Introduction

1. American Accounting Association (AAA) model

The American Accounting Association (AAA) model was developed from a study prepared by Rockness and Langender for the AAA in 1990. They proposed a seven-step method for decision-making in the paper, which takes ethical considerations into account (Becker Professional Education, 2017). The AAA model begins with the following:

The first step is to determine the facts of the case. This phase shows that the decision-making process has begun and that there is no doubt about what should be taken into account.
Step second recognizes the case’s ethical concerns. This stage entails determining the facts of the case and determining the ethical problems at hand (Costa and Pinheiro, 2021).
Stage third entails recognizing the case’s values, principles, and norms, as well as establishing the choice in ethical, social, and, in a few circumstances, professional contexts (BPP Learning Media, 2017). The ideals, principles, and standards are considered in this context to be the professional code of ethics or societal expectation of the profession.
In stage four, all alternative courses of action are acknowledged in this step. This involves defining each option without taking into account the values, principles, and norms established in step 3 to ensure that each of the outcomes is considered, regardless of whether or not the conclusion is suitable.

In step five, Finally, in step 5, the values, principles, and standards defined in step 3 are covered inside the selected choice in step 4. After you’ve completed them, you’ll be able to tell which alternatives are acceptable and which are not.

Phase 6: The importance of the results is taken into account in this step (BPP Learning Media, 2017).

Phase 7: In this step, all relevant information is considered before a decision is reached.

Facts of Case
The circumstances of the case were that Jacqui Leak, a partner in MYH’s audit division, discovered that one of their clients, Morgan Fertilisers, had just switched waste management contractors and signed three-year contracts with Dumparound Ltd. Mr. Jacqui discovered that Dumparound is being investigated and penalized by the local council for exceeding the hazardous waste limit at one of its sites (Case study)

Ethical issues of the case
The ethical considerations, in this case, including whether or not the auditor should investigate whether or not the client is a good corporate citizen and whether or not the client is conducting business ethically.

Below are the stakeholders that will be impacted mainly:

Local community: If waste management is not done effectively, the local community where the company is conducted will be the most affected, as they will have to bear the negative consequences of poor trash management.

Investors: Investors will be impacted since the business’s sustainability and environmental goals will not be met, and as a result, people will have a negative perception of the company, which will negatively impact investors.

Consumers: If the firm does not comply with environmental management requirements to address the concern issues, customers will have a negative impression of the company.

Major Principles, Values, and Rules
The auditors are tasked by the APES 110 with ensuring that the client’s working environment has appropriate protections and will be changed depending on the circumstances (Miralis, 2021). The protections for the working environment situation comprise both firm-wide and engagement-specific precautions. It is discovered that the firm lacks safeguards in both of these areas.

An alternative course of Action
Option 1 is to look into the situation further and question management about the rationale for signing the deal with Dumparound.
Option 2 is to just disregard the reality and express their views as a result.
• If option 1 is selected, the auditor’s independence, honesty, and objectivity will be maintained. The auditor will look into the situation further and question management about the rationale for engaging in the contract with Dumparound.
• If option 2 is chosen, the auditor will not be held responsible because the auditor’s role is not to determine whether or not the client is conducting business ethically. However, to ensure the company’s long-term viability, this issue must be taken into account.

Best Option
Option 1 would be the best ethical choice because it will protect the integrity of the auditor in every situation.

2. Report to MYH’s Managing Partner

To
MYH’s Managing Partner
From: XYZ
Subject: Strength of any negligence case that Oasis might bring against MYH
Dear Managing Partner,

The major difficulty with inventory valuation is recognizing the amount that must be carried out as the value of inventory in the company’s balance sheet. To comply with accounting standards, inventories must be valued at the lower of the realizable and cost value. Furthermore, inventory that has become obsolete or is damaged will not be included in the company’s balance sheet. If the value of inventory is overestimated, it will affect the balance sheet’s numerous components as well as the company’s income statement (Wahlen, Baginski, and Bradshaw, 2017). For example, the company’s shareholder’s equity retained earnings and net income will all be higher. Furthermore, because the closing inventory of one period is shown as the opening inventory of the next period, the COGS for that period will be greater, reducing the gross profit and net profit of the firm. Morgan Fertilizers is found to be overstating their inventories on their balance sheet in the presented case study.

Despite this, the audit firm MYH did not raise any objections and gave their judgment on the company’s financial statements without taking into account the truth. In addition, Oasis Ltd acquired Morgan based on the company’s audited report. When they discovered that inventory had been inflated, they accused the auditor of negligence. It was discovered that 50 percent of the entire inventory on the company’s balance sheet had already become outdated, and the remainder were valued at 35 percent higher than the cost.

Furthermore, even though MYH accurately assessed the inventory, they eventually accepted the management’s valuation of the inventory (Wahlen, Baginski, and Bradshaw, 2017). The auditor must look at the company’s internal control system and plans established by management to reduce the gap in internal control through the confirmation of the inventory count, and they are responsible for designing the methods through which the inventories will be checked.

• Furthermore, the auditor must investigate these issues since they are required to use professional judgment and techniques when doing the audit. Furthermore, the auditor is solely accountable to the client and not to third parties for his actions. However, if the third party can demonstrate the following points, the auditor can be held responsible —
• Any negligence on the part of the auditor’s staff has resulted in a third party making a decision based on the company’s audited financial statements.
• The financial statements were created with the intent of deceiving the third party.
• The annual statement was not prepared genuinely and fairly.
• There were errors or misappropriation in the production of the statement. 
Case law

In Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997), the applicant, Esanda Finance Corporation, provided money to the association based on Peat Marwick Hungerfords’ review report. In any event, Esanda penalized the auditors after the borrower defaulted on the installment because they had given the loan in light of the auditor’s issued audit report, which violated the statutory accounting standard. In any case, the High Court of Australia dismissed the complaint, stating that the loan specialist could conduct the assessment without relying on the auditor’s report. Furthermore, the court said that the evaluators are not in charge of the duty of care owed to third persons.

Concerning the aforementioned case study, it can be stated that instead of properly checking the inventory, MYH accepted the value provided by management, affecting the auditor’s integrity, objectivity, honesty, and independence. Here, Oasis Ltd. has the opportunity to prove the facts and file a negligence complaint against MYH for making decisions based on Morgan Fertilizers’ audited financial report. The court will decide whether to prosecute MYH with negligence or dismiss the case, as it did in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997).

References

Becker Professional Education. (2017). ACCA Approved – P4 Advanced Financial Management. Becker Professional Education Ltd.
BPP Learning Media. (2017). ACCA P1 Governance, Risk and Ethics. BPP Learning Media.
Costa, A. and Pinheiro, M. (2021). Accounting Ethics Education: Making Ethics Real. Routledge.
Miralis, N. (2021). Auditor independence and audit quality: Legally enforceable, not just desirable. Retrieved from https://www.lexology.com/library/detail.aspx?g=fe0052ad-9225-4b8f-8c3b-043a5289227c
Wahlen, J., Baginski, S. and Bradshaw, M. (2017). Financial Reporting, Financial Statement Analysis, and Valuation. Cengage Learning.