Analysis of Audit, Assurance and Compliance

This report analyzes different aspects of auditing including the effects of material misstatements on stakeholders, auditor independence and whistleblowing, lessons from Enron collapse, and steps for improving audit quality.

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
The aim of this report is the analysis of different aspects of auditing like the effects of
material misstatements on the key stakeholders of Coca-Cola Amatil; concepts of auditor
independence and whistleblowing; lessons from Enron Collapse; and the steps that the
auditors are needed to take due to the warning of Greg Medcraft. The result of the report
shows that improper identification of material misstatements in the financial statements
affect various decision-making process of the key stakeholders. After that, unethical
behaviours within the organizations can be eradicated in the presence of auditor
independence and whistleblowing process. In addition, the Enron Scandal shows that
auditors must conduct their works in the ethical and responsible manner.

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Table of Contents
Introduction...............................................................................................................................3
Effects of Material Missstaments on the Key Stakeholders of Coca-Cola Amatil......................3
Auditor Independence and Whistleblowing..............................................................................5
Lessons from Enron Scandal and Arthur Andersons’s Behaviours............................................6
Audit Quality and Needed Steps by the Auditors......................................................................9
Conclusion................................................................................................................................12
References................................................................................................................................14

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Introduction
Auditing can be considered as a special process where the auditors apply different
kinds of analytical procedures for the analysis and inspection of their clients’ financial
statements and the aim is to find out whether there is any material misstatements in them
or not (Chan & Vasarhelyi, 2018). The key stakeholders of the business organizations
consider the report of the auditors as a proof of the presence or absence of material
misstatements in them. It puts the obligation on the auditors to conduct the audit
procedures as per the required standards and principles. For the same purpose, the auditors
can take essential lessons from the large corporate collapses all over the world like Enron
and others (Reding et al., 2013). This particular report has certain aims. The first aim of this
report is the analysis of the presence of material misstatements on the key stakeholders of
Coca-Cola Amatil, an ASX listed company. The next part of the report puts focus on the
concepts of auditor independence and whistleblowing in auditing. The next parts sheds light
on the auditing lessons learned from the collapse of Enron. The focus of the last part is to
suggest the needed steps to be taken for improving the audit quality.
Effects of Material Missstaments on the Key Stakeholders of Coca-Cola Amatil
It affects the key stakeholders of the companies in major way when the auditor fails
in properly identify the material misstatements in the financial statements and it is also
applicable for the key stakeholders of Coca-Cola Amatil. The effects are shows in below
discussion:
Shareholders: Shareholders in Coca-Cola Amatil include the persons and companies that
invest in the company for getting higher return (coca-colacompany.com, 2019). On the
other hand, Coca-Cola Amatil fulfil their capital need from their invested money. This

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stakeholder group depends on the financial statements of the company in order to make
correct investment decision. Hence, improper identification of material misstatements can
create the risk of incorrect investment decision by them as materially misstated financial
statements do not provide the correct financial information about the financial performance
and position of the firms (Henczel, 2013).
Analysts: This particular stakeholder group in Coca-Cola Amatil represents the equity
analysts and other analysts that analyse and evaluate the financial performance and
financial position of the company for the interested stakeholder group (coca-
colacompany.com, 2019). For this reason, they rely on the financial information of the
company through various financial statements. Hence, incorrect identification of material
misstatements can affect the analysis of these analysts as they will not be able in correct
analyse the company in the presence of incorrect financial information.
Peer and Suppliers: This stakeholder group of Coca-Cola Amatil includes the local, national
and international suppliers who provide the company with the required goods for the
purpose of production (coca-colacompany.com, 2019). This stakeholder group analyses the
financial statements of the company for the analysis of liquidity position, efficiency position
and profitability position in order to make decision related to credit decisions. Hence, the
presence of material misstatements can manipulate the assets and liability position of the
company and it can affect the credit decision of this stakeholders (Khan, Muttakin, &
Siddiqui, 2015).
Lenders: In Coca-Cola Amatil, lenders include the person and organizations that provide the
company with the required capital for their business operations (coca-colacompany.com,
2019). For this purpose, it is needed for these stakeholders to analyse the financial stability

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of the company to repay the loan amount and the required information from the financial
statements. Hence, in the presence of improper identification of material misstatements,
this stakeholder group will not be able in acquiring the correct financial ability of the
company from the financial statements (Knechel & Salterio, 2016).
Auditor Independence and Whistleblowing
Auditor Independence: The primary responsibility of the auditors is to provide the
shareholders of the companies with the independent and expert opinion on whether the
financial statements reflect the true and fair view of the financial position (Tepalagul & Lin,
2015). Auditor independence is considered as the mean that assists the auditors in
demonstrating the fact that they can perform the task in the most objective manner. Hence,
the need for the auditor is to stay independent from the client company so that the audit
opinion is not influenced by the relationship between them. As per the principles of audit
independence, the auditors are expected to provide unbiased and honest professional
opinion on the financial statements to the shareholders (Fiolleau et al., 2013).
Whistleblowing: Whistleblowing is considered when an employees, supplier or contractor
of the company goes outside of the normal channel of management for reporting suspected
wrongdoing in the workplace (Zhang, Pany & Reckers, 2013). Whistleblowing can be done
through internal processes of the companies or the external bodies like regulator and
others. Hence, whistleblowing can be considered as the act to reveal inappropriate business
activities, often secretly, to the parties within or outside the organizations with the purpose
to alert the individual or authority who can take the correct actions. In the process of
auditing, a positive connation can be seen between the whistleblowing process and auditor
independence (Gold, Gronewold & Salterio, 2013).

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The APES 110 Code of Ethics for Professional Accountants consists of all the needed
standards and regulations that the auditors are needed to comply with while conducting the
audit procedures (Martinov-Bennie & Mladenovic, 2015). Section 210.11.1 of APES 110
states that the auditors are needed to obtain the permission from the audit client to contact
the previous auditors for more information. APES 110 states to reject the audit nomination
due to the rejection of this request (apesb.org.au, 2018). In the presence of the acceptance
of the request, the requirement for the auditors is to write to the previous auditors for the
information related to the decision of nomination. To provide the required safeguards to
the whistle-blowers in the companies, the above regulation has been introduced and this
particular safeguard has contributed towards the freedom of speech to the employees,
suppliers and contractors. According to Section 100.1 of APES 110, it is the right of the
whistle-blowers to file complaints related to the violation of organizational ethical principles
in the presence of the required evidences like gross mismanagement, abuse of authority,
waste of funds and many others (apesb.org.au, 2018).
Lessons from Enron Scandal and Arthur Andersons’s Behaviours
All over the world, the collapse of Enron is considered as one of the biggest collapses
of all time and it has provided certain lessons to the auditors. They are discussed below:
Uncooking the Books: It can be seen from the collapse of Enron that the auditors, Arthur
Anderson, were involved in the collapse as the management of Enron appointed them for
fulfilling their personal interest. This aspect indicates towards the lesson that the
government agencies should have the auditing responsibilities instead of the private firms.
At the same time, the collapse of Enron has pointed out towards the need of strict
regulatory framework in audit profession that will restrict the audit firms from providing

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consulting as well as non-audit services to the audit firms in exchange of huge fees (da
Silveira, 2013).
Better Auditing Standards: It can also be seen from the Enron collapse that there were
some major issue in the accounting and auditing standards that were major reasons for the
collapse of Enron. This aspect provides the auditors with the lesson that there is a need for
the introduction of robust accounting standards that will ensure sound accounting and
auditing principles within the companies. Hence, the need is to comply with the globally
acceptable accounting principles by the accounting and the auditors (Hosseini & Mahesh,
2016).
Independent Oversight Strengthen Auditing: The collapse of Enron indicates towards the
aspect that the independent oversight of the auditors helps in strengthening the overall
auditing profession. Hence, it is needed to inspect the knowledge of the auditors that the
auditors apply on every audit engagement. It also encourages better documentation. At the
same time, it needs to be mentioned that there is a need for an inspection program that will
consider the inspection of the significant audit judgments due to the act that the audit
procedures are heavily based on the professional judgements in certain circumstances in
the audit profession (pcaobus.org, 2018).
Supervisory Approach – Incentive to Improve: Another major lesson that can be learned
from the Enron scandal is that the quality of audit can better be improved by proving
incentives, instead of threatening punishments. It is because the vast majority of the
auditors as well as accounting companies are intensely committed towards professionalism
and integrity. For this reason, auditing oversight can be considered as the promoter to help
the companies in identifying strengths and weaknesses in the audit practices. An example of

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this can be seen in the Sarbanes-Oxley Act as it contains the example of this kind of
incentive where the board has prohibited the firms to make public disclosure of the
inspection report critic of quality control of a firm (nytimes.com, 2018).
Internal Control Auditing: Another major lesson from the case of Enron is to strengthen the
internal control auditing. One major way for restoring the confidence of the investors was to
require both the management and auditors in reporting on the effectiveness of their
internal control over the process of financial reporting. In order to work this new
responsibility, the need is to issue an auditing standard on this new aspect of the
responsibilities of the auditors. Thus, the important lesson is to maintain the desired
balance between costs and benefits in this particular area (Brandt, 2018).
The Relationship between the Auditor and Audit Committee: Another crucial lesson that
the auditors can learn from the collapse of Enron that the oversight of external auditors
cannot be fully effective in case the companies itself does not have any commitment
towards fair and accurate disclosure. In this process, the key aspect is the relationship
between the company’s auditor and its independent audit committee. It is needed to have a
cordial relationship between the auditors and the audit committee with the aim to make the
audit a success. Hence, the need is to arrange periodic educational forums for the audit
committee members. At the same time, it needs to interview the external auditors for the
same purpose (Hays & Ariail, 2013).
Auditing As a Global Profession: The final as well as major lesson that can be learnt from
the collapse of Enron that auditing is a global profession. Hence, it is needed for the
respective audit boards to work with the other auditors. Hence, it is needed for the auditors

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all over the world to comply with the global auditing principles with the aim to avoid any
kinds of breach of the auditing standards and principles (pcaobus.org, 2018).
Behaviours from Arthur Anderson
It can be seen from the collapse of Enron that Arthur Anderson was the audit partner
of the company at the time of collapse and was the second oldest auditing firm that time.
Arthur Anderson was majorly accountable for ensuring the accuracy of the company’s
financial statements along with the internal bookkeeping. The investors of Enron had faith
on the report of Arthur Anderson for the purpose of investment decisions as they
considered the reports accurate and free from conflict of interest. Later, it was disclosed
that Arthur Anderson was the business partner of Enron and some of the audit executives of
the companies accepted jobs from Enron (Ghafran & O'Sullivan, 2013). In the presence of all
these personal benefits, Arthur Anderson did not feel it necessary to ask for partnership
clarification while verifying the financial statements. It was the acquisition on the auditors of
Arthur Anderson that they destroyed the crucial audit documents of the company. All these
aspects indicate towards the fact that Arthur Anderson did not adhere to the required audit
regulations and standards while auditing the financial statements of Enron (Swanquist &
Whited, 2015).
Audit Quality and Needed Steps by the Auditors
In auditing, the absence of globally recognized definition of audit quality can be
seen. However, when the auditors have the needed professional scepticism and conduct the
audit operations as per the required standards and regulations, it can be considered that the
quality audit has been conducted. There are certain other requirements of quality audit

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such as knowledge about the industry of the audit client, nature as well as degree of audit
and others (Gul, Wu & Yang, 2013).
It can be seen from the statement of Greg Medcraft that there are chances where
Australia might meet the collapses like Enron in case there is not any initiative for enhancing
the auditing standard by the big four auditing firms; they are PwC, Deloitte, KPMG and E&Y.
He has warned Australia to encounter the danger of another financial crisis in case these
firms do not conduct proper audit of the corporate accounts (abc.net.au, 2019).
In case the auditors of these big four audit firms fail to address the above-discussed
issues o urged basis, Australia might witness corporate collapse like Enron. Hence, the most
urgent requirement for the auditors is to perform the necessary audit procedure on efficient
basis after acquiring sufficient assurance on the fact that the financial statements are free
from material misstatements. According to Section 2 of APES 110, it is needed for the
auditors to provide sufficient assurance that the financial statements provide true and fair
overview of the company’s financial standing (apesb.org.au, 2018). According to the
statements of Greg Medcraft, auditing failure at the time of financial crisis contributed
towards the collapse of Enron. For this reason, it is needed for the auditors to be
responsible at the time to conduct the audit of the financial reports with the aim to provide
the key stakeholders with the needed financial information (abc.net.au, 2019).
The news article shows the collection of key audit samples of the big four audit firms
for the 18 months until December by ASIC (abc.net.au, 2019). The inspection of ASIC shows
the failure of the big four audit companies to provide sufficient assurance in 23% cases on
the fact that the financial reports do not have material misstatements. The main reason for
this failure is the lack of scepticism from the auditors and lack of ability to deal with the

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puzzling audit situations. This aspect has the potential to turn out to be worse in the future
(Glover & Prawitt, 2014).
For example, accounting fraud was majorly responsible for the collapse of Enron in
2002 and it contributed towards the deterioration of Arthur Anderson due to their immense
involvement in the whole corporate scandal. In Australia, after ASIC raised their disquiet
related to the asset valuation in financial reports, certain companies like Seven West Media
and Nine Entertainment did write down their asset value in the year 2016 (abc.net.au,
2019).
Greg Medcraft mentioned the fact that ASIC conducted 7000 observation along with
several investigations like more than thousand (abc.net.au, 2019). After these inspections,
they restricted 600 companies from operation, provided order to imprisonment to more
than 80 company staffs and $1.3 million was returned to the investors with six years. In
addition, the federal government of Australia ordered the company individuals to complete
their unfinished tasks. They forced criminal charges in the place of civil charges; and both
the government and financial regulatory board supported these recommendations. Hence,
it is needed to maintain the audit quality for the mitigation of audit independence threat or
bring them down under the danger level with the help of required safeguards (Wolfe,
Christensen & Vandervelde, 2014).
The statement of Greg Medcraft has made it clear that when the business
organizations have very few individuals with the needed knowledge, skills and experience to
conduct audit procedures, the rotation of audit staffs and firms might not provide enough
safeguard and this rule can be observed in the Section 290.155 of APES 110 (apesb.org.au,
2018). However, in case the sovereign controllers have provided an immunity to the audit

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partners for the rotation of audit staffs and firms, it becomes possible for the audit firms to
remain as a key audit partner for more than seven years. However, the necessity of
alternative safeguards like independent external review need to be there.
In addition, according to Section 100.1 of APES 110, it is needed for an auditor to
conduct audit in such a manner so that the best interest of the public can be guaranteed. In
addition, Section 100.2(c) of APES 110 states that it is needed to have safeguards for the
eradication or minimization of the audit threat to the safe level (apesb.org.au, 2018). More
specifically, the application of safeguard can be seen when the audit threats cross the safe
level due to the breach of fundamental and ethical principles of auditing.
On the basis of the statement of Greg Medcraft, it can be observed that it is
promising for avoiding another major financial crisis in case the Australian auditors become
responsible in maintaining professional competence and due care (abc.net.au, 2019). For
this purpose, it is needed for the auditors to possess the required skills, knowledge and
experience that would provide them with major backing to hold capable relationship
between the audit firms and audit clients. Section 100.5(d) of APES 110 indicates towards
the responsibility of the auditors to maintain privacy of the clients’ business information
obtained at the time of providing the professional services (apesb.org.au, 2018). Finally, the
auditors are needed to comply with the required regulations and standards of auditing at
the time to provide the auditing services.
Conclusion
In conclusion, it can be said that Coca-Cola Amatil has different groups of key
stakeholders who use the financial information of the company for various decision-making
purposes and hence, the presence of material misstatements lead to improper decision-

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making of those stakeholder groups. After that, the consideration of the concepts of auditor
independence and whistleblowing states that both these requirements are needed for the
companies in maintaining the ethical adherence of the companies. Various codes of APES
110 are crucial aspects in this case. As per the discussion of the report, the Australian
auditors can learn many lessons from the Enron Scandal like the use of independent
oversight for strengthening auditing, incentives for improvements in auditing, internal
control auditing, cordial relationship between audit committee and auditors and others.
Lastly, in reply of the warning of Greg Medcraft related to the occurrence of financial crisis
and Enron scandal, the report states that the auditors are needed to comply with the
required ethical and auditing standards to avoid these aspects.

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