Impact of non-compliance with Corporate Governance Principles and Recommendations on Audit External auditors may be required to ensure that the entity is in compliance with any relevant legislation and regulations depending on its jurisdiction (Leung et all. 2009). Although external auditors do not have a direct responsibility to provide an opinion on the effectiveness of corporate governance practice of an entity, the auditor’s opinion will affect, to some extent, the investor’s judgment on the company’s overall performance. The majority of Board’s directors of Clive Peeters Limited are not independent so auditors may need to reassess whether the decisions or judgments of the Board are appropriately made and unbiased.
The Board is the key management personnel, and considered as related party to the Company, therefore, auditors may have to evaluate the reasonableness of related party transactions between the Company and key management personnel and use different types of audit procedures to assess the risk that not all related parties and related party transactions are identified and disclosed by the management. Furthermore, external auditors need to maintain good working relationships with the audit committee who has an important role in ensuring the Company’s compliance with relevant regulations and best practice guidelines (Leung et all. 2009). Related parties
Definition of Related Parties Australian auditing standard ASA 550 (Related Parties) defines related parties as a party that directly or indirectly has power over the entity or is influenced by the entity, an associate or a member of key management personnel of the entity, and a close member of the family of related parties (para 8a). Thus, related party transaction refers to any transactions, in the form of either goods or services between related parties (para 8b). Related Parties of the Company In the Related Parties disclosure section, the Company states that the Parent entity (Clive Peeters Limited) has equity interests in 8 subsidiaries.
They disclose the compensations, shareholdings and share options of the key management personnel and any transactions made with key management personnel. On other transactions with key management personnel of the Consolidated Entity, the Company mentioned that the operating rental and outgoings payments to companies related to Mr. Rick Hart are made on the same commercial terms and conditions as with other parties.. Similarly, the transactions with other related parties (e. g. purchase of goods by Directors and their related parties from the Consolidated Entity) during the year were made on the same terms and conditions as available to employees and customers, and were insignificant in nature.
How an auditor gathers sufficient appropriate evidence concerning related parties ASA 550 states that auditors should review information provided by management and perform audit procedures in order to minimize the risk of related parties remaining undetected and gather evidence on related party’s existence by reviewing working papers from the previous years, board minutes, management contracts and agreements, and asking the predecessor auditors for their understanding of related parties (para 18).
ASA 550 states that auditors should review information on related party transactions provided by management and consider other significant related party transactions by observing unusual transactions that indicate the existence of unidentified related parties (e. g. ransactions with unusual prices and terms and unrecorded transactions of free receipts of goods or services (para 24-25). If these situations exist, auditors have to perform further audit procedures (e. g. performing tests of transactions and balances more thoroughly, reviewing accounting records for unusual transactions, and getting confirmation with banks for the accuracy of loan details (para 26).
If audit evidence about related party transactions is inadequate, ASA 550 suggests auditors to carry out other audit procedures. Auditors can inquire about the purpose of related party transactions with the management, obtain confirmation from the related party about the details (e. g. mount and terms) of the actual transactions and inspect the related party’s premises to ensure the validity of the transaction (para 30).
Difficulties the auditor might encounter ASA 550 states that auditors may encounter some challenges in identifying related party and its transaction such as the intricacy of the related parties’ structure and relationships that could be difficult for auditors to trace, the reluctance of management to disclose related party transactions that involve something other than an exchange of consideration, and the possibilities that management manipulates related party transactions, in particular, those that are not conducted at arm’s length (para 20).
Auditors will not have any reference on measuring such transactions. Going Concern Definition of Going Concern Australian auditing standard ASA 570 (Going Concern) states that an entity is considered to be operating as a going concern if it is able to settle its liabilities before or on the due date and if it continues to operate with no intention of closing down its operation in the foreseeable future (para 6). Director’s responsibility in regards to going concern ASA 570 states that management is responsible for assessing the entity’s ability to operate as a going concern, regardless of whether or not the financial reporting framework requires it.
In the assessment process, depending on the size, nature, and complexity of the entity, management used its judgment to predict future conditions by observing factors such as financial (e. g. the entity’s inability to pay its creditors on time and to comply with loan agreements), operating (e. g. loss of key suppliers), and other factors such as changes in government policy (para 13). Auditor’s responsibility in regards to going concern ASA 570 states that auditors are responsible for assessing whether the going concern’s assumption that management use in the financial report’s preparation is appropriate (para 14a). If there are material uncertainties relating to the entity’s ability to operate under going concern basis, auditors have to evaluate whether disclosure is required (para 14b).
Some audit procedures an auditor may use to evaluate the management’s going concern assumption include reviewing the loan agreements, reading minutes of meeting of shareholders to see whether they have acted on financial problems they may have, inquiring with the entity’s lawyers, and discussing cash flow forecast with management (para 33). Going concerns issues raised by the Company In the last 3 sets of published accounts of the Company, there have not been any going concern issues raised by the management. The Director’s Declaration section in the Annual Report 2006 to 2009 confirms that the financial report is prepared under the assumption that the company will continue its normal business operation without any intention to liquidate and that the company is able to settle its liabilities as and when they fall due.
Clive Peeters Limited directors state its banking facilities has been revised after incurring a loss of $8,972,000 caused mainly by unfavourable trading conditions, restructuring costs, and misappropriation of cash by an employee (Clive Peeters Limited Annual Report 2009, p. 57). The directors used 3 main factors to justify the going concern basis; positive cash flow forecast for the year ending 30 June 2010 due to significant cost reduction program, the extension of its bank facility for another 13 months, and expectation of recovery of cash misappropriation within the next 12 months.
Subsequent Event Definition, types, and treatment of subsequent events According to Australian auditing standard ASA 560 (Subsequent Events), subsequent events are defined as events that take place between the balance date and the auditor’s report date, as well as facts discovered following the auditor’s report date (para 4). Facts discovered after auditor’s report date include facts discovered subsequent to auditor’s report date but prior to the issuance of financial report and those that are discovered after the issuance of financial report.
Management’s responsibility regarding events subsequent to balance date The responsibility of management is to identity adjusting and non-adjusting events after balance date and makes disclosure in the financial report. ASA 560 states that management is also responsible for updating the auditor about events that occur after the auditor’s report date that can affect the financial statement (para 13).
Auditors Responsibility regarding events subsequent to balance date ASA 560 states that an auditor is responsible to and is carry out audit procedures to gather evidence that any events that take place up to the auditor’s report date that require either adjustment or disclosure have been identified (para 8), and make judgment whether the management has made proper disclosure regarding such events in the financial report when the effect of subsequent events is material (para 12).
The auditor is not responsible to carry out audit procedures between audit’s report date and the date financial report is issued, however, if there are events discovered within this period, the auditor have to consider whether an amendment to the financial report is required upon discussion with management and take necessary actions in such situations (para 14). Similarly, if there are events discovered after the financial report is released, upon discussion with management, auditors need to judge whether a revision to the financial report is necessary (para 22). How an auditor identity events subsequent to balance date
To identify subsequent events up to the auditor’s report date, ASA 560 states that the auditor may perform auditors procedures such as reviewing management minutes meeting and management reports (e. g. budget), enquiring with the entity’s legal representative for any claims or litigation against the entity, and enquiring with the management on any unusual matters that may have taken place after the balance date that might impact the financial report (para 10). Identification of subsequent events of Clive Peeters Limited On July 2009, the Company found accounting discrepancies in its payroll account, followed by the discovery of cash misappropriation in August 2009 caused by a staff member of the Company that totals $19,336,000 (Clive Peeters Limited Annual Report 2009, p. 39).
This event has caused the Company to make some adjustments to the affected accounts in its Balance Sheet and Income Statement for the year ending 30 June 2009 (e. g. current asset, trade creditors and related payroll provision, recovery cost) and some portion of the unauthorised transaction will be adjusted in year ending 30 June 2010. The investigation on the staff’s fraudulent action also led to the discovery of other unauthorised transaction that occurred by 30 June 2008, resulting in a change in the Company’s Balance sheet for the year ending 30 June 2008 (e. g. an increase in other current asset and an increase in trade creditors and payroll related provisions).
The company indicated that the cash reserve of the Company will materially increase after this cash misappropriation issue is recovered . Other than the cash misappropriation issue, the directors stated that there has been no other subsequent event that significantly affects the operation of the Company.