Audit, Assurance and Compliance

This report aims at the analysis of certain audit aspects like the effects of material misstatements on the key stakeholders, auditor independence, whistleblowing, lessons from Enron collapse and others.

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

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Executive Summary
This report aims at the analysis of certain audit aspects like the effects of material
misstatements on the key stakeholders, auditor independence, whistleblowing, lessons
from Enron collapse and others. As per the report, the key stakeholders of BHP Billiton
would not be able in making correct decision in the presence of improper identification of
material misstatements. After that, both whistleblowing and auditor independence is
needed to diminish unethical behaviours within the organizations. This report also focuses
on the lessons from the scandal of Enron and what the auditors need to do in order to avoid
this type of corporate collapse and financial crisis.

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Table of Contents
Introduction...............................................................................................................................3
BHP Billiton’s Stakeholder Analysis related to Material Misstatements...................................3
Auditors Independence and Whistleblowing.............................................................................5
Auditing Lessons from Enron Scandal and Arthur Anderson’s Behaviour.................................6
Audit Quality and Needed Steps to be taken by the Auditors...................................................9
Conclusion................................................................................................................................12
References................................................................................................................................14

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Introduction
Key stakeholders of the companies use the reports of the auditors as a major
document or tool for verifying the truthfulness as well as fairness of the disclosed financial
reports (Ojala et al., 2014). In the process of auditing, the key responsibility of the auditors
is to conduct the inspection and analysis of the financial reports of the firms so that any
material misstatements can be spotted in them. It is needed for the auditors to make proper
identification of the material misstatements in the financial reports due to the fact that the
key stakeholders extract the required financial information from them (Farouk & Hassan,
2014). For this reason, this report considers the impact of material misstatements in the
financial statements on the key stakeholders of one ASX Listed company that is BHP Billiton.
After that, this report sheds light on the concepts of auditor independence and
whistleblowing related to the public interest requirements in APES 110. Lastly, this report
considers the important lessons learned from the scandal of Enron in the audit profession
along with the required doings of the auditors to maintain the quality of the total audit
operations.
BHP Billiton’s Stakeholder Analysis related to Material Misstatements
There are certain stakeholders within BHP Billiton who can be majorly affected with
the presence of material misstatements in the financial statements and the effects are
shown in the following discussion:
Investment Community: in BHP Billiton, the investment community includes financial
analysts, Socially Responsible Investment (SRI) analysts who provides advises the existing
and potential shareholders about the performance and corporate governance of the firms
and others (bhp.com, 2019). Thus, they follow the financial statements of BHP Billiton for

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fulfilling the above purpose. Improper identification of the material misstatements can
provide them with materially misstated financial information that will lead them to the
failure of identifying the financial performance of the company (Brasel et al., 2016).
Shareholders: The shareholders of BHP Billiton are a varied group with crucial
representation in Australia, South Africa, Europe and North America; and the main interest
area of this stakeholders are to create long-term value in the presence of consistent
financial return and high-quality performance (bhp.com, 2019). This stakeholder group
analyses the financial statements of BHP Billiton for the purpose of investment decision
making. Hence, they will not be able to make the correct investment decision in the
presence of incorrect identification of material misstatements in the financial statements.
Business Partners: The business partners of BHP Billiton represent those business
organizations with which the company has joint venture agreements. The aim of the
company is to ensure the correct delivery of financial return and effective mitigation of
financial risks (bhp.com, 2019). Before entering into the joint venture agreements, the
companies analyse the financial statements of BHP Billiton for ensuring the effective
financial performance of the firm. In this situation, the presence of material misstatements
in them can affect the financial standing of the company (Abbott, Brown & Higgs, 2015).
Suppliers: The suppliers of BHP Billiton includes local businesses as well as international
suppliers; and the company has the responsibility to ensure correct supply agreements,
payment processes and maintenance of the required standards (bhp.com, 2019). Hence, the
incorrect identification of material misstatements in the financial reports can affect the
company by increasing their assets or liabilities abnormally; and it can affect the relation of
the company with their supplies.

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Government and Regulators: BHP Billiton engages with the government and regulators at
local, regional, national and international level; and the main interest of this group is in
national, regional and local regulatory and legislative policy the project life cycle (bhp.com,
2019). Hence, this group will be affected in the presence of material misstatements in the
financial statements.
Auditors Independence and Whistleblowing
Auditor independence states that the external auditors must be independent from
the audit client while conducting the audit procedures. In addition, the auditors are also
needed to ensure the roper maintenance of professional integrity and objectivity as per the
principles of auditor independence (Sharma, 2014). Another major ethical contributors in
the audit profession is the process of whistleblowing that is a major tool in maintaining
ethics and governance in the companies. The key principles of auditor independence state
that the auditors must disclose any material misstatements in the clients’ financial reports
along with the breach of ethical and governance related principles (Broberg et al., 2014).
It is needed for the auditors to show their commitment towards independence
through proper conduct of audit as this commitment has both the direct as well as indirect
impact on the whistleblowing process by the external auditors. Organizational employees
can do whistleblowing in effective manner in case the auditors have effective commitment
towards independence (Mintz, 2015). It needs to be mentioned that the process of
whistleblowing can be considered as certain effective policies that create scope for the
organizational employees in reporting unethical behaviours within the organization. Hence,
a whistle-blower is an organizational person who confronts information related to wrong

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behaviours within the business organizations. Thus, it leads to develop loyalty as well as
commitments towards the profession.
Auditors of Australia can access all the required fundamental ethical principles of
audit through APES 110
Code of Ethics for Professional Accountants issued by Accounting
Professional and Ethical Standards Board (APESB). According to APES 110 Section 210.11.1,
the permission of the audit client is needed related to communicate to the previous
auditors by the existing auditor (apesb.org.au, 2019). There will not be any audit nomination
if the request is rejected as it is necessary to communicate with the previous auditors. In
case the audit client grants the permission, the existing auditor needs to gather the required
information from the previous audit partner of the client. This criteria provides the desired
safeguard to the whistle-blowers and assists in identifying ethical misconduct in the
company. At the same time, the employees of the companies can get the needed freedom
of speech for raising concern against the unethical issues. It needs to be mentioned that the
whistle-blowers have the right for filing complaints against the unethical behaviours in the
presence of sufficient evidence according to the principles of APES 110 Section 100.1
(apesb.org.au, 2019).
Auditing Lessons from Enron Scandal and Arthur Anderson’s Behaviour
The Enron Scandal is an important subject to the audit profession as the auditors can
learn certain crucial lessons from this collapse and they are discussed below:
Effective Audit Standards: The Enron Scandal highlighted many issues in the accounting
standards of the firms. It can be observed from the whole case of Enron that the company
did not feel the necessity to follow the principles of United States (US) accounting standards
for the accounting reporting of certain off-balance sheet substances; and they used narrow

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as well as improper accounting standards that contributed to the accounting standard
problems. The Financial Accounting Standard Board was unable to improve the accounting
standards in the presence of colossal lobbying (da Silveira, 2013). In order to avoid this
issue, it is needed for the accounting standard setters to introduce and implement effective
accounting principles and standards. The recommendation is the compliance with globally
accepted accounting standards.
It is evident from the Enron scandal that the company lacked effective corporate
governance appliance. One of the major reasons for the implementation of corporate
governance within the organizations is to convert the higher-level management as the
agents of the company shareholders. However, one major reason for the breach of
corporate governance is the power of the company chief executives to hold maximum stock
options (Nguyen, 2014). It indicates to the needs to improve the whole corporate
governance situation. The way is to include honest non-executive directors who will ensure
certain aspects like the correct distribution of remuneration to the senior executives,
effective internal control and others. Hence, it can be said that strong corporate governance
can lead to effective audit procedures as it strengthens the internal control.
Avoid Manipulation of the Financial Statements: Capital markets of the countries can be
boosted with the correct financial reporting of the firms. As per the actions of Arthur
Anderson, the auditors of Enron, the collapse of Enron was also the collapse of the audit
profession as the auditor had major guild in the falsification of Enron’s accounts. In addition,
some of the crucial staffs of Enron were involve in conflict of interest and unnatural business
incentives and these also contributed to the Enron collapse. In general, the authority to
appoint the auditors lies in the hands of the shareholders; and it puts the obligation on the

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auditors to work as the agents of the shareholders. It can be seen in the case of Enron that
the management of the company appointed Arthur Anderson as the auditors due to fulfil
their dishonest desires. For this reason, Arthur Anderson provided different consulting and
non-assurance services to Enron for earning huge fees (Aydin, 2014). There are instances
where the external auditors had been appointed as internal auditors. This aspect creates the
opportunity for the senior managers to falsify the firms’ accounts that leads to the decline in
audit quality.
In the presence of all the above aspects, it is needed to seize the audit
responsibilities from the private companies with the aim to transfer them to the
government agencies, but there must be the requirement for the same. However, this
process involves inherent risk of auditing due to the absence of the guarantee that the
government agencies would be able to manage the audit mistakes that the previous
companies did. At the same time, it requires to mention that the managements of the
companies do not have the right to appoint the auditors as it would be better that the
government agencies appoint the auditors with appropriate audit fees as per the
requirements of the firms (Hosseini & Mahesh, 2016).
Moreover, the needs for strict legal regulation cannot be ignored in the overall audit
procedures. It can be seen that the auditors of the companies have been successful to
escape the audit regulations with the assistance of peer review and professional bodies that
are under the control of the auditors. At the same time, there is an immense need to restrict
the rights of the auditors to provide consulting and non-audit services. After that, for
avoiding the aspect of over commitment of the auditors to the audit clients, there is a need
for the rotation of audit firms on the basis of every five years. The ideas are immensely

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helpful in improving the audit quality. In this context, it is required for the Australian
Securities and Investment Commission (ASIC) to restrict the practice of the appointment of
internal auditors and audit managers by the managements of the companies (Kizil &
Kaşbaşı, 2018).
Behaviour of Arthur Anderson: Arthur Anderson was the second largest audit firm at the
time of the collapse of Enron. It was the responsibility of Arthur Anderson to ensure the
accurateness of the financial reporting as well as bookkeeping process. In addition, the
investors had full faith on the audit report of Arthur Anderson and they used them for the
purpose of investment decision making (McLean & Elkind, 2013). It needs to be mentioned
that Arthur Anderson was the business partner of Enron that contributed towards the
development of conflict of interest. In addition, some of the employees of Arthur Anderson
were employed in Enron. In the presence of these benefit, Arthur Anderson did ignore
verifying the required financial statements that led to material misstatements. Moreover,
the auditor of Arthur Anderson was held accountable for destroying some of the crucial
documents in audit process. In spite of this, the audit firm received millions of dollars as
audit fees. All these aspects are indicators that Arthur Anderson was highly unethical in the
audit of Enron (McLean & Elkind, 2013).
Audit Quality and Needed Steps to be taken by the Auditors
There is not any globally recognized definition for audit quality. However, a quality
audit is occurred when the auditors carry out the necessary audit procedures according to
the correct degree of professional scepticism as per the audit standards (Peytcheva, 2013).
In addition, for the occurrence of quality audit, the auditors need to have required
knowledge as well as skills, required audit insight and others. Greg Medcraft puts emphasis

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on the fact that there can be many corporate collapses in Australia like Enron if the big four
audit firms do not conduct quality audit for enhancing audit standards (abc.net.au, 2019). It
can be seen from the same source of information that improper auditing of the financial
accounts of the big corporations can lead to the occurrence of financial crisis in Australia.
The respective Australian authorise need to be active in solving the above-
mentioned issues with the aim to avoid the further corporate collapses like Enron and
others. It is needed to mention that the auditors of Australia have the option to avoid the
collapses like Enron by efficient audit where they are needed to acquire sufficient audit
evidences on the fact that the financial statements are free from material misstatements.
APES 110 Section 2 states that it is the responsibility of the auditors for providing enough
assurance on the fact that the financial statements of the companies reflect the true and
fair financial position of the company (apesb.org.au, 2019). Greg Medcraft mentioned in the
article that one major reasons for the collapse of Enron was the audit failure at the time of
financial crisis (abc.net.au, 2019). It indicates towards the responsibility of the auditors to
show their responsibility as well as accountability at the time of audit so that the key
stakeholders can judge the true and fair financial standings of the companies.
The top four audit firms in Australia are Deloitte, PwC, KPMG and E&Y. As per the
news article, ASIC did collect the key audit samples of these four audit firms for eighteen
months until December 2016; and ASIC has found that these audit companies were
unsuccessful in providing the required audit assurance in 23 percent cases where it was not
confirmed that the financial statements were free from material misstatements. This
situation shows the lack of ability of the auditors of these four companies as they do not
possess the needed professional scepticism; and it is a hindrance in maintaining the desired

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audit quality. It can be mentioned as an example that the presence of accounting fraud was
responsible for the collapse of Enron that also has negative impact on the audit firm, Arthur
Anderson, in the presence of their full involvement in the whole scandal (Ettredge,
Fuerherm & Li, 2014).
According to Greg Medcraft, ASIC did ban more than 600 business organizations and
did imprison more than 80 staffs of the companies after they conducted 7000 surveillance
and more than thousand investigations on the audit processes (abc.net.au, 2019). Due to
this, ASIC was successful in returning more than $1.3 billion to the investors within six years.
Moreover, ASIC did not forget to impose criminal charges on the employees and auditors
involved in unethical accounting practices. At the same time, the quality of audit needs to
be effectively maintained with the aim to lower the threat to audit independence to safe
level (Eshleman & Guo, 2013). According to Greg Medcraft, it is not possible for audit
rotation to provide safeguard to the threat of audit independence when the number of
auditors having the required audit knowledge and expertise is few in the companies and this
regulation can be seen in APES 110 Section 290.155. In addition, as per the exemption of
regulation in certain jurisdiction, it is possible for the auditors to stay as a key audit partner
for more than seven years (apesb.org.au, 2019). However, review of the external
stakeholders’ independence can be considered as a safeguard in here.
APES 110 Section 100.1 puts the obligation on the auditors to perform audit for
ensuring the best interest of the public (apesb.org.au, 2019). Thus, an auditor needs to fulfil
the needs of the public by conducting audit in accordance with the provided regulations and
standards. According to APES 110 Section 100 2(c) it is the requirement for the application
of safeguards in order to diminish or minimize the audit threats to the acceptable level

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(apesb.org.au, 2019). It implies that the auditors should apply the needed safeguards when
the audit threats exceed the safe level. Hence, an important lesson can be obtained from
the statement of Greg Medcraft that it is possible for Australia to avoid another financial
crisis in case the auditors conduct the audit works as per professional competence and due
care (abc.net.au, 2019).
For fulfilling the above-mentioned objective, the auditors of the companies must
have the needed audit skills, knowledge and experience so that they can continue the audit
procedures as per the required rules and regulations. According to APES 110 Section
100.5(d), maintaining the confidentiality of information is a crucial aspect for the auditors as
it is the restriction on the auditors to disclose the confidential information of the clients
when there is not any proper approval (apesb.org.au, 2019). In a nutshell, it can be said that
the important requirement for the auditors is to follows the required principles, standards
and regulations in order to avoid bringing disrespect to the audit profession (Christensen et
al., 2016).
Conclusion
The above discussion indicates towards the crucial fact that the presence of material
misstatements can affect the key stakeholders of the companies in the presence of the fact
that they rely in the financial statements for extracting crucial information for making
investment decision. The same aspect can be seen in case of BHP Billiton. After that, as per
the report, auditors need to be honest and straightforward in their profession as per their
commitment towards independence. Moreover, the whistle-blowers can disclose the
unethical business practices within the organisations through the whistleblowing process.
This report states that the Enron scandal is crucial for the auditors as it has provided the

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auditors with certain audit lessons like not to manipulate the financial accounts of the
companies for personal benefits, to comply with the required audit regulations and others.
It also shows that Arthur Anderson was majorly unethical in the audit practice of Enron that
contribute towards the collapse of the company. As per the suggestion of the report, it is
utmost important for the auditors to maintain professional scepticism along with the
adherence to the audit regulation for avoiding such collapses.

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