ASSIGNMENT OF AUDITING THEORY AND PRACTICE

Running Head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the student
Name of the university
Student ID

1AUDITING THEORY AND PRACTICE
Table of Contents
Introduction......................................................................................................................................2
Case 1...............................................................................................................................................2
Answer (A)..................................................................................................................................3
Answer (B)...................................................................................................................................4
Case 2...............................................................................................................................................5
Answer (A)..................................................................................................................................5
Answer (B)...................................................................................................................................7
Case 3...............................................................................................................................................7
Answer (A)..................................................................................................................................7
Answer (B)...................................................................................................................................9
Answer (C)...................................................................................................................................9
Conclusion.....................................................................................................................................10
Reference list.................................................................................................................................11

2AUDITING THEORY AND PRACTICE
Introduction
The main aim of this project is to focus on 3 case studies provided in this assignment. In
the first case, report is focused in the inherent risk involved in the audit of Max Security
considering both industry and entity risk. Then it focused on the factors that are required to be
taken in consideration while determining the preliminary materiality of Max Security. In the
second case report is discussed about the weakness and strength associated with the debtors
confirmation as audit evidence. Then it is further discussed about the possibility to use debtor’s
confirmation as audit evidence by chant and partners. In the third case the report is discussed
about the ethical issues that are currently faced by Meg faces and will also highlight the way
required to comply with APES 110. It will also further explain the options of the company’s
audit report and will also recommend the appropriate course of action (Fung, 2014).
Case 1
Max Security limited is the audit client of Smith & Associate for the last 15 years and the
entity is based on Wollongong. The company is engaged into manufacturing high-tech personal
carrier armour plated. The main product of the entity is small yet powerful terrain master that is
of highly specialized in nature and it carries on business with the recognized nation and the
government that is democratically elected (Power & Gendron, 2015).
Answer (A)
Inherent risk is the risk occurs by an error, misstatement and omission in a financial
statement due to uncontrollable factors other than a failure to control. In audit inherent risk is
likely to occur when the transaction is complex or high degree of judgment is required. This
misstatement is not easy to catch in audit. Inherent risk does not consider the factors that are

3AUDITING THEORY AND PRACTICE
associated with lack of control rather than the risk of transaction that will take place if control is
not applied. In the given case of Max Security major inherent risk are as follows –
 Industry related risk – Major industry related inherent risk is associated with the nature of
the product. Company manufactures the products which are of highly sensitive in nature
and maintain highly secure environment. In this case inherent risk high owns to the fact
that entirely belongs to an industry where design of products is accounted as highly
sensitive. Vehicles design for carrying manufacturing entity is required to be confidential.
Therefore the selling risk to the allies will become the enemies in later period or risk of
selling to others is also associated with the type of product dealt in by Max Security
(Griffin & Wright, 2015).
 Entity related risk are as follows –
o Dependency on one product is high which is of specialized nature and high
dependent on export customers that will generate risk of revenue.
o Sophisticated product having pricing risk is designed to meet the specification of
the consumers.
o New costing system for inventories after replacing the system is always
associated with risk.
o Document adequate is required for trending.
o Product design and costing system may raise question.
o Risk is always associated with the waste management systems.

4AUDITING THEORY AND PRACTICE
Answer (B)
An auditor must take care of the financial report to get misstatement while planning
audit. Selecting audit procedure for accounting balance and class of transaction is very important
to minimize the audit risk to a level by using the materiality concept. An auditor should also
evaluate the uncorrected misstatement which may be a material, individual or combination with
other misstatement. While evaluating misstatement in relation to a specific account, financial
statement and disclosures both qualitative and quantitative factors are taken into account (Brann,
Owens & Williamson, 2015). Factor required considering while determining material are as
follows –
 Materiality concept means the information in financial statement which is material in
nature that may change the view of a reasonable person. Auditor should also apply own
judgment while deciding the materiality.
 Establishment of benchmark for materiality is required to establish for determining the
misstatement as the main product of the company is sensitive in nature and requires high
level confidential by considering inventories, purchase and sale.
 Quantitative factors has many impacts on materiality and also important for the users as
to compare other items in values. For example accounts may have some fraud which is
considered to be crucial than other errors for an equal amount which shows dishonesty of
management ( Zhang,Yang & Appelbaum, 2015).
 There may be a minor misstatement but for material it can arise from contractual
obligation. Misstatement is surrounded by the sensitive circumstance which involves
fraud and illegal acts.

5AUDITING THEORY AND PRACTICE
 Immaterial misstatement can affect the earning graphs. It increases the management
compensation by satisfying the requirement of bonus and other incentives.
 Misstatement can cause loss or income or can change loss into income and vice versa. It
can also trend to effect in segment information in relation to the financial statement.
 Misstatement that is currently immaterial may become material in future period as it
build over several periods (Gepp et al., 2018).
Case 2
Answer (A)
Debtor confirmation is substantial evidence provide evidence regarding the existence of
assertion which is associated with MSHG’s accounts receivable. Information that is related to the
valuation and allocation to debtors does not provide any assurance of paying the amount in spite
of identifying the error in balance receivable of shady oak of amount that of quit high is $39,
74,569. Term of payment is 14 days though the smallest accounts are overdue for more than 60
days which shows the credit approval system of shady oak along with the debtor collection
period (Chiu, Liu & Vasarhelyi, 2014). Main strength of debtor confirmation as the audit
evidence is –
 Debtor confirmation provides evidence about the rights and wrong for ascertaining the
accounts of MSHG. If debtor replies affirmatively they may provide external evidence
where they owe the money for the service provided by MSHG.
 Debtor’s confirmation can also provide evidence about the amount owned to MSHG.
 Existence of debtor’s evidence can be confirmed by sending confirmation to large
balances since 60% is owned by only 5 practicing medical professionals.

6AUDITING THEORY AND PRACTICE
 40% of balance seems to be a smaller account which seems to be more doubtful as most
of the debtors are allowed more than 14 days. Debtor’s confirmation will provide
evidence regarding their existence. Review of receipts as well as analysis of
characteristics of debtors provide valuation related evidence
Weaknesses –
 For relating to valuation there is no provided of fair evidence and also allocation of
resources as debtors did not provide any other related assurance that they with the motive
for paying the account, but ignorance regarding the account balance is noted (Krahel &
Titera, 2015).
 In case for valuing the large balance, true and fair of evidence is collected from more
reliable source. As now in case of overdue how long the balance can be mentioned. There
would be no doubt for a due within 14 days in making recovery. But again view of
consequent receipts will give extra evidence that will need owing to the nature of
accounts.
 Existence of evidence will provide surety collected by small debtors and also other
process will be done for ascertain of valuation. And also allowance which are in doubtful
debt are simple took not for trade receivable, auditor have to take care regarding control
of credit and need to check the transaction correctly (Byrnes et al., 2018).
Answer (B)
In case of account receivable for ascertaining and allocation there will not be use of
debtors confirmation as they are not solely use for audit evidence. The reason regarding the
balance of account balance is a material and proof is that a lot of the balance due from smaller

7AUDITING THEORY AND PRACTICE
debtors is overdue. Auditor is needed to take assumption method and data which is used by the
management and also consider as a reasonable addition of adjustment to the account. It further
explains the management approach regarding the doubtful debts and its allocation and valuation
process. In provided scenario further attracts Para 9 of ASA 230 for audit documentation to the
extent, timing and nature regarding the process of audit done (Auasb.gov.au, 2019). The auditor
shall record –
 The audit work which is done and completion of process.
 Finding the characteristics of specific items or the matters those are taken for process.
 The name of person who is conducting then audit report and review process.
The person performing the audit will document the ageing analysis of account receivable
for balance of accounts. For example under account receivable transaction which transaction
include and the account receivable were generated on which date and then the conclusion is
drawn (Auasb.gov.au, 2019).
Case 3
Answer (A)
APES 110 are for complying with Meg and its fundamental principle includes
objectivity, confidentiality, behaviour of profession and competence along with due care. Under
Section 100 of the APES 110, the compliance with the fundamental standard can threatened
potentially from wide variety of circumstances and may in a category for threat of self-interest,
threat of familiarities, threat of advocacy, and threat of self-review (Barton & Bruder, 2014).
Under the given case of Meg, consequence related to APES 110 principle is -

8AUDITING THEORY AND PRACTICE
 Threat of Intimidation as the CEO is showing to intimidate Meg for making her agree on
the valuation. And the statement of auditor in which they need an auditor with a view
which is more realistic in nature as this can be make replacing of Meg and her audit firm
with any other firm of audit that will be in favour of valuation made by him.
 Threat of self-respect as per which Meg would not do upset to the CEO by doing
anything else in the fear that may her firm lose the contract. Meg can lose her profession
objectivity because of the threat of self-interest and by the request of CEO to abide and
so Meg can get serious threat and as per which the safeguard the principle (Christensen
et al., 2016).
 Assuming that documentation of audit is complete and shall refer the same to the
committee of Ethical of Meg audit firm for guidelines with request.
 It should be sure that all audit documentation is complete and the ethical committee
should get report regarding firm guidelines.
 It can ask another partner or partners from the firm for audit to evaluate and join her with
CEO for the deal.
 May ask to be heard at the AGM of the client for explaining problem that may arise to
shareholders of the entity.
 May ask any other independent person for value pf the assets in the question.
 Resigning from client.
 Referring the subject matter to the ASIC (Christensen et al., 2016).
Answer (B)
Options for Meg’s report are as following –

9AUDITING THEORY AND PRACTICE
 Report which is not qualified will highlight of the matter paragraph that in case any
contract on any asset valuation is reached and owing to that significant problem related to
going concern approach is raised that is not disclosed inadequately (Newton et al., 2015).
 Unqualified report in case of Meg is able to reach the conclusion with CEO regarding
appropriate valuation of asset.
 Qualified report in case the misstated valuation does not have any impact on financial
reports. This is unexpected as with the given information regarding significant nature of
valuation to profitability assessment as well as solvency of the entity.
 Adverse report in case the statement which is not correct for valuation has significant
impact on the financial reports. Specifically this is aim while misstatement regarding
asset valuation will raise significant doubt regarding going concern status of the entity
(Newton et al., 2015).
Answer (C)
Meg will try to find the solution related to the issue taking assistance from client’s board
as well as other partners of audit firm and shall make sure of that correct valuation of the asset
are disclosed through the financial report. 2nd reporting option presented in (a) above will be
most likely in that case. Issuance of adverse report and reporting that to ASIC and resigning from
the client’s audit will be last alternative if relationship between the client and the auditor breaks
down. But, Meg shall agree with the request of CEO for not overvaluing assets as this will be
against the professional ethics (Fung, 2014).

10AUDITING THEORY AND PRACTICE
Conclusion
For more incentives misstatement of financial information and auditing has become a
legal requirement of many industries and firms who have the power to exploit the financial
system for personnel gain. So auditing is mainly associated to ascertain the validity and
reliability of information and provide reasonable assurance that statements are free from material
error. A financial statement is set to be true and fair when it is free from material misstatement.
From the discussion of above three cases discuss it can be established that in case 1, some of the
main risk is related to the product risk, risks associated with pricing of sensitive products and
information for the products supply and sell. In case 2, the auditor will not the look to debtors
evidence as an auditor cannot depend upon such evidence in reporting such. In case 3, Meg will
not comply with CEO for asset valuation and shall have issue regarding the opinion result in
adverse.

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Reference list
Auasb.gov.au. (2019). Retrieved 20 August 2019, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_230_Compiled_2015.pdf
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Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the
Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297). Emerald
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