Auditing Victorian Manufacturing Company

This assignment tasks students with analyzing a hypothetical audit report for Victorian Manufacturing Company. The report highlights two key issues: the company's use of FIFO and LIFO inventory methods and their failure to update the fair market value of their Melbourne factory. Students must determine the appropriate audit opinion based on these findings and explain their reasoning.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Requirement [a]...........................................................................................................................2
Requirement [b]...........................................................................................................................2
Requirement [c]...........................................................................................................................3
Requirement [d]...........................................................................................................................3
Answer to Question 2......................................................................................................................4
Requirement [a]...........................................................................................................................4
Requirement [b]...........................................................................................................................5
Requirement [c]...........................................................................................................................5
Answer to Question 3......................................................................................................................6
Requirement [a]...........................................................................................................................6
Requirement [b]...........................................................................................................................6
Requirement [c]...........................................................................................................................7
References........................................................................................................................................8

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Answer to Question 1
Requirement [a]
As per APES 110 Code of Ethics for Professional Accountants, Section 130, it is the
obligation on the auditors to comply with the required laws and regulations of auditing. As per
the given situation, a special advertisement from Berowra Accountants can be seen in the local
paper providing the surety of tax refund foe their audit clients. It needs to be mentioned that tax
refund is only possible when the companies pay extra amount of tax than their tax liabilities and
it has no connection with auditing. It is the responsibility of the auditor to ensure that the
financial statements of the companies are free from material misstatements; in case it is not, then
to provide audit opinion accordingly. Thus, from the above discussion, it can be observed that
Berowra Accountants has given the advertisement by braking the principles of auditing and thus,
this action of them has violated the principle of Professional Competence as per APES 110
(Nerandzic, Perovicy and Zivkov 2012).
Requirement [b]
As per APES 110 Professional Appointment, Section 210, the obligation is on the
auditors to effectively determine the effect of their new professional contract on the fundamental
principles of audit profession (William Jr, Glover and Prawitt 2016). It implies that the auditors
need to determine whether there is any negative effect of their appointment has on the audit
profession or not. Athletic clubs are considered as not-for-profit societies. In the provided
situation, it can be observed that Jamie Harvey, the auditor of a chartered accountant firm is
being asked to hold the position of the treasurer of the local athletic club. In addition, Jamie
Harvey does the audit of large public organizations. Thus, it can be seen that the post if treasurer
in the local club does not have any connection with the audit of large public companies. In

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addition, there is not any threat involved in holding an position in any not-for-profit societies.
Thus, based on the above discussion, it can be said that the action of Jamie Harvey has not
violated any audit ethical principle as per APES 110 (Leung et al. 2014).
Requirement [c]
APES 110 Principle of Objectivity, Section 120 puts the obligation on the auditors not to
compromise the audit judgment or audit opinion by coming under any kind of influence, conflict
of interest, biasness and others. It is the responsibility of the auditors to deliver the correct and
fair audit opinion as auditors are the representatives of investors and creditors. In the given
situation, it can be observed that the final payment of Pymble Accountants is depending on the
delivery of appreciate audit opinion. In this context, it needs to be mentioned that the
‘appropriate’ audit opinion refers to the favorable audit opinion to the audit client. Thus, in this
case, there can be two situations. In the first situation, there will not be any violation of audit
principle in case the auditors provide correct audit opinion irrespective of the payment. This is
the desired situation. In the second situation, there will be the violation of auditing principle, in
case the auditor provides Monlec Limited with favorable audit opinion. Thus, this action will
violate the Objectivity principle of audit as per APES 110.
Requirement [d]
According to APES 110 Principles of Confidentiality, Section 140, APES 110 puts the
obligation on the auditors that it is their responsibility to maintain the confidentiality of audit
information obtained at the time of providing professional services to the clients (Zadek 2013).
However, the opposite of this rule can be seen in the provided case. The give situation states that
Chadwick Accountants have received all the accounting papers from Winton Accounts. It needs
to be mentioned that these accounting papers include the confidential financial information of the

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audit clients of Winton Accountants. As per the provided situation, it is the job of Chadwick
Accountants to analyze the audit quality of Winton Accountants. As a part of their jobs, it is
required for Chadwick Accountants to conduct various analytical procedures for obtaining audit
evidences. However, it can be observed that by obtaining the audit papers, the company has
gained access of the accounting information of Motoring Services Company. Thus, from the
above discussion, it can be observed that this action of Winton Accountants has violated the
Confidentiality principle of ethics as per APES 110.
Answer to Question 2
Requirement [a]
According to APES 110, Self-review Threat, Section 100.12, the auditors are not
allowed to use or take reference from any previous audit judgment made by any of the audit
members of the same audit team, or otherwise, it will create the self-interest threat of audit
independence. After analyzing the given situation, it can be observed that Jane Davis has
acquired the confidential financial information of Jenkins Ltd due to work in the place of the
senior audit manager of the company, Leona Ng. Now, the accounting firm in which Jane Davis
works, Thronleign Accountants wants to take advantage of the knowledge of Jane Davis by
including her in the audit team for Jenkins Ltd. in this case, it can be clearly observed that the
actions of Thronleign Accountants to include Jane Davis in the audit firm is against the principle
of audit indolence of APES 110. Thus, based on the above discussion, it can be concluded that
the actions of the accounting firm poses the Self-review Threat of audit independence
(Tepalagul and Lin 2015.).

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Requirement [b]
As per APES 110, Intimidation Threat, Section 100.12, there will be a threat to auditors’
independence, in case the auditors are deterred from acting objectively due to the actual or
perceived pressure from the clients that includes the attempt to create influence on the auditors
for getting favorable audit outcome (Carson, Redmayne and Liao 2014). In the given situation, it
can be observed that the audit manager, John Darrow has received the audit papers from the
audit client, Winmalee Limited. The papers are related with the accounting works of the audit
client and they have produced these papyri so that the auditors consider them while drawing the
audit opinion. In this aspect, it needs to be mentioned that the auditors are required to conduct
various analytical procedures for obtaining the audit evidences. By providing the accounting
papers to the auditors, Winmalee Limited is indirectly creating influence on the auditors and is
deterring them from providing an unbiased audit opinion. Thus, this particular situation is posing
the Intimidation Threat of audit independence as per APES 110.
Requirement [c]
According to APES 110, Self-interest Threat, Section 100.12, it is the obligation on the
auditors not to have any kind of financial or non-financial interests on the property of the audit
clients, or otherwise, it will create the self-interest threat of audit independence. In the given
case, it can be observed that the auditors have received invitation from the chocolate company to
visit their plant and social club before audit operation for non-auditing purpose. Thus, in this
situation, the intention of the company may be to influence the audit opinion by providing
aspects for amusements to the auditors. Hence, in this case, there can be two situations. In the
first situation, the auditors will not create any threat of audit independence in case they simply
reject the invitation of the company to visit the plant and social club. In the second situation, in

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case the auditors accept the invitation and visit the plant and social club, they will pose Self-
interest Threat for audit independence as per APES 110 (Bryce, Ali and Mather 2015).
Answer to Question 3
Requirement [a]
The auditors provide unqualified audit opinion when the financial statements of the
companies have developed and presented as per the required accounting standard and there is not
any material misstatements in the financial statements. From the given situation, it can be
observed that the Connor Company is facing extreme difficulty in making the repayment of their
loans due to the weak debt position of them. At the same time, the bank increases the difficulty
of the company by demanding the speedy repayment of the loans. In this case, it is noteworthy to
be mentioned that in spite of the financial difficulties, the auditors have not found any material
misstatements in the financial statements of the companies. It implies that the company has
developed and prepared their financial statements as per the required accounting standard and the
company has not done anything to manipulate their financial difficulties. Thus, for all these
reasons, the auditors will issue Unqualified Audit Opinion (Krishnan and Wang 2014).
Requirement [b]
The auditors issue qualified audit opinion when the some part of the financial reports of
the companies have not been developed as per the required accounting standards, but there is not
any material misstatements in the other parts of the financial statements. It is the legal obligation
on the companies to comply with the accounting regulations of the operating countries. In this
case, it can be observed that the company has adopted the LIFO method instead of FIFO. This
action of the company has breached the accounting principle of the country; in addition, the

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difference between FIFO and LIFO has created material effect on the inventory of the company.
Apart from these places, the auditors have not encountered any material misstatements in the
financial reports of the company. For this report, the auditors will issue Qualified Audit
Opinion by stating the reason for not being unqualified (Ittonen 2012).
Requirement [c]
It is the accounting obligation on the business organizations to review the value of their business
plants and factories on a regular interval so that the gap between the carrying value and fair
market value can be minimized. For Victorian Manufacturing Company, the directors of the
company are living by the assumption that the market price land and building has been stable
over the five years and for this reason, they have not done the valuation of their Melbourne
factory for five years. For this reason, the company has been charging the same amount of
depreciation over the years. There will be major material effect on the financial statements of the
company in case the assumption of the directors is wrong. In that case, the amount of deprecation
can be increased or decreased. Moreover, in the absence of correct fair value of the factory, the
auditors will not be able to carry on the audit operations. For all these reason, the auditors will
provide Disclaimer of Opinion (Monroe and Hossain 2013).

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References
Bryce, M., Ali, M.J. and Mather, P.R., 2015. Accounting quality in the pre-/post-IFRS adoption
periods and the impact on audit committee effectiveness—Evidence from Australia. Pacific-
Basin Finance Journal, 35, pp.163-181.
Carson, E., Redmayne, N.B. and Liao, L., 2014. Audit market structure and competition in
Australia. Australian Accounting Review, 24(4), pp.298-312.
Ittonen, K., 2012. Market reactions to qualified audit reports: research approaches. Accounting
Research Journal, 25(1), pp.8-24.
Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees and
going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and Assurance
Services 6e. Wiley.
Monroe, G. and Hossain, S., 2013. Does audit quality improve after the implementation of
mandatory audit partner rotation?. Accounting and Management Information Systems, 12(2),
p.263.
Nerandzic, B., Perovicy, V. and Zivkov, E., 2012. Personality and moral character traits and
acknowledging the principles of management ethics, auditing and accounting ethics. Economic
research-Ekonomska istraživanja, 25(sup1), pp.288-312.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.

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William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.
Zadek, S., 2013. Building corporate accountability: Emerging practice in social and ethical
accounting and auditing. Routledge.

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