Weaknesses - Solid Waste

Solid Waste had been a case that leaves quite a big impact on Androids. As we can see, there
are too many weaknesses arise from this case. Androids had been acting recklessly as based
on what we can see from this case. Security Exchange ommission !SE" found Androids been
guilty of issuing materially false and misleading audit reports on Solid Waste financial statement
for the period #$$% through #$$&. Androids' audit engagement team recogni(ed that Solid
Waste employed )aggressive* accounting practice yet they still allowed management of Solid
Waste to use improper accounting to inflate its operating income and other measures to
success, primarily by deferring the recognition of current period operating expenses into the
future and by netting one+time gains against current and prior period misstatements and current
period operating expenses. Solid Waste capped Androids' corporate audit fees at the prior
year's level but allowed Androids to earn additional fees for tax, attest work unrelated to
financial statement audits or reviews, regulatory issues and consulting services. ,ost
accounting practice that are applied by Solid Waste were violating with -AA.. /hus, Androids
approved the issuance of an unqualified audit report on the financial statement each year
regardless of its reality and six of its partners are found to be involved.
Question Solid Waste
0ased on auditors opinion that we had compile, Androids had been at fault in many aspect.
1irstly we are about to discuss about how they violate the ,2A+by+3aw. /hey violate
,2A+by+3aw in terms of integrity, ob4ectivity, professional behavior and independence. Section
110 of by-Laws on professional ethics states that principle of integrity imposes an obligation on
all professional accountants to be straightforward and honest in all professional and business
relationships. 2ntegrity also implies fair dealing and truthfulness. A professional accountant shall
not knowingly be associated with reports, returns, communications or other information where
the professional accountant believes that the information to contains a materially false or
misleading statement, to contains statements or information furnished recklessly or to omits or
obscures information required to be included where such omission or obscurity would be
misleading. When a professional accountant becomes aware that the accountant has been
associated with such information, the accountant shall take steps to be disassociated from that
information. 2n this Solid Waste case, Androids' engagement team had been not acting truthful
enough as they end up allowed Solid Waste to continue employed )aggressive* accounting
which result in increasing operating income and understating operating expenses. Androids had
failed to totally apply integrity in carrying out their duty as an auditor. Section 120 of by-Laws on
professional ethics states that principle of objectivity imposes an obligation on all professional
accountants not to compromise their professional or business 4udgment because of bias, conflict
of interest or the undue influence of others. A professional accountant may be exposed to
situations that may impair ob4ectivity. 2t is impracticable to define and prescribe all such
situations. A professional accountant shall not perform a professional service if a circumstance
or relationship biases or unduly influences the accountant's professional 4udgment with respect
to that service. Androids had failed to act ob4ectively when carrying their duty as many conflicts
of interest arise. Androids gain additional fees from Solid Waste, as what Solid Waste want is
for Androids to cooperate with them to cover up their )aggressive* accounting practice that they
had been applying all along. Androids make 4udgment that are biased and recklessly issued
unqualified audit reports. Section 150 of by-Laws on professional ethics states that professional
behavior is about obligation on professional accountants to comply with relevant laws and
regulations in addition to these 0y+3aws and avoid any action that the professional accountant
knows or should know may discredit the profession. /his includes actions that a reasonable and
informed third party, weighing all the specific facts and circumstances available to the
professional accountant at that time, would be likely to conclude adversely affects the good
reputation of the profession. Androids clearly violate this 0y+3aw when they did not reveal all the
findings that they get regarding the improper accounting practice that had been applied by Solid
Waste. /hey 4ust simply identify them as )continuing audit issues*. Section 290 of by-Laws on
professional ethics divides independence into independence of mind and independence in
appearance. 2ndependence of mind is the state of mind that permits the expression of a
conclusion without being affected by influences that compromise professional 4udgment, thereby
allowing an individual to act with integrity, and exercise ob4ectivity and professional skepticism.
2ndependence in appearance mean that the avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, would be likely to conclude, weighing all
the specific facts and circumstances, that a firm's, or a member of the audit team's, integrity,
ob4ectivity or professional skepticism has been compromised. Androids failed to act both
independence of mind and independence in appearance as they end up compromising with
Solid Waste to cover up Solid Waste materially misstatement that exist in their accounting
practice.
Secondly, we brainstorm issue regarding creative accounting. 2t is an accounting
practice that follows required laws and regulations, but deviate from what those standards
intends to accomplish. reative accounting capitali(es on loopholes in the accounting standards
to falsely portray a better image of the company. Although creative accounting practices are
legal, the loopholes they exploit are often reformed to prevent such behaviors. 0ased on
auditors, creative accounting should not be applicable and must be avoided as far as we can.
Androids' engagement team discovered Solid Waste's accounting practices that gave rise to
misstatements involving understatements of operating income and they suggest Solid Waste to
record those 4ournal entries or correct the accounting practices but Solid Waste refuse to do so.
Androids' partner relented and instructed the engagement team to identify these as )continuing
audit issues*, as they are aware that it is considered as creative accounting. /hus this will allow
them to issue unqualified audit report on Solid Waste.
3astly is the issue regarding Androids provides both audit services and non+audit
services to Solid Waste. 0ased on auditors opinion that we gather, audit firm are permitted to
provide )permissible non+audit services* to their audit client. Ethical code forbids auditors to
provide non+audit services to audit clients if that would present a threat to independence for
which no adequate safeguards are available. 2n such circumstances, the firm must either resign
as auditor or refuse to supply the non+audit services. /he code includes specific activities where
no acceptable safeguards are available. 5nder corporate governance point of view, the audit
committee, as representative of the shareholders, is required to oversee the relationship with
the auditors and keep the nature and extent of non+audit services under review. /he audit
committee must satisfy itself that the independence and ob4ectivity of the auditor are not
compromised. /his important task specifically require that, for listed companies, audit
engagement partners in the firm who are responsible for a company6s audit must able to
disclose in writing to the audit committee all relationships between the audit firm and the client
that may reasonably be thought to bear on the firm6s independence and the ob4ectivity of the
audit engagement partner and staff !including arrangements for ensuring that independence
remains when non+audit services are commissioned" and the related safeguards that are in
place and confirm that, in their professional 4udgment, the firm is independent and the ob4ectivity
of the audit engagement partner and audit staff is not impaired. /herefore, auditors are allowed
to provide permissible non+audit services to audit client as long as it does not affect their
independence and ob4ectivity. 0ased on this case, Androids did follow the guidelines of non+
audit services that they are permitted to provide to Solid Waste. 0ut the issue arise when Solid
Waste ask for their non+audit services purposely due to their intention of influencing Androids to
compromise with them to cover up their )aggressive* accounting practices. /his is now causing
Androids to no longer able to provide their services with integrity and ob4ectivity.
Recommendation Solid Waste
.rofessional skepticism is an attitude that is very familiar with an auditor. Every auditor should
be able to act with professional skepticism in order for them to produce audit reports which is
reliable. Auditing and Assurance Standard !ASA" did provide a clear picture of auditing and
assurance related matter. 5nder ASA 788, it is clearly stated that an auditor must plan and
perform audit with professional skepticism as they need to consider the possibility of financial
statement to be materially misstated. 1raud may arise at any point of audit, so an auditor should
be able to identify the areas that contain high risk. .rofessional skepticism is about questioning
mind and critical assessment of audit evidence. /hus, an auditor should maintain attitude of
professional skepticism through the audit, recogni(e and consider the possibility of materially
misstatement due to fraud that could arise regardless of their past experience with the same
entity which provides them with honesty and integrity management. Androids should stress out
this point of attitude that able to help them converting to become a good auditor 4ust like what
their founder used to do.
9ext is about how auditor response to the risk of materially misstatement due to fraud.
An auditor should able to determine the overall response to assess the risk of materially
misstatement due to fraud at the financial report level and shall design and perform further audit
procedures whose nature, timing and extent are responsive to the assessed risks at the
assertion level. ASA %%8 states that the auditor needs to perform substantive procedures that
are specifically responsive to risks that are assessed as significant risks. 5nder paragraph :8 of
Auditing Standard, the auditor needs to consider management's selection and application of
significant accounting policies, particularly those related to sub4ective measurement and
complex transaction. Androids' engagement team should be well aware that every risk have it
related response which will help them to determine the materially misstatement better. 2f any
materially misstatement arises due to fraud, they should response well to the problem and they
cannot simply hide it or use creative accounting to cover it up.
1rom this case, we know that Androids are well aware of the manipulation of data by
Solid Waste regarding 4ournal entry and their accounting practice, yet they still did not take
appropriate action. /his is where management representation is vital. According to paragraph
$& of Auditing Standard, auditor should try all his best to obtain written representation from
management confirming that it acknowledges its responsibility for the design and
implementation of internal control to prevent and detect fraud, it has disclosed to the auditor the
results of its assessment of the risk that the financial report may be materially misstated as a
result of fraud and it has disclosed to the auditor its knowledge of actual, suspected or alleged
fraud affecting the entity. ASA ;<8 related to ,anagement =epresentation had provided
guidance on obtaining appropriate representations from management in the audit. 2n addition to
acknowledging its responsibility for financial report, it is important that, irrespective of the si(e of
entity, management acknowledges its responsibility for internal control designed and
implemented to prevent and detect fraud. 0ased on Solid Waste case, Androids had discovered
material misstatement, yet Solid Waste still refuse to alter and take corrective action. /hey had
act not in accordance with the standard. Androids should have been communicated with their
top management regarding this matter, but as in this case, their top management asks them to
apply creative accounting in their report so they should find other alternative. /hey cannot
blindly follow what their top management asks them to do when they are well aware that it is not
right to do so. 2t is stated in the paragraph $$ of Auditing Standard that an auditor need to report
any identified fraud or information related to the existence of fraud to appropriate level of
management. 2f auditor has identified fraud involving management, employees who have
significant roles in internal control or others where the fraud results in material misstatement in
the financial report, they shall communicate these matters to those charged with governance as
soon as possible. Androids' engagement team should have report to the governance as to when
they obtain their findings regarding this matter. 2t is the correct action that should be taken by
them on that moment.
=eference
http>??www.investopedia.com?terms?c?creative+accounting.asp
https>??www.icaew.com?en?technical?ethics?auditor+independence?provision+of+non+audit+
services+to+audit+clients
http>??www.ey.com?.ublication?vw35Assets?.oint@of@view@+@AandA@on@non+audit@services?
B123E?.oint@of@view@Cur@perspective@on@issues@of@concern.pdf