AUDITING ASSURANCE AND PRACTICE Auditing Assurance and Practice Name

Running head: AUDITING ASSURANCE AND PRACTICE
Auditing Assurance and Practice
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Executive Summary:
The report here will be performing a detailed analysis of the notions regarding the material
misstatement of the accounting information below the materiality level that changes the
company’s perception regarding the financial situations amid the stakeholders. The report
would be addressing the effect of material misstatement on the decision making ability of the
stakeholders. An analysis of Wesfarmers stakeholders would be performed to determine the
main risks that are faced by the stakeholders of company. Additionally, an analysis of Enron
scandal will be considered as well. Furthermore, the statement of Greg Medcraft would be
assessed to discuss the quality of audit that the professional accountants should be addressed.

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Table of Contents
Introduction:...............................................................................................................................3
Key Stakeholder Analysis of Woolworths:................................................................................3
Concepts of Independence and Whistleblowing:.......................................................................5
Lessons auditors can learn from Enron scandal and behaviour of Arthur Andersen:................6
Behaviour of Arthur Andersen:..................................................................................................8
Audit Quality and explanation relating to auditors need in addressing the waring noted by
Greg Medcraft:...........................................................................................................................9
Conclusion:..............................................................................................................................12
References:...............................................................................................................................13

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Introduction:
The report here will take into the account the concept of materiality misstatement in
the accounting information that changes the view of an organizations economic state of
affairs amid the stakeholders. In the process of auditing, the auditing evidences mainly
creates an influence on the degree and emphasises on the audit effort. Whereas the materiality
decision is related with the concept of tolerable degree of risks as well as the degree of
evidence that is necessary to create an opinion (Louwers et al. 2015). The concept of
materiality directly creates an impact on the conduct of audit with subsequent view that the
investing community are sceptical regarding its application.
The report would perform the key stakeholder analysis of the Wesfarmers and would
provide an explanation as how the vital stakeholders would be impacted if the material
misstatement is not identified adequately in the financial reports. The concepts of
independence and whistleblowing will be addressed with reference to APES 110 Code of
Ethics (Carson, Fargher and Zhang 2016). The instances of Enron scandal will be mentioned
and reference to APES 110 code of ethics for audit quality of professional accountants will be
discussed as well.
Key Stakeholder Analysis of Woolworths:
Wesfarmers have realised that it openly listens to its stakeholders as it is vital in
understanding their changing anticipations. Every division of Wesfarmers communicates with
its stakeholders in the most appropriate manner for its business by considering the needs of
its stakeholder groups (Sustainability.wesfarmers.com.au 2019). Based on the group level the
Wesfarmers takes into the account the interest of the wide range of stakeholders that is
ascertained by the actual or probable effect of its business on their interests.

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Consumers as the stakeholders of the company plays a vital role and hence
insufficient for the consumers that can be very detrimental for the growth of the company.
Wesfarmers has made heavy investment to provide its services through the online channels.
Wesfarmers has improved its optimism by playing a vital role in the success of the company.
At Wesfarmers every division obtains feedback from the stakeholders and later prioritises the
most material issues that is addressed based on the disclosure needed under the global
reporting initiative standards (Sustainability.wesfarmers.com.au 2019). The company
engages with the wide range of its stakeholders throughout the year and draws a report on
their feedback and other sources to successfully complete the procedure of materiality. There
are some of key risks that is posed to each of the identified stakeholders of the business are
given below;
Consumers: In some of the situation the degree of misstatement is regarded as the important
element to ascertain the materiality. If the material misstatement is not recognized adequately
or adjusted in relation to financial statement, then it may result in loss of reputations which
may adversely create an effect on the financial position of Wesfarmers.
Suppliers: Wesfarmers is committed towards the long-term consequences that not only
benefits its stakeholders and suppliers but also forms the normal and acceptable business
practices that contributes towards the innovation as well as long term sustainability practices
(Sustainability.wesfarmers.com.au 2019). The material misstatement might result in effect on
the debt covenants and other financial contractual arrangements with suppliers.
Communities: Wesfarmers have always believed that a strong business environment is
supported by the unified and comprehensive community surroundings. Financial
misstatement or non-disclosure of financial information may create an impact on the
regulatory and compliance requirements of Wesfarmers.

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Shareholders: Wesfarmers identifies the importance of giving its shareholders with the
access of daily information along with the ability of participating in the shareholder decision
of the business. If the risk of material misstatement at Wesfarmers is not addressed in a
proper way, the ratios that is used by the shareholders to determine the financial position of
Wesfarmers might give a misleading results relating regarding the cash flows and business
functions.
Concepts of Independence and Whistleblowing:
As per the section 290 of the APES 110 code of Ethics, the requirements independent
audit and review engagement that renders assurance engagements where the practicing
member of public states the concluding remarks on the historic financial performance
(Knechel and Salterio 2016). Additionally, as per section 291 of the APES 110 code of ethics
the requirements relating to assurance do not comprise of Audit and review engagement
relating to historical information that is reviewed under the APES 110 code of ethics
depending upon the assurance arrangements.
The concept of Independence is necessary in following the principles of integrity as
well objectivity. The independence of auditor is viewed as independence that relates to
internal and external auditor by the parties having financial interest in the business that is
under audit. The word independence requires objectivity and integrity in the auditing
procedure (Simnett, Carson and Vanstraelen 2016). The term independence requires the
auditor to independently carryout the work of audit freely and objectively.
The word independence involves independent mind that allows expression of
conclusion without any being effected by the influence of professional judgement. This
ultimately helps the auditors to act with objectivity and integrity for the purpose of
professional scepticism. For auditors, independence also comprises of the appearance

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(Fernandez-Feijoo, Romero and Ruiz 2016). For auditors avoiding the unwarranted situations
is very much sensible as the conversant third party may probably determine the weightage of
every factors or circumstances that include whether the audit members have complied with
the integrity and professional scepticism.
Whistleblowing on the other hand is referred as to some degree where the employee,
contractor or the supplier went beyond the normal management to report about the suspected
misconduct at work which comprises of narrating out the trusted matters. Whistleblowing can
be performed with the help of internal process which is created by the company or reporting
to the external body particularly the regulators or the external whistleblowing (Laing and Hoy
2018). Publicly disclosing the information to the media is usually deemed as whistleblowing
and those that are of any interest to the internal auditor with likely indication on the
controlling environment where the internal auditors is required to move beyond their
organization to enable the concerned individual to transact with the problems.
As per the statement made by Bradbury, Raftery and Scott (2018) internal audit
should not be held responsible for recognizing and preventing corrupt practices. Internal
auditors have the information that are very sensitive and subsequent to the company and has
noteworthy significances. This results in separation of auditors from other members of the
company. The information might relate to the exposure of frauds, threats, uncertainties and
misuse of power that acts as a threat to health and safety of the company.
Lessons auditors can learn from Enron scandal and behaviour of Arthur Andersen:
The case of Enron is viewed one of the largest fraudulent scandals across the world.
After the investigation of fraudulent activity, Enron ended up being bankrupt. The filing of
bankruptcy by Enron in November is regarded as the beginning of auditing corporate scandal
(Hoque and Pearson 2018). The failure of Enron is mainly because of the corrupt practices

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adopted by the senior. Enron scandal provided a clear lesson that accompanied some major
challenges that is presently faced by the auditors. The lesson that is learned from the case of
Enron is stated below;
Improper use of power: Inappropriate use of power may at certain occasion upset the
financial viability of the business. The executives that worked at Enron used their power
unfeelingly. The vice-chairman position was considered as the ejector seat as those that
acquired the position were subsequently removed upon addressing the issue (Kumar and
Sharma 2015). Misuse of power gave rise to financial problem for Enron. It has been noticed
several times that the managers have failed to understand that a new market was created by
the employees. The board members have failed to make use of accurate oversight and were
unable to challenge the decision of management.
Supervisory Approach: As evident a better quality audit work is useful in offering
incentives rather than threatening or punishing. There are large number of auditors and
corporate accounting firms that are extremely committed in maintaining integrity and
professionalism. Omission forms the matter of substance in helping the companies to identify
the weakness and strengthen their practices (De Paula 2016). Undertaking the supervisory
approach would have been helpful in excess of exemplified top management at Enron. With
respect to the supervisory approach until the auditing company or the individual auditor is
performing their duties in good faith and are willing to carry out the auditing work inside the
prescribed auditing standards, this would assist in enhancing the quality of audit by
recommending the adoption of disciplinary action.
Internal Control Auditing: Another lesson that can be learned is related to internal auditing
control procedures (Roy 2015). This is an area of special interest relating to reporting of
internal control requirements. Another area of learnings is restoring the confidence that is

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needed by the management and auditors to report regarding the effectiveness of the Enron’s
internal control environment over financial reporting.
The auditor-audit committee relation: Another area of learning in case of Enron is the
external accounting omission that cannot completely effective if the company was not
dedicated towards reasonable and precise financial disclosure. As a result, the relation amid
the company’s auditor and the independent audit committee is regarded vital element in the
work of audit.
Auditing as the worldwide profession: The decisive lesson learned from the scandal of
Enron is that audit is a worldwide profession (Kamaruddin et al. 2017). The scandal of Enron
stated that omission gave rise to difficult situation which comprised of likely conflict of
interest with laws and those working in other nations.
Irresponsible behaviour: At Enron the officials legitimately failed to take the necessary
actions that were required and also failed to consider the appropriate omission as well as the
failure of Enron to take the responsibility that led to ethical miscues of their company. The
CEO had already warned about the financial obscenities and some members of the board
were also failure in understanding the operations of the business. On numerous occasions the
managers at Enron left their employees on their own that resulted them in taking number of
possible means (Sin, Moroney and Strydom 2015). After the collapse of the business, none of
the senior members stepped forward to take the responsibility of collapse. Greed was the
main contributing factor that allured the managers and subordinates at Enron to wrong
doings. The financial report concealed the losses and the managers also adopted some tactics
that was designed to keep the price of stock increasingly high.

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Behaviour of Arthur Andersen:
Arthur Anderson is viewed among the world’s top five leading auditing firms that was
also the auditor of Enron. This means that the work of Arthur was to look into the accounts of
the business whether it reflect the correct financial position from the financial statements. As
evident, it is believed that Andersen may have stood in line of defence in the environment of
fraud and deception (Antipova 2016). Arguments associated to the conflicting interest was
directed towards Andersen as they acted Enron’s auditors and consultant. Andersen obtained
highest amount of fees from the auditing and consultation work from the company.
In the third quarter of 2001, when the instances of accounting irregularities were
reported, the regulators as well as media placed their emphasis on Andersen. The degree of
accounting errors as well as the role of Andersen attained the widespread attention. The
auditors at Enron represented an authoritative atmosphere for exploring the impact on the
auditor’s reputations relating to client market price and failure in audit (Adelopo 2016). The
most damaging effect on the reputation of Andersen was the admission that the employees
working in the company has destroyed the documents as well as the emails which was
associated to the audit engagements. On the whole, the destructive announcement has led to
an impact on the audit quality of Andersen as well as the reputational loss which resulted in
the negative impact on the market value of the company’s customers.
Audit Quality and explanation relating to auditors need in addressing the waring noted
by Greg Medcraft:
According to the statement of Gred Medcraft Australia might face the Enron type
collapse apart from the big four accounting firms to expressively enhance their audit standard
(Gustavson 2015). The Chairman of ASIC Gred Medcraft has warned that the poor quality of
audit practice adopted for the company accounts may play the role of canary in coal mine
until the occurrence of next financial crisis.

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As per the Gred Medcraft, another scandal similar to Enron may occur soon.
Nevertheless, Enron like scandal can be avoided by making sure that the auditors carryout
their work of audit and get the assurance that the financial reports is free from any kind of
material misstatements. According to Gred Medcraft, he has expressed his fear that he does
not has any trust in the financial information. In his statement he recalls that Enron’s
investigation invited the financial crisis in most of the areas of audit (Jones 2017). As per the
Gred Medcraft, he has specified that the degree of trust a community can have on the
financial report that is guaranteed by the auditors.
According to the statement of ASIC, samples obtained from the audits performed by
Deloitte and E&Y, KMPG and PWC during the last 18 months till the end of December 2018
reflected that 23% of the audit work did not provided any kind of rational assurance that the
books of accounts reflect true and fair view with not kind of error of omission (Krishnan,
G.V., Patatoukas and Wang 2018). As per the findings of the report it is understood that there
was the absence of scepticism and generally was short of challenging approach which was
confronted by the business. On being asked that whether the poor auditing played the role of
canary in the coal mine Gred Medcraft issued a warning that there was notable red flag and
with the passing of time the auditing scandal became worse.
The US based company Enron stunningly declined in the year 2002 in a scandal and
the company has planned the accounting fraud in an inventive way (Mubako and O'Donnell
2018). As a result, it contributed to the fall of Arthur Andersen since it was failure in
recognizing the monetary misstatement. As per the statement of Gred Medcraft, ASIC
conducted approximately 700 high intense survey and consisted of several investigations that
led to the imprisonment of around 80 people and banning more than 600 firms. The survey
also included a return that amounted to $1.3 billion for investors which ultimately stormed
into financial crisis.

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In the statement made by the Gred Medcraft, he has handed the list of some
unfinished business to the Federal Government and has also made his successor ready for the
upcoming year. As per Gred Medcraft, it would be not sufficient to impose civic penalties
because the government as well as the financial system have recognized the application of
key audit partners whose continuity is regarded important in occasional circumstances due to
the unexpected events that are beyond the control of company (Bucaro 2018). These
companies might be permitted an additional year in the audit team until the independence
threat is completely eliminated or reduced to an acceptable level by applying necessary
safeguards.
As per the statement of Gred Medcraft when an organisation has only limited
knowledgeable people and expertise to deal with the key audit partners in audit of public
entity then rotating the key audit partners may not be able to provide the company with
necessary safeguard. If the independent regulator, under the appropriate jurisdiction has been
provided with the exemption from the rotating the audit partner then under such
circumstances the independent regulator has provided with the necessary alternative
safeguards that should be applied for regular independent external review. One of the
differentiating mark in the audit profession is shouldering of responsibility and acting in the
interest of public. Consequently because of this, the accountability of the auditing member is
not to exclusively satisfy the need of the individual client and employer. At the time of acting
in the interest of the public the auditor is required to observe and comply with the APES 110
code of Ethics.
According to Gred Medcraft it is necessary to apply the safeguards related to the
elimination of threats and bringing down to a tolerable level (ABC News 2019). Safeguard
turns out to be vital element for the auditors because it helps in ascertaining the threat of
material misstatement and inform the third party to conclude that the auditing principles are

12AUDITING ASSURANCE AND PRACTICE
not compromised. Gred Medcraft also states that the another financial crisis may be avoided
if sufficient professional competency and care is maintained by the auditors with the
sufficient understanding as well as skills that are necessary to make sure that the relation
between the employer and clients is competent sufficient. Additionally, to respect the
confidentiality level for the information that is obtained from the business relationship, there
should be no disclosure of information to the third parties without any specific authorities
unless the legal or the professional right of duty to disclosure of information is made to the
third party.
Conclusion:
On arriving at the conclusion, the analysis of stakeholders performed for the
Wesfarmers suggest that the company is centrally committed towards maintaining the
stakeholders value as well as organization ethics to differentiate the business from the
competing firms is the market. The concept of Materiality creates an impact on the decision
making process of Wesfarmers and necessitates Wesfarmers to apply the relevant care in
giving an overall disclosure of the financial information for its stakeholders.
The scandal of Enron stated that the management has misused their power.
Furthermore, the corporate culture of Enron plays significantly contributed to its downfall.
The case of Enron is regarded as the biggest corporate scandal that spoiled the reputation of
corporate businesses. After the scandal there is an increasing level of awareness among the
executives relating to the accounting misstatement that are erroneous in order to avoid the
criminal charges.

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References:
ABC News. (2019). Poor auditing could be 'canary in the coal mine' for financial crisis:
ASIC. [online] Available at: https://www.abc.net.au/news/2017-11-03/asic-boss-concerned-
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Adelopo, I., 2016. Auditor Independence: Auditing, Corporate Governance and Market
Confidence. Routledge.
Antipova, T., 2016. Auditing for financial reporting. In Global Encyclopedia of Public
Administration, Public Policy, and Governance. Springer.
Bradbury, M.E., Raftery, A. and Scott, T., 2018. Knowledge spillover from other assurance
services. Journal of Contemporary Accounting & Economics, 14(1), pp.52-64.
Bucaro, A.C., 2018. Enhancing auditors' critical thinking in audits of complex
estimates. Accounting, Organizations and Society.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a
synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
De Paula, F.R.M., 2016. The principles of auditing a practical manual for students and
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Gustavson, M., 2015. Does good auditing generate quality of government?.
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Jones, P., 2017. Statistical sampling and risk analysis in auditing. Routledge.

14AUDITING ASSURANCE AND PRACTICE
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Gutiérrez, K.S.B. and Haro-Zea, K.L., 2017. Journal of Modern Accounting and
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Auditing, 19(3), pp.282-294.

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https://sustainability.wesfarmers.com.au/our-report/materiality-process/ [Accessed 22 Jan.
2019].
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