Auditing Ethics and Independence Challenges

This assignment delves into the crucial topic of auditor independence, examining the various threats that can compromise it, such as financial interest, self-review threat, and undue influence from management. It discusses the importance of safeguards implemented by professional bodies and accounting firms to mitigate these threats. The assignment also explores the ethical considerations surrounding auditor independence, emphasizing the need for integrity, objectivity, and professional skepticism. Furthermore, it analyzes the impact of auditor independence on audit quality and the reliability of financial reporting.

Running head: Auditing & Assurance
Auditing & Assurance

Auditing & Assurance 1
Table of Contents
Answer to Q1(a)..........................................................................................................................................1
Answer to Q1(b)..........................................................................................................................................1
Answer to Q1(c)...........................................................................................................................................1
Answer to Q1(d)..........................................................................................................................................2
Answer to Q2(a)..........................................................................................................................................2
Answer to Q2.(b).........................................................................................................................................2
Answer to Q2(c)...........................................................................................................................................3
Answer to Q3(a)..........................................................................................................................................3
Answer to Q3(b)..........................................................................................................................................3
Answer to Q3(c)...........................................................................................................................................4
References...................................................................................................................................................5

Auditing & Assurance 2
Answer to Q1(a).
As per section 250(1), ‘Marketing Professional Services’ of the International Ethics Standards
Board for Accountants, if a ‘Professional Accountant in Public Practice’ requests for obtaining
work through advertising his expertise and qualifications, there is a possibility of possible risks
to conformity with the basic principles.
According to section 250(2), the professional accountant shall not degrade his /her profession
while advertising his expertise or qualification. The accountant should be fair and sincere in his
dealings. The accountant shall not make ‘a mountain out of a molehill’ for his services,
qualifications or expertise.
So, in this case, the Berowra Accountants are advertising a special in the local paper that they
guarantee to provide their clients with a tax refund .It is a wrong practice to guarantee tax
refunds. They can plan the tax savings and tax planning. So, there is a violation of section 250
Marketing services in the mentioned case (International Ethics Standards Board for Accountants,
2016).
Answer to Q1(b).
As per section 210(1), Professional Appointment, of the International Ethics Standards Board for
Accountants, the professional accountant in public practice shall evaluate the prospective client
before accepting the offer to provide expertise and services. The risk of non-compliance of the
basic principles may arise due to ambiguous issues pertaining to the client.
According to section 210(4), the professional accountant shall gain full knowledge and
comprehend the client fully. He/she should also evaluate the owners, managerial personnel,
governance and commercial activities. The accountant should secure the client’s assurance
regarding the improvement of the corporate governance practices and internal control
procedures.
According to section 220(1), Conflicts of Interest, of International Ethics Standards Board for
Accountants, a professional accountant shall recognize the situations which could pose a threat to
Conflicts of Interest.

Auditing & Assurance 3
So, in this case, Jamie Harvey is an auditor for a chartered accounting firm has been offered to be
the treasurer of the local athletics club .It is against the ethical principles of section 210 and 220.
Hence, Jamie can’t be the treasurer of the local athletics club (Glover & Prawitt, 2014).
Answer toQ1(c).
According to section 290(1) Independence –Assurance Engagements of International Ethics
Standards Board for Accountants, the professional accountants shall be independent of their
clients. So, in the given case the Pymble Accountants has carried the audit of Monlee Ltd. and
the final payments are dependent upon receiving the appropriate report (PWC, 2013).
There is a violation of the ethical principle under section 290 as it is unethical on the client’s side
to influence the results of the analysis of the financial statement. So, the auditors should decline
such offer from the client’s side (International Ethics Standards Board for Accountants, 2016).
Answer to Q1(d).
According to the section 230(1), Second Opinions of International Ethics Standards Board for
Accountant, if a professional accountant have been asked to deliver a second opinion on the
auditing and accounting matters, by or on behalf of the company which is not his/her client may
pose a threat to compliance of the basic principles. If the professional advice provided by the
latter accountant is not based on the same set of information which were made available to the
former, it may pose a threat to compliance with the auditing principles (Patrick, Vitalis &
Mdoom, 2017).
So, in this case, where Winton Accountants have submitted the working papers of audit of
Motoring Services Company after its completion to Chadwick Chartered Accountants for the
quality review of the audit work is against the ethical principle. According to section 230(2) of
International Ethics Standards Board for Accountants, they should first evaluate the probability
of any risks and implement the precautions to minimize them upto a significant level.

Auditing & Assurance 4
Answer to Q2(a).
Kaveh et al. suggests that accounting emphasizes on stating the facts and the consistency of the
financial statements in an impartial manner. Through Independence, the auditor states that he has
performed his task in an unprejudiced way.
The auditor should express an honest and fair opinion pertaining to the financial statements.
He /she should not be affected from the influence of the client entity. His judgment shall not be
prejudiced by any relationship between them. In the given case, the auditors are facing ‘Self
Review Threat’ in which one of the members of the auditor team Jane Davis has been the past
employee of the client entity. So, she should not be appointed as a part of the audit team. It
would affect the independence of the auditing team (Nawaiseh & Alnawaiseh , 2015).
Answer to Q2.(b)
As per CPA (2014) the ‘Management Threat’ occurs when the audit firm performs the work
regarding the judgments and decision making which should be the accountability of the
management.
In the given case, John Darrow, the Audit Manager of Darrow Associates Accountants, has
received the accounts of Winmalee Ltd. which has the optimistic approach of the valuation of
development expenditure capitalized in the intangible assets. It might have an impact on the
firm’s performance. The management should adopt the pessimistic approach while assessing the
value of the development expenditure capitalized in the intangible assets. It is the management’s
duty to adopt the right approach while valuing the development expenditure.
Also the auditors are facing the threat to integrity as per section 110 ‘Integrity’ of the ICAEW
Code of Ethics. Integrity implies not only in adopting fair dealings but also fairly communicating
with the client entity while conducting the audit (ICAEW, 2013).
So, the auditors are facing the ‘Management Threat’ as well as ‘Threat to Integrity’.

Auditing & Assurance 5
Answer to Q2(c).
In the given case, the chocolate company invited the auditing firm to visit its seconds chocolate
shop where defective chocolates were sold at a discount and to join its social club, before the
completion of audit. This may result in ‘Self – Interest ‘Threat to the independence of auditors.
It occurs when the auditing firm or its members can take the undue advantage from the financial
interests or self- interest from the client. With regards to the mentioned case, the client entity is
trying to affect the independence of the auditors by offering discounted products and hospitality
so that they can produce ‘good report ‘of its financial statements. As a result, the auditors are
facing ‘Self- Interest Threat’ to their independence (Ali & Nesrine, 2015).
Answer to Q3(a).
As per Section 570 of the Auditing Standard ‘ASA 570 Going Concern’, the accountability of
the auditors is to assess whether the firm has the capacity to continue as a successful entity and
financial report should be prepared accordingly.
So, in the given case, as per ASA 570, the auditor would give a ‘Qualified Opinion’. As the
company is running short of funds to pay its debts and it has been asked by the bank to repay its
overdraft within a month. All the other attempts to obtain the funds have been failed. So, the
company is facing the threat to operate successfully in the near future (Auditing and Assurance
Standards Board, 2015).
Though the auditors have not found any substantial misstatements in its financial report but there
seems to be a threat to its existence. The auditors will mention the commissions made by the
company in the additional paragraphs and the reasons of their ‘Qualified Opinion’
(Wickramasingha &. Nanayakkara, 2015).
Answer to Q3(b).
In the given case, where the difference between LIFO and FIFO is calculated which has led to
material misstatements affecting the stock. The auditor shall produce an ‘Adverse Opinion’ in
this regard. As per Australian Auditing Standard ‘ASA 405 Evaluation of Misstatements
Identified during Audit’, the auditors shall form their view regarding the financial reports .They

Auditing & Assurance 6
must analyze whether the accounts are free from substantial mismanagements (Auditing and
Assurance Standards Board, 2015).
Answer to Q3(c).
In the given case, the factory located in Melbourne was valued five years ago. The same amount
is included in the balance sheet, assuming that the market values have remained same during the
past five years.
In this case, the auditors will give a ‘Qualified Opinion’ regarding the financial reports of the
Victorian Manufacturing company. They will mention their qualifications in the extra paragraph
(PCAOB, 2017).

Auditing & Assurance 7
References
Ali , O. M. & Nesrine, A. (2015) Factors Affecting Auditor Independence in Tunisia: The
Perceptions of Financial Analysts. Journal of Finance and Accounting. 3(3), pp.42-49.
Auditing and Assurance Standards Board (2015) Auditing Standard ASA 450 Evaluation of
Misstatements Identified during the Audit [Online]. Available from:
http://www.auasb.gov.au/admin/file/content102/c3/ASA_450_Compiled_2015.pdf [Accessed 19th
January, 2018].
Auditing and Assurance Standards Board (2015) Auditing Standard ASA 570 Going Concern
[Online]. Available from:
http://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 15th January,
2018].
CPA (2014) Provision of accounting services to an audit client: Example of Threats and
Safeguards [Online]. Available from
http://www.cpaireland.ie/members/technical-resource/ethics/ethical-standards-for-auditors/
accounting-services-examples-of-threats-and-safeguards [Accessed 18th January, 2018].
Glover, S. M. & Prawitt, F.D. (2014) Enhancing Auditor Professional Skepticism: The
Professional Skepticism Continuum. Current Issues in Auditing. 8(2). pp.P1–P10.
ICAEW (2013) Integrity [Online]. Available from
https://www.icaew.com/en/technical/ethics/integrity [Accessed 19th January, 2018].
International Ethics Standards Board for Accountants (2016) Handbook of the Code of Ethics
for Professional Accountants. New York: International Ethics Standards Board for Accountants.
Kaveh, M., Khalili, M. , Ghorbani , A. & Soroush, M.( 2014) Professional Ethics in Accounting
and Auditing. World Essays Journal. 1(2),pp. 85-93.
Nawaiseh, M. A.L.AI. & Alnawaiseh, M.(2015) The Effects of the Threats on the Auditor’s
Independence. International Business Research. 8(8),pp.141-149.
Patrick, Z., Vitalis , K. & Mdoom, I.(2017) Effect of Auditor Independence on Audit Quality: A
Review of Literature. International Journal of Business and Management Invention. 6(3),
pp.51-59.

Auditing & Assurance 8
PCAOB (2017) AS 3105, Departures from Unqualified Opinions and Other Reporting
Circumstances [Online]. Available from https://pcaobus.org/Rulemaking/Docket034/2017-001-
auditors-report-final-rule.pdf [Accessed 19th January, 2018].
PWC (2013) Point of View [Online]. Available from https://www.pwc.com/gx/en/audit-
services/publications/assets/pwc-pointofview-mandatoryrotation.pdf [Accessed 19th January, 2018].
Wickramasingha, S.R.M. &. Nanayakkara, K.G.M. (2015) The External Auditor’s Opinions and
The Stakeholders’ Purposes: An Empirical Analysis in Sri Lanka. Kelaniya Journal of
Management.4 (1), pp. 31-49.