principles and norms of the case and this further involves establishing the decision in the ethical, social and in few cases, within the context of professional behaviour. In this context, the professional code of the ethics or social expectation of profession is considered as the values, principles and norms. Under the 4th step all the alternative course of the action is recognized. This includes defining each alternative without taking into consideration the values, principles and norms under step 3 with regard to assure the fact that each of the outcome is taken into consideration irrespective of the fact that the outcome may or may not be appropriate (Howard et al., 2016). Next, under step 5 the values, principles and norms those were identified under step 3 are covered within the identified option under step 4. After completing these, it shall be possible to identify which option fits under the norms and which options are not. Under step 6, the significance of the results is taken into consideration. Finally, under step 7, the decision is made taking into consideration all the relevant facts. Facts of the given case The facts of the case was that the partner of the audit division under MYH, Jacqui Leak found that one of their client Morgan Fertilisers recently changed their waste management contractor and entered into the 3 years contracts with Dumparound Ltd. it was found by Mr. Jacqui that Dumparound is investigated and charged for exceeding the toxic waste level by local council for one of their sites (Dalton, Davis Viator, 2015). Ethical issues of the case The ethical issues with regard to the case is that whether the auditor shall look into the fact that the client is a good corporate citizen or not and whether the client is managing its business ethically or not. Stakeholders list that will be affected Local community if the waste management is not carried out properly then the biggest impact will b eon the local community where the business is being carried out as they have to suffer the adverse impact of improper waste management Investors investors will be affected as the sustainability and environmental lookout will not be fulfilled and therefore, people will have bad impression regarding the company, which in turn will affect the investors Customers the customers will have a feeling in their mind regarding improper conduct of the companys if it does not conform with the environmental issue management requirement (No et al., 2017). Major values, rules and principles The values, principles and norms are considered to have a big impact on the integrity of the financial statement of the company. As per the APES 110, the auditors are entrusted with the task of conforming that the working environment of the client has relevant safeguards and will be varied on the basis of the circumstance. The safeguards for the circumstance of the working environment include firm-wide safeguards well as the engagement-specific safeguard. It is found that the company is lacking the safeguard with respect to both the aspects. Alternative course of the action Option 1 is to further investigate the matter and question the management regarding the justification behind entering the contract with Dumparound. Option 2 is to just ignore the fact and give their opinion accordingly. Values and alternative With regard to maintain the integrity and objectivity of the auditor, the best option will be further investigate the matter and question the management regarding the justification behind entering the contract with Dumparound. This decision will help to maintain the independence, integrity and objectivity of the auditor. Alternatives access of the consequences If the option 1 is chosen, then it will help to maintain the independence, integrity and objectivity of the auditor. The auditor shall further investigate the matter and question the management regarding the justification behind entering the contract with Dumparound If option 2 is chosen, though the auditor will not be liable as the auditors job is not to find the fact that whether te client is carrying out its business ethically or not. However, to maintain the long-term sustainability of the company, this matter is required to be taken into consideration. Making the final decision The ethical decision is option 1. The auditor to maintain their integrity shall investigate the matter. 2.Report to MYHs managing partner The main issue with regard to the inventory valuation is to recognize the amount that is to be carried out as the value of the inventory in the balance sheet. As per the accounting standard, the inventories must be measured at the lower value out of the cost and realisable value (Onyekwelu Ugwuanyi, 2014). Further, the inventory which has become obsolete or which is damaged shall not be considered under the balance sheet of the company. If the value of inventory is overstated, it will have an impact on the various items of balance sheet as well as the income statement of the company. For instance, the shareholders equity, net income and retained earnings of the company will also show higher amount. Further, as the closing inventory of one period will be shown as the opening inventory of next period, the COGS of that period will also be shown at higher amount, which in turn, will reduce the gross profit as well as net profit of the company (Gray Ehoff Jr, 2014). In the given case study, it is recognized that Morgan Fertilizers are involved in the act of overstating their inventory in the balance sheet. Knowing the fact, the audit firm MYH did not raise any issue and stated their opinion on the financial statement of the company without taking into consideration the fact (Onoja Abdullahi, 2015). Moreover, based on the audited report of the company, Oasis Ltd took over Morgan. However, when they found the fact that inventory were overstated, they charged the auditor for being negligent. It was found that out of the total inventories in the balance sheet of the company, 50% of the inventories were already became obsolete and rest were valued at 35% more that the cost. Further, one major issue was that even if MYH valued the inventory correctly, they finally accepted the managements valuation of the inventory (Haribhai-Pitamber Dhurup, 2014). Through the confirmation of the inventory count is the managements duty and they are responsible for planning the strategies, through which the inventories will be verified, the auditor must look into the matter of internal control system of the company and strategies prepared by the management to minimize the gap in internal control. Further, the auditor shall look into these matters as they are obliged to apply the professional judgement and approaches while carrying out the audit (Gu, 2013). Further, the auditor will not be liable to the third parties for his act and is only liable to the client. Nevertheless, if the third party is able to prove the following mentioned points, then the third party can make the auditor liable Third party has taken decision on the basis of the audited statement of the company Any negligence done on the part of the employee of the auditor Intentionally the financial statement were designed to mislead the third party The annual statement was not prepared with true and fair view. Errors or misappropriation were there in the statement preparation (Feng, McVay Skaife, 2014). Case law In case study of Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997), the applicat, Esanda Finance Corporation, loaned cash to the association in view of the review report issued by Peat Marwick Hungerfords. In any case, after borrower default on the instalment, Esanda charged to the auditors on account of the fact that they have issued loan in light of the issued audit report by the auditor that broke the mandatory accounting standard. In any case, the High court of Australia expelled the case saying that the loan specialist as opposed to depending on the auditors report could complete the examination all alone. Further, it was expressed by the court that the evaluators are not in charge of the obligation of duty to third parties. With reference to the above case study, it can be commented that as MYH instead of verifying the inventory correctly, they accepted the value given by the management, which in turn will affect the integrity, objectivity, honesty and independence of the auditor. Here, Oasis Ltd. can establish the fact and bring negligence charge against MYH with regard to the fact that they have taken decision based on the audited financial report of Morgan Fertilizers. However, it is the courts decision whether they will charge the audit firm MYH for negligence or dismiss the case like Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) Reference Abernathy, J., Hackenbrack, K. E., Joe, J. 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