Auditing Professional Practice

This article discusses the fundamental principles of auditing professional practice and the ethical standards that auditors must adhere to. It covers various scenarios and situations that may create threats to compliance with fundamental principles and the impact they may have on auditor's independence.

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Auditing professional practice
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Table of Contents
Question 1..................................................................................................................................2
Answer a.................................................................................................................................2
Answer b................................................................................................................................2
Answer c.................................................................................................................................3
Answer d................................................................................................................................4
Answer e.................................................................................................................................4
Answer f.................................................................................................................................5
Question 2..................................................................................................................................6
Situation 1..............................................................................................................................6
Situation 2..............................................................................................................................7
Reference....................................................................................................................................8

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Question 1
Answer a
An auditor is not supposed to engage himself in any activity or any business that may
impair his integrity, good reputation or objectivity of the profession as it will not be
compatible with fundamental principles. Integrity is being honest and straightforward with
regard to all business and professional relationships. Further, to maintain the independence of
the auditor he shall not involve in any activity that may compromise his professional
judgement and may disallow him to act with integrity (Accounting Professional & Ethical
Standards Board 2017). In the given case, if Jenny Wang, senior auditor of Panania Cars Pty
Ltd accepts the 20% discount on purchasing car from the company it may impair his integrity
which in turn, may have an impact on his audit opinion. Hence, to maintain his good
reputation and independency in professional aspect he shall not accept the offer otherwise it
will go against the ethical principle of APES 110.
Answer b
As per Section 260 of APES 110, significance and existence of the threat depends on
intent, value and nature of offer. If the gifts offered is informed and reasonable taking into
consideration all the circumstances and facts and considering inconsequential and trivial the
auditor may conclude that the offer is under nor business course. The auditor shall further
ensure that the offer will not have any impact on his decision making or gathering
information (George, Jones and Harvey 2014). Under such circumstances, the auditor may
conclude that any compliance threat with regard to fundamental principles will be at
acceptable level. In the given case, it can be concluded that Christmas gift provided by
Lancom Cosmetics amounting to $ 350 to its auditor Katrina Wearne will not create any

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compliance threat if it does not have any impact on decision making. Hence, it will not
breach the ethical principle of APES 110.
Answer c
Principle of due care and professional competence imposes the below mentioned
obligations on auditor –
 Act diligently as per the applicable professional and technical standards while
delivering professional services and
 Maintaining professional skill and knowledge at required level for assuring that the
employers or clients receive professional competent services (Arens et al. 2013).
For maintaining professional competence the member in the public practice is
required to have continuous understanding and awareness regarding relevant business,
professional and technical developments. It enables the member in the public practice to
maintain and develop capabilities that will enable him to perform within professional
environment competently. Fundamental principle of the professional competence obliges the
auditor to offer only the services those he is competent to carry out. Therefore, before
accepting any particular engagement the member in the public practice shall determine
whether the acceptance of the engagement will create threats to the compliance of
fundamental principle. For instance, it will generate self-interest threat to due care and
professional competence if the engagement team are not competent to perform the activities
required for carrying out engagement properly (Accounting Professional and Ethical
Standards Board (APESB 2017). Hence, in the given case if D.Maron, the chartered
accountant should not have accepted the engagement as he does not have any knowledge and
experience regarding the installation of computer system. Acceptance of the engagement will
violate the ethical principle under APES 110.

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Answer d
To respect and maintain confidentiality with regard to the information gathered from
business relationship and professional relationships, the member is not allowed to disclose
the information to 3rd parties without specific and proper authority from the client. Only
exception is that there is professional or legal duty or right to disclose the information.
Further, the information shall not be used for personal advantages or advantages of third
parties. The member is also required to comply with confidentiality principle even after end
of the relationship between the client and member (Everett and Tremblay 2014). In the given
case, for maintaining the quality assurance 6 accounting firms are taking part in review
program for working papers. Under the program each firm will review working papers of any
other firm and will discuss the weaknesses and strengths of audit. However, using the client’s
business information without prior approval from them will have impact on the
confidentiality. Therefore, it will violate the APES 110 ethical principle.
Answer e
As per Section 220 of APES 110, any member under public practice shall apply
reasonable steps for identifying circumstances that may lead to interest conflict. Such
scenarios may lead to compliance threat to comply with fundamental principles. For instance,
objectivity threat may be created when the member directly competes with the client or has
joint venture with the client’s major competitor. Further, the member under public practice
must evaluate impact of threat and shall apply appropriate safeguards for eliminating threat or
reduce the threat to acceptable level. In the given case, the chartered accountant, Bill Holland
sets up the fire and casualty insurance agency apart from tax and audit services (Al
Momamani 2013). Though he does not uses his own name it will create threat to ethical
principle of APES 110 as he regularly requests his manager to check the adequacy of client’s
insurance. Further, it will create self-interest threat to the compliance with regard to

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professional behaviour principle as services and products of the the auditor marketed in
inconsistent manner.
Answer f
Self-interest threat will be created if the auditor in addition to regular audit services
delivers non-audit services including bookkeeping services, advisory services to company’s
management or tax services to the same client. Offering non-audit services creates threat to
independency of the auditor. Self-interest threat generated from offering non-audit services
will be so significant that any kind of safeguards will be unable to reduce the threat to
acceptable level. Further, the member under public practice must take reasonable steps for
identifying the scenarios that may pose interest conflict (Kung and Li Huang 2013). In the
given scenario, public accountant Emma Lawrence along with regular audit services offers
different non-audit services like bookkeeping services, advisory services to management or
tax services to the same client. Therefore, providing non-audit services along with audit
services will breach the ethical principle of APES 110.

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Question 2
Situation 1
If the audit firm assumes the responsibility of the client’s management it would create
intimidation threat and the impact will be so significant that any safeguard will not be able to
reduce threats to the acceptable level. For instance, deciding upon which recommendation
shall be implemented by the firm and which recommendation will create familiarity threat or
intimidation threat. Further, assuming regarding management’s responsibility will create
familiarity threat as the firm will be aligned with interest and views of the management too
closely. Thus, the audit firm must not assume the responsibility of management for the audit
client. Further, to avoid the risk associated with assumption of management’s responsibility
while offering non-assurance services to the audit client, the audit firm must be satisfied that
management is answerable for taking significant decisions and judgements (Naslmosavi,
Sofian and Saat 2013). Further, it shall be evaluated that the management’s proper
responsibility has been generated through analysis of service results. It will reduce the firm’s
risk owing to any significant decision made based on significant judgements or any decision
made on behalf of the client management. Further, the risk can be reduced while the audit
firm provides the client an opportunity to make decisions and judgements based on
transparent analysis and issues presentation.
Further the audit engagement states the reasonable assurance under which the audit
expresses his opinion regarding the true and fair presentation of the company’s financial
statement. Further, the auditor is responsible for expressing his opinion whether the financial
statements are prepared in compliance with the applicable framework for financial reporting
that includes that the engagement is conducted as per the auditing and assurance standards
(Guénin-Paracini, Malsch and Tremblay 2014). Hence, if the auditor involves himself in

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recommending and assuming the responsibility of the client’s management it would create
intimidation threat.
Situation 2
Self interest threat will be created if the fees dues from the audit client is overdue for
long period, particularly when the significant part of the fees are unpaid before issuance of
the next years audit report. Generally, the client is required to pay the audit fees before
issuance of the report. Therefore, if the fees remain unpaid it will attract self-interest threat
that will have adverse impact on the independence of the auditor. Further, when the fees from
the client represent big proportion that is more than 15% of total fees of the client firm
dependence on the client and the concern regarding losing client will create self-interest
threat which in turn will have adverse impact on auditor’s independence (Al Nawaiseh and
Alnawaiseh 2015).
Any member in the public practice may get offer for hospitality and gifts from the
audit client. This kind of offers will create threats with regard to compliance of fundamental
principles. Therefore, if John accepts the offer of free trip to Europe it will attract self-interest
threat which in turn will have adverse impact on the auditor’s independence (Tepalagul and
Lin 2015).
Inventories shall be valued at cost or market value whichever is lower. If the company
does not consider reduction in the fair value while valuing the inventory it will violate the
requirement of AASB (Aasb.gov.au 2017). Further, it has material impact on financial
statement of the company. Hence, if the auditor ignores the fact it will attract self-interest
threat which in turn will have adverse impact on auditor’s independence.

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Reference
Aasb.gov.au. 2017. Australian Accounting Standards Board (AASB) - Home. [online]
Available at: http://www.aasb.gov.au/ [Accessed 12 Aug. 2018].
APESB, 2017. Code of Ethics for Professional Accountants. Accounting Professional &
Ethical Standards Board. [online] Available at:
http://www.apesb.org.au/uploads/standards/superseded_pronouncements/
21092016145901_APES_110.pdf [Accessed 12 Aug. 2018].
Al Momamani, M.A., 2013. The effect of auditors' ethics on their detection of creative
accounting practices: A field study. International Journal of Business and
Management, 8(13), p.118.
Al Nawaiseh, M.A.L. and Alnawaiseh, M., 2015. The Effects of the Threats on the Auditor’s
Independence. International Business Research, 8(8), p.141.
Arens, A.A., Best, P., Shailer, G. and Fiedler, B., 2013. Auditing, Assurance Services and
Ethics in Australia. Pearson Higher Education AU.
Everett, J. and Tremblay, M.S., 2014. Ethics and internal audit: Moral will and moral skill in
a heteronomous field. Critical Perspectives on Accounting, 25(3), pp.181-196.
George, G., Jones, A. and Harvey, J., 2014. Analysis of the language used within codes of
ethical conduct. Journal of Academic and Business Ethics, 8, p.1.
Guénin-Paracini, H., Malsch, B. and Tremblay, M.S., 2014. On the operational reality of
auditors' independence: Lessons from the field. Auditing: A Journal of Practice &
Theory, 34(2), pp.201-236.

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Kung, F.H. and Li Huang, C., 2013. Auditors' moral philosophies and ethical
beliefs. Management Decision, 51(3), pp.479-500.
Naslmosavi, S., Sofian, S. and Saat, M.B.M., 2013. The effect of audit firm size on
independent auditor’s opinion: Conceptual framework. Asian Social Science, 9(9), p.243.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.