Auditor Independence and Disclaimer of Opinion

The assignment examines the critical relationship between auditor independence and the issuance of an audit opinion. A specific scenario is presented where directors' assumption about the fair value of land and buildings poses a significant challenge to the auditor's ability to conduct a complete and accurate examination. This situation highlights the potential for auditor independence to be compromised when management's assumptions limit the scope of the audit, ultimately leading to a disclaimer of opinion.

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

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Answer to Question 1
Requirement [a]
From the provided situation, it can be seen that Berowra Accountants are providing the
guarantee of tax refund to their client thorough special advertisement. In this case, it is required
to know the concept of tax refund. Tax return refers to the difference between tax paid and tax
owed. More specifically, companies can get tax refund when the amount of tax liability of the
companies is less than tax paid. Whether a company will get tax refund or not totally depends on
the income, profit and tax expenses of the companies (Galit and Metaban 2012). It is not possible
for the auditors to make the guarantee of tax refund. On the other hand, the main responsibility
of the auditors is to examine the financial accounting of the companies in order to find material
misstatement and to do compliance check. Thus, it would be non-audit service in case of tax
refund. For this reason, as per APES 110 Code of Ethics for Professional Accountants, Section
130, this act of Berowra Accountants has breached the principle of Professional Competence and
Due Care (Han Fan, Woodbine and Cheng 2013). As per this act, an auditor can make client by
knowing the limitations of the professions and Berowra Accountants has failed to do so.
Requirement [b]
According to the provided case study, Jamie Harvey, an auditor of a charter accounting
firm has been asked to be the treasurer of the local club. In addition, Jamie Harvey only does the
audit of large public corporations. It needs to be mentioned that athletic clubs are considered as
not-for-profit societies. According to APES 110 Professional Appointment, Section 210, at the
time of accepting a new client appointment, the auditors are required to determine whether the
acceptance of the appointment would affect the compliance of fundamental ethical principles of
audit (Ottaway 2014). In this case, if the auditor accepts the proposal to be the treasurer, there

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would not be any breach of ethical principles and there are certain reasons. First, Jamie Harvey is
the auditor of large public corporations and there is not any connection between the works of the
club and large companies. Second, any fundamental ethical principle will not be affected in case
of the appointment in not-for-profit organizations (Kuan 2014). For all these reasons, there will
not be any ethical issues.
Requirement [c]
In the provided case, there is a situation where the payment of the auditor that is the
Pymble Accountants is dependent on the audit opinion that needs to be appropriate to the audit
client, Monlec Ltd. It implies that Monlec Ltd is demanding for favorable audit report from the
auditors. In this context, it needs to be mentioned that auditors are the representative of the
stakeholders and investors, not the companies. According to APES 110 Principle of Objectivity,
Section 120, the auditors should not compromise their business or professional judgment for any
kind of biasness, conflict of interest or any kind of influence (Athanasiou 2014). It implies that
the judgment of the auditors should not be affected with any kind of influence or biasness. In
case of the provided situation, in case the auditor provides an audit report that is favorable for
Monlec Ltd, then there will be a breach of objectivity principle of auditing. There will not be any
breach of auditing ethical principle if the auditors do not provide a biased audit opinion (Trung
2015).
Requirement [d]
In the provided case, it can be seen that Winton Accountants has provided all the audit
reports and papers of Motoring Services to Chadwick Chartered Accountants. Chadwick
Chartered Accountants have the job of reviewing the audit quality of Winton Accountants. This
situation indicates that Chadwick Chartered Accountants have to perform different kinds of tests

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and processes to check the audit quality of Winton Accountants. APES 110 Principles of
Confidentiality, Section 140 state that auditors have the professional obligation to maintain the
confidentiality of the information acquired about the auditing clients (Athanasiou 2014). It
implies that the auditors cannot disclose the acquired information about the audit clients to any
third party. In the provided situation, it can be seen that Winton Accountants have disclosed all
the confidential information about Motoring Services to Chadwick Chartered Accountants by
providing them all the audit papers (Carey, Monroe and Shailer 2014). Thus, Winton
Accountants have breached the principles of confidentiality in auditing with their action.
Answer to Question 2
Requirement [a]
From the provided case, it can be observed that Thornleigh Accountants have sent Jane
Davis in the place of Leona Ng to complete the audit of Jenkins Ltd due to the illness of Leona.
Now, Thornleigh Accountants is intending to include Jane Davis in the audit team to conduct the
audit of Jenkins Ltd from mid July. This particular situation develops the threat of audit
independence for Thornleigh Accountants. According to APES 110, Self-review Threat, Section
100.12, a member of an audit team does not have the right to use the results of a previous audit
judgment made by another audit members of the same audit team (DeFond and Zhang 2014). In
addition, it also states that the results of any previous audit judgment by any member of the same
audit company cannot be used. The same principle is also applicable for Thornleigh Accountants
as the company is planning to use the audit judgment of Jane Davis as she has been the accounts
manager of Jenkins Ltd and she has the knowledge about the accounts of the company. Thus,

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self-review threat of auditor’s independence will be raised in case Thornleigh Accountants
includes Jane Davis in the audit team.
Requirement [b]
From the provided situation, it can be seen that the John Darrow is responsible to conduct
the audit operations of Winmalee Ltd. Winmalee Ltd has presented to John all the accounting
paper copies including accounting standards and computer files in order to support their
valuation of intangible assets. In this context, it needs to be mentioned that it is the responsibility
of the auditors to obtain conclusive audit evidences by examining different types of financial
accounts of the audit clients and the auditors are not supposed to consider any papers provided
by the audit client. In the provided situation, the auditors can feel pressured by the audit client in
order to agree with the judgment of audit client. In addition, by providing these papers,
Winmalee Ltd can create indirectly create pressure on John to deliver their favorable audit
report. Thus, as per APES 110, Section 200.8, this situation can create Intimidation Threat of
auditor’s independence (Ojo 2013).
Requirement [c]
From the provided case study, it can be seen that the chocolate company has invited the
auditors to visit the second chocolate show and also invited them in the social club of the
company. It needs to be mentioned that the auditors should not involve any kind of entertainment
activities with the audit clients. According to APES 110, Self-interest Threat, Section 100.12,
there will be a threat of auditor’s independence in case any kind of financial or non-financial
interest of the auditors influence the audit opinion (Deumes et al. 2012). In the provided case, it
can be observed that the chocolate company may be trying to influence the auditors by inviting
them in the entertainment activities as the motive can be to get favorable audit opinion. Thus, in

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case, the auditors accept the invitation of the company to attend the social club, they would
create the self-interest threat of auditor’s independence.
Answer to Question 3
Requirement [a]
The main responsibility of the auditors is to examine the financial statements of the
companies in order to ensure that the financial statements of the companies are free from
material misstatements and they have been prepared by complying with all necessary
regulations. In addition, auditors do not have the responsibility to comment on the financial
position of the companies if there is not any kind of fraud. In case of Connor Company, it can be
seen that the firm is heavily dependent on bank overdraft to pay their loans, as they do not have
any other finance option left. In addition, the bank wants repayment within one month. It shows
the weak financial condition of Connor Company. However, this aspect has not created any
effect on the materiality. The auditor has not encountered any material misstatement in any of the
financial statements of Connor Company. It implies that the Connor Company has not
manipulated any of their financial statements to hide their weak debt-paying condition. Thus, the
auditor will issue Unqualified Audit Opinion for Connor Company (Tsipouridou and Spathis
2014).
Requirement [b]
It is the responsibility of the companies to prepare and present their financial statements
based on the standards of generally accepted accounting principles. In addition, companies are
required to comply with the accounting regulations of the country in which they are operating. In
the provided situation, it can be seen that the company is supposed to follow FIFO method for

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the valuation of inventory, but they are following LIFO method as their parent company of
America uses it. For this reason, the differential effect between the adoption of FIFO and LIFO
has affected the valuation of inventory that contributes to material misstatement. Thus, in this
particular area, the auditor has every right to issues adverse opinion, as there are both compliance
issue and material misstatement. However, except inventory, there is not any sign of material
misstatement in any of the financial statement of the company and there is not any compliance
issue. For this reason, the auditor will issue Qualified Audit Opinion. Qualified audit opinion is
almost similar to unqualified audit opinion; but, in qualified audit opinion, the auditor has to add
another paragraph that will highlight the reason for which the report is not unqualified
(Rahimian, Tavakolnia and Karamlou 2014).
Requirement [c]
It is required for the companies to do the valuation of their fixed assets like plant,
machinery, land, building and others on a regular basis due to the change in market price. In case
of Victorian Manufacturing Company, it can be observed that they have not done the valuation
of their factory in Melbourne for last five years as the directors think there is not any change in
the market value. Thus, the directors are taking a major assumption that may not be appropriate
and can create a major material misstatement. At the time of conducting the audit operations, the
auditors need the current fair value of land and buildings and in the absence of this, the auditors
will not be able to provide correct audit opinion as it limits their examination process. For this
reason, the auditor will issue Disclaimer of Opinion, as they are unable to complete the accurate
audit report (Kachelmeier, Schmidt and Valentine 2016).

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References
Athanasiou, A., 2014. Avoiding client persuasion. Taxation in Australia, 48(10), p.601.
Athanasiou, A., 2014. Boy, you're gonna carry that weight a long time!. Taxation in
Australia, 49(2), p.106.
Carey, P.J., Monroe, G.S. and Shailer, G., 2014. Review of Post‐CLERP 9 Australian Auditor
Independence Research. Australian Accounting Review, 24(4), pp.370-380.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting
and Economics, 58(2), pp.275-326.
Deumes, R., Schelleman, C., Vander Bauwhede, H. and Vanstraelen, A., 2012. Audit firm
governance: Do transparency reports reveal audit quality?. Auditing: A Journal of Practice &
Theory, 31(4), pp.193-214.
Galit, S.H. and Sorbe, T., Metabank, 2012. Computerized extension of credit to existing demand
deposit accounts, prepaid cards and lines of credit based on expected tax refund proceeds,
associated systems and computer program products. U.S. Patent 8,090,649.
Han Fan, Y., Woodbine, G. and Cheng, W., 2013. A study of Australian and Chinese
accountants’ attitudes towards independence issues and the impact on ethical judgements. Asian
Review of Accounting, 21(3), pp.205-222.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.

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Kuan, K.T.C., 2014. Auditor independence: an analysis of the adequacy of selected provisions in
CLERP 9 (Doctoral dissertation, Queensland University of Technology).
Ojo, M., 2013. Audits, audit quality and signalling mechanisms: concentrated ownership
structures.
Ottaway, J., 2014. IMPROVING AUDITOR INDEPENDENCE IN AUSTRALIA: IS
‘MANDATORY AUDIT FIRM ROTATION’THE BEST OPTION?.
RAHIMIAN, N., TAVAKOLNIA, E. and KARAMLOU, M., 2014. Qualified Audit Opinion and
Debt Maturity Structure.
Trung, N.K., 2015. Ethics Education In The University. International Journal of Scientific &
Technology Research, 4(8), pp.5-10.
Tsipouridou, M. and Spathis, C., 2014, March. Audit opinion and earnings management:
Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.