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Question: Background You are an experienced auditmanager at Samway Baker Fitzgerald (SBF), an accounting f...

Background

You are an experienced audit manager at Samway Baker Fitzgerald(SBF), an accounting firm with offices in Orange, Wagga Wagga,Tamworth, Port Macquarie and Albury in NSW, Toowoomba in Queenslandand Ballarat in Victoria. In the next 18 months, you hope to bepromoted to partner at the Orange office. Although a medium-sizedfirm by national standards, SBF includes Australia’s largestregionally-based auditing practice. Most of SBF’s audit clients arein the mining, manufacturing and agriculture industries. Forvarious reasons all of those industries are currently underpressure: mining from a downturn in commodity prices, manufacturingfrom fierce overseas competition, and agriculture from adevastating drought that continues to grip Eastern Australia.

It is a cold Thursday evening in July 2019 and you are meetingwith your audit team to finalise the 30 June 2019 year-end auditfor Far Faraway Pastoral Limited (FFA), a major agriculturalcompany based in Orange, listed on the Australian Stock Exchange(ASX), and one of SBF’s largest clients by fee revenue. During themeeting, three of your audit seniors each bring a potential issueto your attention.

Samantha Gabrielle was responsible forreviewing FFA’s corporate governance arrangements and reports that‘at 30 June 2019 the board of FFA comprises: CEO Bruce Blanch, theCFO Alexandra Rose and three non-executive directors: Kevin Oliver(a former executive at Macquarie Bank who has an 11 percentshareholding in FFA and is Chair of the Board), Matthew James (aretired farmer who was a major supplier to FFA), and JacquelineGrace (an Orange-based orthopaedic surgeon).’

Steve Barker was responsible for reviewing therevenue cycle and argues that ‘an ASIC report on their recentreview of the financial statements of some major agriculturalcompanies now means that FFA’s method for recognising revenues onits sale of cattle is very questionable’. In the 30 June 2019financial year just ended, cattle sales constituted nearly 50% ofall revenue recorded by FFA. Steve reports that he has alreadydiscussed the matter with the senior partner on the FFA audit, SkyeMartin, who said that the method has been used for 10 years andthat no adjustments to the 30 June 2019 financial statements wereto be made. Steve reports that he then told Skye Martin he acceptedher decision but wanted to include a dissenting statement in theaudit working papers. She refused to permit such a statement in theworking papers but offered to write a letter to you as the FFAaudit manager acknowledging full responsibility for the 30 June2019 audit. Steve alleges that as he left his meeting with SkyeMartin, she made some negative comments about your chances of beingpromoted to partner in the near future.

Kate Hammond was responsible for reviewing theoperations of an FFA subsidiary based in Western Australia (WA),called TRC, that sells rural and farm supplies. You are aware thatwhilst TRC is the market leader in WA and has a strong balancesheet, it was making losses for the past two years. During theprevious financial year ended 30 June 2018, TRC significantlyupgraded its accounting information system to more effectivelymanage inventory sales. TRC hired a well-regarded IT consultant toundertake the upgrade which was completed on 31 March 2018.

As SBF did not have offices in WA, you organised an independentexpert based in Perth to review and evaluate the accountinginformation system. The independent expert concluded that thesystem appeared reliable and that the changeover was correctlycarried out. At 30 June 2018 year-end, this new system had been inplace for 3 months, and TRC management reported that they werehappy with the way it was operating. In early 2019, given droughtpressures on its core business in Eastern Australia, FFA acceptedan offer from WA-based agricultural company McCarran Pastoral, whoalready owned 15% of TRC, to sell their remaining 85% interest tothem. The agreed sale price was $45.8m, equivalent to FFA’s 85%share of TRC’s net assets. The sale was finalised on 15 April 2019,but half the sale price is not due to be paid until 15 August 2019,after the 30 June 2019 audit of FFA has been completed.

Kate reports that significant errors in the changeover of theaccounting information system back in March 2018 have only justbeen discovered in July 2019, more than 15 months later. The errorsresulted in the inventory at TRC stores being misstated by $16.6mand net assets by the same amount. As a result McCarran Pastoral isplanning to withhold most of its remaining settlement payment toFFA, and FFA is planning to sue SBF for negligence for its loss ofthat payment.

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Question  

What should you do in response to the information provided bySteve Barker? With reference to the Code of Ethics for ProfessionalAccountants, use the following American Accounting Association(AAA) Model template to guide your answer:

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