Audit and Assurance

The assessment analyses the financial statements of an ASX listed company for analysing whether the annual reports are free from material misstatements of the business. The company which is considered is WoolWorths ltd which is engaged in the business of retail. The assessment shows that the stakeholders of the business are important constraints and they are also affected by the activities of the business. The assessment would also include discussion on the case of Enron and the factors which caused the collapse of company. The analysis of Medcraft article are also considered for improving the quality of audit.

Running head: AUDIT AND ASSURANCE
Audit and Assurance
Name of the Student:
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Author’s Note:

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AUDIT AND ASSURANCE
Executive Summary
The main purpose of the assessment is to analyse the financial statements of an ASX listed
company for analysing whether the annual reports are free from material misstatements of the
business. The company which is considered is WoolWorths ltd which is engaged in the business
of retail. The assessment shows that the stakeholders of the business are important constraints
and they are also affected by the activities of the business. The assessment would also include
discussion on the case of Enron and the factors which caused the collapse of company. The
analysis of Medcraft article are also considered for improving the quality of audit.

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Table of Contents
Introduction.....................................................................................................................................3
Stakeholder’s Analysis.....................................................................................................................4
Independence and whistleblowing in relation to auditors:............................................................6
Lessons from Enron Scandal............................................................................................................7
Audit quality and steps to be taken by the auditors for Medcraft................................................10
Conclusion......................................................................................................................................11
Reference.......................................................................................................................................13

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Introduction
The investors of the business are the owners of a company and therefore they need to
know whether the company in they have invested their money is performing well or not. The
only way the investors are able to interpret the performance of a business is through audit
financial statements. In case the financial statements which is shown to the investors contain
material misstatement than the same poses a serious risk for the investors as well as the
auditor which has conducted the audit for the business (Tepalagul and Lin 2015). The
assessments cover the interests of the stakeholders of the business by analysing annual reports
of a company which is listed in Australian Stock Exchange (ASX). The company which is taken
into consideration is Woolworths ltd which is considered to be giant in the business of retail
and has a significantly large operations (Woolworthsgroup.com.au. 2019). The assessment
considers the impact of material misstatement on the stakeholders if the annual reports of
Woolworths ltd contain the same.
The second part deals with the concept of whistleblowing in a business and APES 110
requirements which needs to be followed by every professional (Rahmina and Agoes 2014). The
assessment also includes analysis of the downfall of Enron and the lesson which Arthur
Anderson learnt from the case (Foster and Shastri 2013). The assessment would be concluding
with audit quality steps which is taken by the auditor after examining the financial statements
of G. Medcraft.

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Stakeholder’s Analysis
The stakeholder’s analysis of Woolworths Company would be undertaken considering
the individuals or groups who are depended on the performance of the business. Some of the
stakeholders of the business are discussed below:
Shareholders:
The shareholders or the investors are the individual who invest in the shares of the
business and are part owners of the business. The management of the company conducts on an
annual basis meeting of the shareholders so that the shareholders of the company are aware of
the activities which are undertaken by the business and in the same the management of the
company reveals to the shareholders regarding the activities and projects which are undertaken
by the management of the company (Abbott et al. 2016). The shareholders of the business
mainly want to know about what the company is doing to increase the profitability of the
business and also what the company is doing for the entire community. In case there is a
material misstatement in the annual reports of the business, the shareholders would be taking
wrong decisions depending on the same which could even result in generating losses for the
shareholders.
Customers and employees:
The business is mainly a retail business and therefore a lot of products are on offer for
the business. The main revenue generation is depended on the customers and whether the
same are interested in the products which is being offered (Lobo and Zhao 2013). It is very
important to consider the interest of the customers and ensure that the same are satisfied. The

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management of Woolworths are quiet keen on looking after the interest of the customers and
appropriately checks any kind of feedback which is received from the customers. Similarly, the
employees are the life force of organization and the management has a practice of
appropriately taking care of the employees of the business (Knechel and Salterio 2016). The
business has around 74,757 employees who are young and inexperienced which shows that the
management is not afraid to nurture new employees and develop their skills. Material
misstatement in the annual reports would also affect the decisions which are taken by such
individuals and can be bad for them.
Government:
The third major stakeholders of the business are the government who expects that the
business appropriately pays it taxes and also meets the legal requirement of the country. The
business is operating in their jurisdiction and therefore must adhere to the laws of the land and
appropriately develop strategies so that the legal requirements are met (Jiang, Habib and Zhou
2015). The government is affected by material misstatement as any misstatement in income
statement means that the profit shown would be low and this would affect the tax expenses of
the business.
Suppliers:
The suppliers are the people who provide the products which are sold by the business
and such individuals may be farmers who provide food products which are sold by the business.
The farmers get their revenues from the company which may be on cash basis or credit basis.

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Any material statement would risk in altering their amounts which would adversely affect their
livelihood.
Independence and whistleblowing in relation to auditors:
The independence of an auditor is an important factor which needs to be considered by
the external auditor while making an audit opinion. The auditor’s independence ensures that
the auditor is able to perform his duties following the principles of integrity and objectivity.
Whistleblowing can be defined as the process which states that an staff member can be report
any breach in ethical standards to the authorities. These are important concepts which helps in
maintain the ethical standards in a business. The auditor is responsible for ensuring that the
financial statement which is [prepared by the management are appropriately presented.
The independence of the auditor has an impact on the whistle blowing ability of the
auditor of the external auditor of the business. Th auditor needs to report regarding any breach
in ethical standards in the business if the same is identified by the management of the
company. The role of the whistle blower is to report on any mis use of power by the
management of the company. This ensure that ethical standards are maintained in an
organization.
“APES 110 Code of Ethics for Professional Accountants” has been issued by the
“Accounting Professional and Ethical Standards Board (APESB)” for ensure that a certain level of
ethical standards is maintained. The new auditor of the business can request from the client for
communication with the previous auditor of the client and the same is covered under Section
210.11.1 of APES 110”. If the client refuses the request of the client that the nomination is

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normally denied. In case the request is granted, the nominated auditor could ask for all
information from the previous auditor and then the decision regarding the nomination can be
undertaken (Mostafa Mohamed and Hussien Habib 2013). The principle has been introduced to
safeguard the interest of the whistle-blowers. This condition was introduced by regulations so
that a freedom of speech can be provided to the whistle-blowers in reporting any fraud or
misconduct of the management of the company (Apesb.org.au. 2018). The right for filing
complaints are covered under “Section 100.1 of APES 110”:
 Rules, law and regulations
 Gross mismanagement
 Gross fund waste
 Misuse of authority
 Substantial danger to the safety of the public at large
Lessons from Enron Scandal
The Enron scandal can be considered to be one of the biggest and shocking scandal
which was faced by global economy. The scandal was mostly due to accounting issues and
problems faced. The lessons which can be learned from the overall collapse of Enron for the
auditors are listed below in details:
Uncooking of Books of Accounts
The books of accounts are considered to be important document on the basis of which
the users of the financial statements take major decisions. Accurate books of accounts are

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necessary for any effective capital market. The auditor of Enron was responsible for shredding
the information and incriminating the documents before investigation can be taken place. The
failure of audit was mainly due to conflict of interest of the auditor and for perverse incentives
from the company. It is to be remembered that an auditor should act on behalf and in the best
interest of the shareholders of the business and ensure that the financial statements are free
from material misstatements (Lennox and Li 2014). But in the case of Enron, the auditor was
paid by the management and therefore there came conflict of interest in between duty of the
auditor. The auditor was given a position in the higher management and therefore it become
easy to control the auditor as there was conflict of interest. Therefore, it is normal that the
overall quality of audit of the financial statement would suffer drastically.
The major change which could be brought about in audit is to ensure that there is no
conflict of interest with the auditor and the organization. The responsibility of the auditors can
be taken away from the auditors and given to the government or some governmental
organization. In case of audit, there was significant inherent risks that the governmental bodies
would not be able to understand the material misstatement. In addition to this, the selection
process of the auditor should not be with the management of the company and the auditor
should act in the best interest of the shareholders and thereby ensure in improving the quality
of audit.
In addition to this, a statutory discipline should be brought about in audit profession for
the purpose of ensuring that the overall quality of audit can be maintained. The government
can impose regulations which can be equivalent to ban on audit for ensuring that overall safety

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of accounting profession. Another step which can be taken by the government is compulsory
rotation of the auditor on regular basis. This is done in order to ensure that auditor is not
committed to the client and maintain overall level of independence of auditor. There is another
step which is to prohibit commission which is paid to the auditors of the business and ensure
that there is no situation where conflict of interest arises on the part of the auditor.
Requirement of Better Auditing Standards
In the case of Enron, the auditor of the business had not followed effectively applicable
accounting standards on the company. The case of Enron shows that there are certain areas
which was a concern such as off-balance sheet dodges, accounting standards which are
followed in US are highly negligent. The financial Accounting Standard Board had taken various
tseps for improving the quality of accounting and the same is set in order to ensure that sound
principles and rules are followed in formulating the financial statements of the business. The
case of Enron also revealed that the role of effective governance is important in any business.
After the incident of Enron, many regulations were brought in by government which
ensure that several checks and control management was made so that the directors can act in
the best interest of the shareholders of the company. Thus, it can be said that there is a need
for changing the system so that best interest of the shareholders can be maintained. The
organization needs to appoint directors who are honest in their approach and also needs to
provide them with appropriate remuneration so that they are motivated enough to perform
their job effectively. In addition to this, the management needs to set up an audit committee
which would be comprising of independent directors so that better governance can be

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maintained in the organization. The management of companies can also appoint internal
auditors for ensuring that there are regular internal checks in the operations of the business.
Behaviour of Arthur Andersen
The auditing firm of Arthur Andersen was the second oldest firm which conducted audit
for business at the time when the firm was conducting audit for Enron. The firm was
responsible for auditing for Enron and also internal book keeping of the business. The reports
which was provided by the firm was used as a basis for taking major investing decisions by the
investors. The report which was generated by Arthur Andersen was not accurate as there was a
conflict of interest as Arthur Andersen was one of the partners of the business. Andersen was
accused guilty of obstruction by destroying the audit documents of Enron which showed that
the auditor of the business was not acting ethically and not in the best of interest of the firm.
The auditor was not acting in best interest of the shareholders of the company.
Audit quality and steps to be taken by the auditors for Medcraft
The audit quality of external audit is an important component which must be considered
by the auditor and the same should be conducted with a degree of professional scepticism and
the sane should be conducted following relevant standards of auditing. The other necessary
elements are that the annual reports provide proper insight to the sector of the business.
As per Greg Medcraft, there are chances that Australia might be facing incidents which
are similar to Enron unless firms can be following appropriate auditing standards. The auditor
needs to ensure that the auditor needs to ensure that audit is conducted appropriately. The
above mention issues show that there might be incidents of corporate collapse so the auditor

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needs to carry out his duties efficiently (Ettredge, Fuerherm and Li 2014). As per section 2 of
APES 110, the auditor needs to ensure that financial presentation which is shown in annual
reports are showing true and fair view. Medcraft is of the option that the collapse of Enron was
largely due to inappropriate presentation of the financial information and also due to the fact
that the auditor was unable to perform his duties effectively.
An analysis of a new article shows that ASIC has collected audit evidences for 18 months
until December 2016 made by Deloitte, PwC, Ernst and Young and KPMG out of which 23% of
adequate assurance regarding the accuracy of the financial statement was not provided. This
shows that auditor lacks professional’s scepticism. In the case of Enron, the auditor was
responsible for fraud activities and concealing of evidences.
According to Medcraft, ASIC has carried out 7,000 surveillances, numerous
investigations above thousands, banned above 600 organisations, imprisoned above 80
individuals and returned $1.3 billion to the investors in the last six years. It is therefore
recommended that criminal charges should be imposed on individual who are engaged in
frauds. Therefore, maintaining the audit quality is crucial to mitigate the threat of
independence. Another step which can be taken in audit is to rotate the auditors of the
business regularly. The role of governance and appropriate auditing standards is important for
avoiding frauds of the business.
Conclusion
The discussion shows that the role of independence of the auditor is very important for
ensuring that the overall quality of audit is maintained. The discussion considers the business of

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Woolworths ltd, for which the annual report for 2018 is considered so that no material
misstatement is present in the financial statements of the business. The discussion also shows
the case of Enron and the incident which resulted in the fraud. The discussion also shows the
role of Authur Anderson who was also accused for the fraud which was committed in the
business. The assessment finally ends with recommendations of Medcraft as to how the overall
quality of audit can be improved by the business.

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Reference
Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial
reporting quality: The joint importance of independence and competence. Journal of
Accounting Research, 54(1), pp.3-40.
Apesb.org.au., 2018. [online] Available at:
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 05
Dec. 2019].
Ettredge, M., Fuerherm, E.E. and Li, C., 2014. Fee pressure and audit quality. Accounting,
Organizations and Society, 39(4), pp.247-263.
Foster, B.P. and Shastri, T., 2013. Material internal control weaknesses and earnings
management in the post-SOX environment.
Jiang, H., Habib, A. and Zhou, D., 2015. Accounting restatements and audit quality in
China. Advances in accounting, 31(1), pp.125-135.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Lennox, C. and Li, B., 2014. Accounting misstatements following lawsuits against
auditors. Journal of Accounting and Economics, 57(1), pp.58-75.
Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report misstatements:
Evidence from quarterly and annual restatements. The Accounting Review, 88(4), pp.1385-
1412.

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Mostafa Mohamed, D. and Hussien Habib, M., 2013. Auditor independence, audit quality and
the mandatory auditor rotation in Egypt. Education, Business and Society: Contemporary
Middle Eastern Issues, 6(2), pp.116-144.
Rahmina, L.Y. and Agoes, S., 2014. Influence of auditor independence, audit tenure, and audit
fee on audit quality of members of capital market accountant forum in Indonesia. Procedia-
Social and Behavioral Sciences, 164, pp.324-331.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
Woolworthsgroup.com.au. (2019). [online] Available at:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf [Accessed
5 Feb. 2019].