Auditing Theory and Practice

This document provides an overview of auditing theory and practice, including different types of threats and audit opinions. It also discusses the compliance with IFAC Codes of Ethics.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Author’s Note

1AUDITING THEORY AND PRACTICE
Table of Contents
Answer to Question 1.................................................................................................................2
Requirement 1........................................................................................................................2
Requirement 2........................................................................................................................2
Requirement 3........................................................................................................................2
Requirement 4........................................................................................................................2
Requirement 5........................................................................................................................2
Requirement 6........................................................................................................................2
Requirement 7........................................................................................................................3
Requirement 8........................................................................................................................3
Requirement 9........................................................................................................................3
Requirement 10......................................................................................................................3
Answer to Question 2.................................................................................................................3
Answer to Question 3.................................................................................................................4
Requirement a........................................................................................................................4
Requirement b........................................................................................................................4
Requirement c........................................................................................................................5
Requirement d........................................................................................................................5
Requirement e........................................................................................................................5
Requirement f.........................................................................................................................5
Requirement g........................................................................................................................6
Requirement h........................................................................................................................6
References..................................................................................................................................7

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Answer to Question 1
Requirement 1
It can be classified as Intimidation threat because of the threat from the audit client
which can deter the auditor from acting objectively due to actual pressure (Tepalagul and Lin
2015).
Requirement 2
It can be classified as Self-interest threat as the audit member has other interest in the
audit client which can influence the audit judgement or decision (Tepalagul and Lin 2015).
Requirement 3
This situation can create Advocacy threat due to the fact that the auditor is promoting
the business of the audit client by acquiring shares of them.
Requirement 4
It needs to be classified as Self-interest threat as the audit team has a close family
members who has direct financial interest in the audit client and it can affect the audit
judgement (Dogui, Boiral and Heras‐Saizarbitoria 2014).
Requirement 5
It is a case of Advocacy threat as the auditor is involved in promoting the client’s
business by promoting the new issue of shares.
Requirement 6
This threat can be classified as Advocacy threat due to the fact that the auditor is
promoting the business of the client by acting as an advocate on behalf of the client.

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Requirement 7
This situation is creating Intimidation threat as the audit client is creating pressure on
the auditor for reducing fees that can affect audit objectivity (Hossain 2013).
Requirement 8
This will create the Self-interest threat as the auditor will have direct financial interest
in the client after becoming the member of the board of the audit client.
Requirement 9
This can be classified as Self-review threat due to the fact that the auditor can use the
previous knowledge about the company in forming the audit opinion as he used to be the
director of the client.
Requirement 10
This can be classified as Self-review threat as there is a possibility that the auditor
may not appropriately evaluate the results of the previous judgement as the same audit firm
implemented the system.
Answer to Question 2
It can be seen from the provided scenario that there are certain threats of compliance
with the IFAC Codes of Ethics and they are discussed below.
The provided scenario states that ABC firm has been the audit partner of Company
Ltd for ten years. This long-standing relationship between the auditor and the audit client can
create Familiarity threat as the audit partner can become too sympathetic to the interest of the
others and the auditor can compromise audit Objectivity in the influence of this relation
(ifac.org 2019).

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It can also be seen from the provided scenario that Company Ltd throws an all
expenses party to the audit firm for celebrating the audit and it has made the audit less formal.
It implies that the audit firm has other interest in the audit client which can create self-interest
threat of audit independence. At the same time, it needs to be mentioned that the less-formal
audit leads to the violation of the IFAC code of Professional Behaviour as the wrong
behaviour of the auditors of ABC discredits the profession given the condition that that the
auditors are needed to maintain their professionalism while providing the professional
services (Cameron and O'Leary 2015).
At the same time, it can be seen that Company Ltd puts the condition to John to
reduce the audit fees in case he wants to be the Director of the company in two years’ time. It
implies that Company Ltd is creating indirect pressure on the auditor to get the favourable
audit outcome. It also creates threat of Objectivity code of IFAC as the auditor may can
compromise the audit objectivity in the presence of pressure from the client (Ardelean 2013).
Answer to Question 3
Requirement a
The auditors issue Qualified audit opinion when the audit client has not maintained
the financial records as per the accounting regulation, but there is not any material
misstatement due to this. In the provided scenario, the auditor is unable in obtaining the
confirmation of eight major clients. Since he is satisfied about the balances through other
audit procedures, he will issue qualified audit opining by stating the reason for the report as
not qualified (Tsipouridou and Spathis 2014).
Requirement b
The audit client has put restriction on the auditor to carry out procedures for verifying
property, plant and equipment that is 35% of total assets. For this reason, the auditor is unable

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to complete the accurate audit report and it can create material impact on the financial
outcome of the firm. Thus, the auditor needs to issue Disclaimer of Opinion (Habib 2013).
Requirement c
According to the provided scenario, there will be material impact on the financial
statements in case the contingent liability become actual liability; but it does not have any
material impact on the current financial position of the client. Thus, the auditor needs to issue
Qualified Audit Opinion as the company has not provided the information of contingent
liability as per the accounting regulations and it does not have any material impact (Habib
2013).
Requirement d
Auditors issue Disclaimer of Opinion when they are not able in obtaining and
accessing the required audit evidence for the development of correct audit report. In this
provided case, the auditor is not able in assessing the cash sales with any of the audit
processes due to client’s inadequate internal control. Thus, he needs to issue disclaimer of
audit opinion (Chen et al. 2013).
Requirement e
In this case, the auditor is satisfied that there is not any material misstatements in the
financial statements of the new client, but the client is not providing the auditor with the
information about the opening balance. For this reason, the auditor will issue Qualified audit
opinion by adding an extra paragraph which will include the reason for which the audit is not
unqualified (Chen et al. 2013).
Requirement f
It is needed for the auditors to issue Adverse audit opinion when the audit client has
not followed the Australian Accounting Standards for the preparation of their financial

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statements and it creates major material misstatements in them. The same aspect can be seen
in the provided case as the company has not been following the Australian Accounting
Standards for four years that creates material misstatements. Thus, the auditor needs to issue
Adverse audit opinion.
Requirement g
As per the provided situation, the audit client is using the LIFO method disallowed by
the Australian Accounting Standard and it has created material effects only on the inventory.
There is not any other material misstatements due to this. For this reasons, the auditor is
needed to issue Qualified audit opinion as the company has not complied with the inventory
valuation regulation of Australian Accounting Standards and due to the limited effect of
material misstatements (Stanisic et al. 2014).
Requirement h
The auditors issue Unqualified audit opinion when there is not any material
misstatements in the financial statements and all the financial statements are prepared in
accordance with the correct framework. For this reason, it is needed for the auditor to issue
unqualified audit opinion. The auditors do not have any requirement to consider the going
concern status of the company while providing audit opinion (Stanisic et al. 2014).

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References
Ardelean, A., 2013. Auditors’ ethics and their impact on public trust. Procedia-Social and
Behavioral Sciences, 92, pp.55-60.
Cameron, R.A. and O'Leary, C., 2015. Improving ethical attitudes or simply teaching ethical
codes? The reality of accounting ethics education. Accounting Education, 24(4), pp.275-290.
Chen, J., Cumming, D., Hou, W. and Lee, E., 2013. Executive integrity, audit opinion, and
fraud in Chinese listed firms. Emerging Markets Review, 15, pp.72-91.
Dogui, K., Boiral, O. and Heras‐Saizarbitoria, I., 2014. Audit fees and auditor independence:
The case of ISO 14001 certification. International Journal of Auditing, 18(1), pp.14-26.
Habib, A., 2013. A meta-analysis of the determinants of modified audit opinion
decisions. Managerial Auditing Journal, 28(3), pp.184-216.
Hossain, S., 2013. Effect of regulatory changes on auditor independence and audit
quality. International Journal of Auditing, 17(3), pp.246-264.
Ifac.org. 2019. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS. [online]
Available at: https://www.ifac.org/system/files/publications/files/ifac-code-of-ethics-for.pdf
[Accessed 28 Mar. 2019].
Stanisic, N., Petrovic, Z., Vicentijevic, K. and Mizdrakovic, V., 2014, April. Auditor
Switching and Qualified Audit Opinion: Evidence from Serbia. In The 2014 Proceedings of
The first international Conference Sinteza, Belgrade.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.

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Tsipouridou, M. and Spathis, C., 2014, March. Audit opinion and earnings management:
Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.