Auditor's Role and Professional Skepticism

The provided document is a solved assignment that delves into the significance of auditors' roles, particularly their responsibility to exhibit professional skepticism. It examines how auditors' skepticism affects audit quality, highlighting the importance of this trait in ensuring accurate financial statements and preventing corporate corruption. The assignment also touches upon internal audits as a source of ethical behavior, efficiency, and effectiveness in work units.

Running head: AUDITING AND RISK ASSURANCE
Auditing and Risk Assurance
Name of the Student
Name of the University
Authors Note
Course ID

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Introduction:
The auditing standard ASA 240 is associated with the responsibilities of the auditor
associated to fraud in audit of a financial statement. Particularly, the scope of auditing
standard expands on ASA 315 and ASA 330 in respect to risk of misstatement because of
fraud. Misstatement in financial statement might arise either because of fraud or error (Aicpa
2017). The distinctive factor amid the fraud and error is whether there is underlying action
which lead to misstatement of the financial statement is deliberate or not deliberate.
According to the Australian auditing standard fraud is regarded as the wider concept. The
auditor is generally concerned with the fraud which causes material misstatement in the
financial statement. Even though auditor might suspect or in rare circumstances recognize
fraud the auditor does not make the lawful determination of whether the fraud has eventually
happened.
The primary accountability for preventing and detecting fraud relies on those that are
charged with the governance and management of organization (Li, Simunic and Ye 2017). It
is vital for the management to place a high stress on reducing the opportunities of reducing
fraud and deterring fraud that may persuade an invidious to commit fraud due to the
probability of detecting and punishing. The auditor enters much expanded ground to detect
the fraud.
Auditors Responsibility:
An auditor performing the work of audit in compliance with the ASA is accountable
for attaining sufficient reassurance that the financial statement that are taken as the whole is
free from material misstatement originating from fraud or error (Bozkurt 2014). Because of
the inherent disadvantages of audit there are risks that are unavoidable since some of the

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material misstatement of financial statement should not be detected, even though the audit is
sufficiently planned and executed in compliance with Australian auditing standards.
The auditor is responsible for assessing the correctness of the accounting policies used
and appropriateness of the accounting estimations disclosures that are made by the directors.
The auditor is accountable for identifying and evaluating the risk of material misstatement
relating to the financial statement due to error and fraud and conduct an audit procedure that
are responsive to the risk.
The auditor is accountable for assessing the overall demonstration, construction and
content of the financial report along with the disclosure whether the financial statement
provides an underlying evidence of transactions that attains fair presentation (Shah 2017). At
the time of obtaining the reasonable assurance the auditor accountable for upholding
professional skepticism during the audit. The auditor is responsible for communicating with
the directors concerning the matters, prearranged scope and timing of audit with significant
findings from audit. This comprises of identifying the significant deficiencies in the internal
control which the auditor is required to identify during the audit.
Auditor failure in detecting and reporting fraud in ABC Learning:
In context of the current case study of ABC learning an evidence of overstatement of
revenues were noticed. In context of the revenues it is held that the auditor of ABC has failed
to derive sufficient and appropriate audit evidence for numerous fee revenue (Kassem and
Higson 2016). This ultimately resulted in significant amount of material overstatement of the
ABC revenue. Furthermore, the items originating from the provision of childcare services
were erroneously categorized since the revenues resulted in overstatement of the ABC
revenues.

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The audit report of ABC learning suggests that there was incorrect treatment of the
development revenues. The ASIC notes that the revenues transaction was not considered as
revenue derived through the provision of childcare services (Ma’Ayan and Carmeli 2016).
On classifying the normal revenues as the transaction the users of the monetary reports
enabled them to consider developer’s fees as the recurring revenues that originated from the
provision of child care services. Therefore, any kind of attempt made to value the childcare
centres were useless. Evidences from the audit report suggest that the revenues were not
disclosed in a manner which clearly indicated that were recurring and resulting from the
provision of child care services. The critical assessment suggested that payment formed the
part of scheme that was artificially designed to inflate the profits (Fazli et al. 2014). The
auditor was unsuccessful in obtaining the adequate audit evidences in respect of the accurate
bookkeeping treatment for numerous fees which resulted in significant amount of material
misstatement of the ABC proceeds.
Among the other auditing issues surrounded the ABC learning was that the auditor
has failed to get the adequate evidences to enable a sensible knowledgeable auditor to
determine that ABC was a going concern.
Requirements of Professional skepticism:
At the time of getting reasonable assurance the auditor is required to maintain the
professional skepticism all through the audit. Fundamentally, ISA 200 necessitates the use of
professional skepticism as the medium of improving the ability of the auditor to recognize the
risk of material misstatement and respond to the risk recognized (Soh and Martinov-Bennie
2015). Professional skepticism is closely associated with the essential ethical deliberations of
the auditor fairness and liberation. Professional skepticism is associated with the
implementation of professional judgement by the auditor. If an audit is conducted without

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using the professional skepticism then it may not result in high quality audit. Consequently,
implementing the professional skepticism must assist in assuring that the auditor does not
overlook the unfamiliar circumstances or undertake incorrect assumptions at the time of
ascertaining the audit response.
As the part of audit procedure in compliance with the Australian auditing standard the
auditor is required to exercise proficient decision and maintain the professional skepticism all
through the audit procedure. As the part of audit the auditor is required to make accounting
estimates (Pitt 2014). The accounting estimates requirements include fair valuation of
accounting estimations. This comprises of noteworthy assumptions made by management in
establishing accounting estimates and reviewing the decisions that are made by the managers
for management in creating an accounting estimates.
Another requirement of professional skepticism is that the auditor must review the
management’s assessment of going concern and whether the plans of management are
feasible or not. This is especially vital in the circumstances where there prevails significant
amount of doubt over the capability of the organization to continue as the going concern
(Klassen, Lisowsky and Mescall 2015). The auditor on the other hand are under the
obligation of fulfilling the requirements of related party relations and disclosure. For an
auditor it may be difficult in getting the information of the related parties since the
information might be confined to the management meaning for which the auditor might have
to remain dependent management to recognize all the related parties.
The auditor is required to remain sceptical at the time of assessing the business
underlying principle behind the related party’s transaction. Furthermore, the professional
skepticism requirements of the auditor also include paying considerations on laws and
regulations (Bowlin, Hobson and Piercey 2015). The auditor is required to remain alert all

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through the audit process for reflecting that there may be instances of suspected non-
compliance with rules and regulations.
Unless it is found that the auditor has the sufficient purpose to believe the conflictions
the auditor might accept the records and documents that are genuine. If there are situations
that forces the auditor to believe that the document might not be authentic or the conditions in
the document have been altered but not revealed to the auditor (Quadackers, Groot and
Wright 2014). Where the responses to the enquiries of the management or the person that are
charged with the governance are not consistent then the auditor should investigate the
inconsistencies.
Auditors failure in applying Professional Skepticism:
Auditors are regarded as the vital gatekeepers who are dependent upon to offer
assurance and market confidence in the quality of the monetary statement. The ASIC
constantly place their focus on auditor’s importance for implementing professional
skepticism and getting the sufficient audit evidence to assist their conclusions (Cohen, Dalton
and Harp 2014). It is necessary that auditors implement correct skills, experience and
skepticism in recognizing and responding to the risks by obtaining audit evidence and
judging the areas as going concern. In context of ABC learning it is understood that the
auditor failed to sufficiently perform his duties as auditor. The auditor failed to obtain
suitable evidence of audit relating to appropriate accounting treatment for numerous fees that
resulted in overstatement of ABC revenue.
The auditor failed to classify the items of income. This resulted in consequences that
items from the provision of childcare services were not correctly categorized as revenue and
led to overstatement of ABC revenue. The auditor further failed to enable that ABC was the
going concern and lacked professional skepticism in supporting his opinion that the financial

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report of ABC was free from material misstatement (Brazel et al. 2016). The auditor failed to
create audit procedure to deal with the evaluated risks and failed to adequately document the
testing that was undertaken relating to fraud risk. The auditor failed to use the professional
judgement and lacked professional skepticism while auditing ABC learning financial report.
Ethical issues contributed to ABC Downfall:
As evident the code of ethics for professional accountants lay down the ethical
requirements for professional accountants. To act in the interest of public a professional
accountant should observe and comply with the ethical requirements. As evident in the
current case study of ABC learning the major reason that contributed to the collapse of ABC
learning was the ethical issues (Klein 2015). The chief ethical issues led to the downfall of
the ABC learning was the lower payment of wages to the employees in order to incur lower
cost and more amount of profits that enables them to attain the competitive advantage in the
corporate world. This misstatement in the financial report by the auditors is regarded as one
of the major ethical issues.
Section 110 of the code of ethics requires an accountant to follow the principles of
integrity in order to impose the obligation on all the professional accountants to act in a
straight forward manner (Press and Woodrow 2018). Integrity also refers to the fair dealing
and truthfulness. To capture the market, share and gain more profit ABC learning gave their
employees a lower rate of wages and was found to below the Australian standards. The
accountants of ABC failed to discharge their obligation with integrity and provided
inappropriate accounting reports relating to cash flow and business model.

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Another ethical issue that contributed to the fall of the ABC learning was the
significant ethical and moral lapse in the share that was floated by the company when the
CEO engaged in the related party transaction. The ethical issue in the case of ABC learning
revolves around the deception to the shareholders as the shareholders have invested money
on false pretence. The management of the ABC learning failed to act in compliance with the
section 130 related to professional competency and due diligence (Ma’Ayan and Carmeli
2016). The maintenance professional competency and diligence encompassed the
responsibility of acting in agreement with the requirements of obligation carefully and on
timely manner. Unearthing claims arising out of the insufficient revelation, related party
transactions and mis-administration have contributed to the ethical downfall of the
organization.
Another ethical reason that was responsible for the downfall of the ABC learning was
the lack of objectivity. Section 120 of the code of ethics provides that the accountants must
not compromise their professional or business judgement because of the unwarranted effect
on others (Pitt 2014). The accounting misstatement of financial reports rotates around the
deceiving the shareholders regarding the overall position of the organization on false pretence
have evidently contributed to the collapse of the ABC learning. The accountants did not
provide true financial and position of the company to the stakeholders. This enable the
company to remain exposed to the situations impair objectivity.
Conclusion:
As evident from the study above the major reason that contributed to ABC Learning
downfall was the financial discrepancies. The in appropriate financial management such as
high debts and abnormal acquisition attributed to main discrepancies in the financial
information. The inflated value of the assets and increased valuation offered wrong
information to the shareholders that was not approved by the AASB.

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The auditor’s failure in reflecting the company as the going concern with lack of
professional skepticism in responding to accounting risk contributed to the company down.
Conclusively the underlying fact states that management of company was ineffective in
controlling the fortunes of ABC learning.

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Reference List:
AICPA, 2017. Statement on Auditing Standards, Number 126: The Auditor's Consideration
of an Entity's Ability to Continue as a Going Concern (No. 126). John Wiley & Sons.
Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation,
professional skepticism, and interactions with managers on audit quality. The Accounting
Review, 90(4), pp.1363-1393.
Bozkurt, O., 2014. The Effect of Internal Audit Procedures and Auditors’ Responsibilities on
the Independent Audit Decision. Research Journal of Finance and Accounting, 5(1), pp.26-
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Brazel, J.F., Jackson, S.B., Schaefer, T.J. and Stewart, B.W., 2016. The outcome effect and
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