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Assessment item 1 – Case A (ethics and the legal environment)

AssignmentTutorOnline

Value: 15%

Due Date: 17-Mar-2021

Return Date: 09-Apr-2021

Length: 1,500 words

Group Assessment: No

Submission method options: Alternative submission method

TASK

Background

You are the audit manager of JDM, an accounting firm with offices in the Sydney metropolitan area. JDM is a middle tier auditing firm specialising in the audit of firms in the manufacturing and property development industries. During May 2020 you met with the audit senior of JDM, Tyrone Vickery, to discuss a number of findings and issues Tyrone has identified relating to several of JDM’s clients.

Lightning Ltd

One of JDM’s biggest clients is Lightning Ltd. Lightning is involved in the property development industry and until last year had been very profitable, however the economic downturn has started having a financial impact. Tyrone tells you he has just had the final audit meeting with the CEO of Lightning, Ben. At this meeting there were discussions about the main findings and the adjustments which need to be made to the accounts. Tyrone says one major issue with the audit is lingering doubts over Lightning’s status as a going concern. Lightning has been close to violating it’s loan contracts which require it to maintain a current ratio of 1.7:1. Tyrone says the issue has caused him many sleepless nights of late – he says the people who run Lightning are likable, and he is aware of the negative impact that Lightning’s closure would have on its stakeholders including its creditors and employees. Tyrone is also worried that Lightning’s violation of loan terms could have a negative impact on his own career prospects, with Lightning being such an important client.

Tyrone says Lightning’s year-end is 30 June and that JDM carried out most of its work during February. At that time all of the projections looked fine, however recently Tyrone found out that one of Lightning’s major customers, Autumn Ltd has been placed into administration. At year-end Autumn owed Lightning $2.3 million. Tyrone says that if this amount were to be written off Lightning would definitely be breaching its loan contracts. Tyrone says he asked Ben whether any provision had been created in relation to the amount due from Autumn or whether any updates to the projections originally audited in February had been made. Ben advised Tyrone that he didn’t think that was necessary and justified this by saying that the administrator of Autumn believed that Autumn would be able to meet all of its outstanding debts. Tyrone said he hoped this was true, but he advised Ben that he still needed to obtain assurances from the administrator directly. Tyrone tells you that Ben reacted to this angrily, asking why that would be necessary as he was happy to provide a letter validating the administrators views. Tyrone says he advised Ben that he has to do his job, but that this made Ben even angrier, and Ben starting shouting, saying that “this is the first sign of trouble for our company and JDM are willing to help the bank shut our doors. This will be a disaster for our creditors and our employees!” Tyrone tells you than upon concluding the meeting Ben said to him that all Lightning was asking for was time – to be given a chance to trade out of the situation – and that as far as he was concerned, the accounts would not be altered. Ben also said that if Lighting were to collapse, he would let all their stakeholders know who caused the closure of this business – the auditors.

Cardinal Ltd

After discussing the audit of Lightning, Tyrone informs you of the latest developments regarding another of your clients, Cardinal Ltd, a company which provides warehousing and distribution for chemicals used in the manufacture of household cleaning products. Tyrone tells you that Cardinal was carrying a very high level of inventory in its audited balance sheet at the time a successful takeover offer was made by Spruce Ltd.

Tyrone says that two months after the takeover, it was discovered that the inventories held by Cardinal were considerably over valued and that they did not in fact possess the quantity of inventory claimed at the time of the audit. Tyrone also says that Spruce is filing court action against JDM and that they have evidence supporting the following:

JDM did not attend all stocktakes at year-end. While JDM were present at stocktakes for the Sydney based operations of the company, the inventory at the Sydney warehouse was also found to have been overvalued by 27%.
While JDM correctly accounted for the quantity of the Sydney stock, they accepted managements’ valuation, which did not take account of significant quantities of chemicals which were in poor condition and were therefore not of merchantable quality.
50% of the company’s inventory is purportedly held at the company’s facility in Goulburn and is it this inventory that Spruce is claiming does not exist.

Tyrone says that Spruce are also claiming that JDM were subjected to considerable pressure by Cardinal’s management to complete the audit within one month of the balance date. Tyrone says that JDM has undertaken this audit for the past six years, that there was no evidence of any previous misstatements of the value of inventory and that Spruce is claiming that they had relied on the audited financial statements in making their takeover offer. Tyrone tells you that there is no evidence that anyone at JDM was aware of this intended use of the accounts.

Lid Ltd

Lastly, Jack tells you about Alex Wilson, who set up his own IT business (Lid Ltd). After creating a piece of software which experienced exponential sales growth, Alex decided to list Lid on the ASX. After listing, the board of Lid has been reorganised several times and is now comprised of Alex as CEO, CFO Angelo Utah; and three non-executive directors. Chris Newman (a lawyer); Nigel Foley (a wealthy industrialist) and Steven Morris, a Chartered Accountant and Chairman of the Board, who has, as recently as 1 year ago, worked as a senior employee of DFB, an Accounting/Business Advisory firm which provided extensive advisory/consultation services to Alex on the best ways to manage Lid Ltd through its expansion and listing on the ASX.

Required

Question 1 (6 marks)

Advise Tyrone as to what he should do in response to the information he has provided regarding the audit of Lightning Ltd, making reference to the Code of Ethics for Professional Accountants. Use the following American Accounting Association (AAA) Model template to guide your response.

American Accounting Association Model	Decision-making process
1. Determine the facts	The facts are …
2. Define the ethical issues
3. Identify the major principles, rules, and values
4. Specify the alternatives
5. Compare values and alternatives
6. Assess the consequences
7. Make your decision

Question 2 (6 marks)

Based on the information provided by Tyrone in relation to Cardinal Ltd, and making reference to specific common law and/or auditing standards, prepare a report which addresses the following:

An outline of all the elements of the tort of negligence;
The case that Spruce Ltd could prepare in their efforts to sue JDM for negligence.
An assessment as to whether Spruce will be successful in their legal action
An explanation as to whether this assessment of success (as above) would change if Spruce had written to JDM telling them that they intended to buy Cardinal and were relying on the audited financial statements to assist them in making their decision.

Question 3 (3 marks)

Advise Tyrone of any breaches of the ASX’s ‘Corporate Governance Principles and Recommendations’ and what action (if any) will need to be taken by JDM.

RATIONALE

SUBJECT LEARNING OUTCOMES

This assessment task will work towards assessing the following learning outcome/s:

be able to explain and critically evaluate influences on audit and assurance services including: Australian and international professional standards, statutory and common laws, regulatory bodies, and public expectations within a global market.
be able to exercise critical and reflective judgement and appreciate the value of ethical practice.

GRADUATE LEARNING OUTCOMES

This task also contributes to the assessment of the following CSU Graduate Learning Outcome/s:

Academic Literacy and Numeracy (Application) – CSU Graduates consider the context, purpose, and audience when gathering, interpreting, constructing, and presenting information.
Ethics (Application) – CSU Graduates form judgements and apply ethical decision making and reasoning to identify creative solutions to ethical problems.

MARKING CRITERIA AND STANDARDS

Criteria	High Distinction	Distinction	Credit	Pass
Question 1
Use of critical and reflective judgment in ethical practice in the application of the ethical decision guide (6 marks).	Complex, comprehensive, and detailed application of the ethical decision guide demonstrates insightful critical and reflective thinking.	Logical, comprehensive, and accurate application of the ethical decision guide demonstrates coherent critical and reflective thinking.	Accurate application of the ethical decision guide demonstrates critical or reflective thinking.	Accurate application of the ethical decision guide.
Question 2
Identification and application of the influences of common law and auditing standards on negligence issues during the audit process (6 marks).	Comprehensive synthesis and application of the common law and auditing standards most integral to deciding failure to exercise due care and duty of care to a third party.	Comprehensive synthesis and application of the common law and auditing standards most integral to deciding failure to exercise due care, and duty of care to a third party.	Synthesis and application of the common law and auditing standards important to deciding failure to exercise due care, and duty of care to a third party.	Application of common law or auditing standards important to deciding failure to exercise due care and duty of care to a third party.
Question 3
Explanation and critical evaluation of the influence of Australian and international professional standards, public expectations and regulatory bodies on audit and assurance services (3 marks).	Comprehensive, focused, and concise synthesis and critical evaluation of the relevant ASX Corporate Governance Principles and Recommendations.	Comprehensive and accurate synthesis and critical evaluation of the relevant ASX Corporate Governance Principles and Recommendations.	Critical evaluation of the relevant ASX Corporate Governance Principles and Recommendations.	Lists relevant ASX Corporate Governance Principles and Recommendations
These last two criteria relate to the whole of the case study. N.B. although these criteria are not given a separate mark, they will be taken into account when marking each of the previous three criteria.
Professional communication using a business report format: * Arial 10pt or TNR 12 pt font; * 1.5 or double line spacing; * space between paragraphs; * appropriate headings; * professional language.	Focused, intelligible, accurate, and concise statements are organised into a professionally-structured and formatted report which engages the reader and justifies and clarifies an insightful critical perspective.	Focused, accurate, and intelligible statements are organised into a professionally-structured and formatted report which clarifies a critical perspective and facilitates the reader’s understanding.	Accurate statements are organised into a structured and effectively-formatted report which conveys a coherent perspective and facilitates the reader’s understanding despite minor spelling, grammar, paragraphing, or punctuation errors.	Statements are organised into a structured report which communicates a relevant perspective to the reader despite some frequent and/or intrusive spelling, grammar, punctuation, paragraphing, or formatting errors.
Appropriate resources and correct APA (6^th or 7th ed.) referencing	Seamlessly and articulately integrated evidence from four or more credible, relevant sources. All work has been referenced correctly as per APA (6th or 7th ed.) requirements.	Integrated evidence from two or more credible, relevant sources. All work has been referenced correctly as per APA (6th or 7th ed.) requirements.	Supported argument with evidence from one or more credible, relevant sources. All work has been referenced within the body of the answer and in the reference list. Occasional formatting errors and/or omissions of information do not comply with APA (6th or 7th ed.) but do not affect transparency or traceability of source material.	Supported argument with evidence from the text. Others’ work is always acknowledged. Frequent formatting errors and/or omissions of information do not comply with APA (6th or 7th ed.) but do not affect transparency or traceability of source material.

PRESENTATION

Assessment tasks should be submitted via Turnitin as a Microsoft Word document. Do not submit as a PDF document.

The first page should contain your name, student number, subject code, word count and due date. Please use 12 point font and avoid the use of fancy templates with added colour or graphics.
Lines should be double spaced.
The assessment tasks should be within +/- 10% of the word limit. The word count is taken from the first word to the last word and includes quotes. Quotes must comprise less than 10% of the total word count.
Proof-read your work so that it is free of spelling, grammar, and punctuation mistakes. Use language that is appropriate for academic and professional tasks. Ensure you use respectful and appropriate terminology. For assistance, see Learning Skills: http://www.csu.edu.au/division/studserv/learning
Your reference list should contain all source documents that you refer to, quote or paraphrase from. It must conform to the APA referencing style: http://student.csu.edu.au/__data/assets/pdf_file/0011/294977/APAReferencingSummary2013.pdf