Auditing: Importance of Actual and Perceived Independence

This document provides insights into the importance of actual and perceived independence in auditing and how it affects the overall success of the audit program. It discusses the violations of confidentiality and independence principles in auditing and provides alternative actions for addressing them. The document also explores the steps and factors to consider before accepting an audit appointment. Additionally, it highlights the weaknesses in internal controls and their implications. Finally, it suggests tests to conduct for auditing the computer system and master file amendments.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Requirement a..............................................................................................................................2
Requirement b..............................................................................................................................2
Answer to Question 2......................................................................................................................3
Answer to Question 3......................................................................................................................5
Answer to Question 4......................................................................................................................6
Answer to Question 5......................................................................................................................8
Requirement a..............................................................................................................................8
Requirement b..............................................................................................................................9
References......................................................................................................................................10

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Answer to Question 1
Requirement a
Actual Independence – Actual independence is considered as the independence of the auditors
or the independence of mind. It is concerned with the state of mind of the auditors and ability of
the auditors in acting in specific situations. Actual independence is important for auditing since
auditors who have actual independence can make independent audit decisions. It is crucial for
the overall success of the audit program (Tepalagul and Lin 2015).
Perceived Independence – Perceived independence is what a third party would perceive about
the auditor as being independence so that the auditor can be perceived by others to be
independent. Perceived independence is considered as crucial for the auditors since the presence
of this independence diminishes the possibility for the auditors to have any obligation or interest
in the audit client which is a crucial success factor in audit (Carey, Monroe and Shailer 2014).
Requirement b
i. Bob is responsible for copying the confidential business information of Club Casino
while not providing the appropriate reference and it indicates the absence of proper
approval. This action of Bob violates the Confidentiality principle of auditing which
puts the obligation on the auditor not to disclose the confidential business information of
audit clients acquired in the absence of proper approval (apesb.org.au 2019). As an
alternative action, Bob should have requested the management of Club Casino for using
the information.
ii. Wendy performed the company secretarial duties in Ace Limited in spite of being their
audit engagement partner. As per APES 110, Section 290.147 and 290.148, the works of

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company secretary include administrative duties such as company management and
maintenance of many organizational records which create a close association between the
auditor and the audit client (apesb.org.au 2019). This can breach auditor’s Independence
and can create Self-Review and Advocacy threats. The alternative actions for Wendy
would be to refuse performing the company secretarial duties or to be removed from the
engagement team.
iii. The job of factory foreman includes the supervision of internal business environment of
the businesses and Leo’s responsibility is to test the internal control of cash payments
which has relation with the job of his father. According to APES 110, Section 290.127,
the presence of this personal relationship between Leo and his father can violate audit
Independence and can lead to Self-interest, Familiarity and Intimidation threat
(apesb.org.au 2019). The alternative action would be not to accept the engagement job in
the company by Leo.
iv. Chan & Associates accepts furniture as well as shareholding in an unlisted company
from Classic Reproduction Pty Limited against their due fees. As per APES 110, this
incident directly leads to the violation of auditor’s Independence by creating Self-
Interest threat. The alternative action would be not to accept these gifts against the due
audit fees (apesb.org.au 2019).
Answer to Question 2
According to the provided situation, it is needed for the audit partner to take into account
certain steps and factors before accepting the appointment and they are mentioned below:

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 It is needed for the audit partner to take into consideration of any reason for the non-
acceptance of the audit engagement like situations that can lead to the compliance with
the fundamental auditing principles where safeguards cannot be applied for reducing
these threats to acceptable level. In this situation, the audit partner is needed to analyze
the fact that why the managing director is not happy with the current auditors. At the
same time, the audit partner is needed to take into consideration the reasons of the anti-
corruption inquiry on Games Limited since it can lead to the occurrence of threat to
compliance with the fundamental auditing principles. These aspects need to be
considered because these are the questionable issues associated with the client, Games
Limited, which can lead to the threats of integrity and professional behavior (Ajao,
Olamide and AyodejiTemitope 2016).
 The audit partner is needed to directly communicate the Existing Accountant of Game
Limited for establishing the facts and circumstances for proposed changes because it will
give the audit partner a clear idea on whether he should accept the appointment or not.
For example, there may be certain aspects that can lead to disagreement with the existing
accountant which can influence the decision for accepting the appointment (Carson et al.
2014).
 In case there is audit threats in Game Limited, it is needed for the audit partner to
ascertain the fact that whether necessary safeguards can be applied for the reduction of
these threats. It is needed to decline the appointment in case safeguards cannot be applied
to reduce the threats to acceptable level (Hariri, Haron and Patel 2015).
 In addition, the audit partner needs to take the permission of Game Limited to
communicate with the existing auditors in written form. In case Game Limited provides

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the permission, the audit partner needs to request the existing auditor for all information
required for making decision on audit acceptance. The audit partner needs to decline the
appointment in case Game Limited declines to provide the permission (Hariri, Haron and
Patel 2015).
Answer to Question 3
Sl. No. Internal Control Weakness Reasons
1 Credit manager is solely responsible for
credit permission based on his familiarity
with the contractor’s reputation
The manager can provide approval of
providing credit to his relatives or friends
who do not have reputation. It can lead to
default in payment (Gillett 2016).
2 Accounts receivable supervisor has the
independent responsibility for verifying
the pricing and other details and to
prepare the invoice
The accounts receivable manager can
provide unnecessary discount in prices to
the contracts due to his personal gain
which can be loss making for the company
3 Accounts receivable manager prepares
the monthly computer-generated
accounts receivable subsidiary ledger
without reconciling it with accounts
receivable, control account and overdue
account monthly report
This can lead to the faulty accounts
receivable subsidiary ledger which can
show reduced or excess receivables from
the contracts (Dzomira 2014).
4 Cashier does not have the access to the
journal or ledger
This make the cashier unable to verify
whether the correct cash payments and
collections are recorded in the journal or
ledgers which can lead to errors in cash
payment and received
5 Cashier is solely responsible for
performing the cash receipt function
It provides him the scope to
misappropriate funds from some of the
transactions which can lead to the

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falsification in the cash balances. This can
harm the company (Maguire 2014).
Answer to Question 4
Sl. No. Internal Control Weakness Reasons
1 The store department is solely
responsible for providing the list of
required items.
Due to the independent responsibility of
the store department to provide the list of
their requirements, there is not any system
or person to review the requirements in
order to ascertain whether there is actual
need for those items. It can lead to over or
under ordering of the required items (Liu
et al. 2014).
2 There is not any process to oversight or
review the total purchase and payment
function.
This is a key weakness in the internal
control of Retro Pty Ltd since the absence
of oversight or review can lead to many
errors and frauds in this whole purchase
and payment system. Implementation of
proper review system will provide the
management with proper feedback so that
the whole system can be improved.
3 Receiving department has the authority
of considering order received.
In the presence of this sole authority to
consider “order received”, the receiving
department can manipulate with the
received order by stating there is less
order received when the orders have been
received in correct amount. This is a major
weakness in this system (Feng et al.
2014).

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4 Accounts payable department has the
sole authority for approving payments.
Lack of authorization as well as approval
can be seen in this process since the
accounts payable department has the sole
authority for making payment. This can
lead to unauthorized, unnecessary or
fraudulent payments of the purchases by
the accounts payable department. Some
other consequences are conflict of interest,
improper charges on payment and others.
5 Financial accountant has the sole
authority for the preparation of cheques
for the suppliers, signing the cheques and
recording it in the cash disbursement
journal.
The presence of this sole authority on the
financial accountant provides him with the
scope to manipulate the accounts and
financial frauds since he also has the
responsibility to record them in cash
disbursement journals. He can issue
additional cheque in the name of fictitious
suppliers that can hamper the company.
This is another key weakness in the
internal control of Retro Pty Ltd (Rainer et
al. 2013).
6 Assistant accountant is authorized to
undertake a sequence check of all the
acceptable forms.
It case the assistant accountant makes
error in the sequence check process, he
will not be able in identifying misconducts
or errors in the whole system and it is a
major flaw in internal control.
7 Financial accountant is authorized for the
preparation of the bank reconciliation
and investigation of reconciliation items
and preparation of cheques.
In the presence of the dual role of the
financial accountant, he may not conduct
the reconciliation process in proper
manner since he is also involved in
manipulation of cheques.

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Answer to Question 5
Requirement a
Sl. No. Internal Control Weakness Implications
1 The accounts clerk is authorized for
filling the copies of purchase orders
when he is also authorized for filling the
copy 2 of GRN.
In the presence of this weakness, the
accounts clerk will be able in
manipulating the purchase orders since he
is also responsible for filling the GRN.
Thus, the management of My Pet will not
be able in detecting this fraud (Salcedo et
al. 2013).
2 The production orders are filled by the
production controller and it is matched to
the production order copy of production
controller
Since the GRN is matched to the
production report copy of the production
controller, it is not possible to identify
frauds or manipulations made by the
production controller in the production
order.
3 The computer automatically selects both
the raw materials and finished goods
suppliers based on latest price and
delivery time.
This is a weakness since any error or
malfunction in the computer system can
lead to the selection of wrong suppliers.
This can hamper the operations related to
raw materials and finished goods (Feng et
al. 2014).
4 The accounts clerk has the access to the
master file amendments.
The access of this password in master file
amendments provides the authority to the
accounts clerk to make amendments in the
master file. Thus, it becomes easier for his
to manipulate or illegally revise the master
file which can affect the total operation of
the company (Karim, Nawawi and Salin
2018).

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5 Orders will be generated to suppliers and
sub-contractors recorded in the master
file; and this is a key weakness in internal
control system.
In the presence of this weakness, the name
of the suppliers as well as sub-contractors
can easily be changed by changing the
names on the master file; and people
having the access of master file
amendments can do this.
6 The production controller has the
authority to make the necessary changes
in the master file regarding raw materials
and finished goods.
Since there is not process to review the
changes made by the production controller
except the amendment form, he can easily
make fraudulent or manipulative changes
in the master file. This process can hamper
the whole production process of the
company (Skaife, Veenman and Wangerin
2013).
Requirement b
1. The first test will be the testing of the computer system that selects the suppliers of raw
materials and finished goods. The auditors will be responsible for ascertaining whether
the computer system is updated with the later price and delivery times for the selection of
suppliers.
2. The second test will be done on the master file amendments. In this test, the auditor will
be responsible for checking how many times the master file is amended by checking all
other related functions and amendment forms in order to detect fraud in them (Borom
2013).

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References
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auditing. Unique Journal of Business Management Research, 3(1), pp.32-40.
Apesb.org.au. 2019. APES 110 Code of Ethics for Professional Accountants. [online] Available
at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 28
Apr. 2019].
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