Auditor Independence and Material Misstatement

This assignment delves into the critical concept of auditor independence and its potential threats. It examines how a lack of independence can lead to material misstatements in financial statements, using the example of Victorian Manufacturing Company's failure to re-value its Melbourne factory. The impact on audit opinions, including the possibility of issuing a Disclaimer of Opinion, is also discussed.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the Student
Name of the University
Author name

1AUDITING THEORY AND PRACTICE
Table of Contents
Answers of Question 1.....................................................................................................................2
1 A...............................................................................................................................................2
1 B................................................................................................................................................2
1C.................................................................................................................................................3
1D................................................................................................................................................4
Answers of Question 2.....................................................................................................................4
2 A...............................................................................................................................................4
2B.................................................................................................................................................5
2C.................................................................................................................................................6
Answers of Question 3.....................................................................................................................6
3A................................................................................................................................................6
3B.................................................................................................................................................7
3C.................................................................................................................................................7
References........................................................................................................................................9

2AUDITING THEORY AND PRACTICE
Answers of Question 1
1 A
From the situation provided it can be said that Berowra Accountants are providing a
guarantee of the tax refund to their clients via special advertising ways. In this case, it is
worthwhile to know the basic concept of tax refund. To explain tax refund, it can be said that it is
the difference between the paid tax and the owed tax. To determine whether a business
organization will receive a tax refund or not is totally dependent on the factors like the profit,
income and the expenses regarding tax of the concerned business organization. It will not be
possible for the auditors to ensure a tax refund (Galit and Metaban 2012). Apart from that the
major responsibility of the auditors are to scrutinize the financial accounting of the business
organizations to identify the material misstatement and also to check the compliances. Thus it
can be said that it would be definitely a non-audit service in case of tax refund. Due to this
reason as per APES 110 Code of Ethics for Professional Accountants, Section 130, the act of
Berowra Accountants has broke the principle of Professional Competence and Due Care (Han
Fan, Woodbine and Cheng 2013). According to this act, an auditor can retain their clients by
getting to know the limitations of the professions and in this case the accountants of Berowra
have not been able to do so.
1 B
As per the case study provided, Jamie Harvey, who is an auditor of a charter accounting
firm is been asked to take up the role of the treasurer of a local club and Harvey only does audit
of large public organizations. it should be mentioned that the athletic clubs are considered to be

3AUDITING THEORY AND PRACTICE
non-profit-organizations. As per APES 110 Professional Appointment, Section 210, while
accepting an appointment of a new client, the auditors should determine whether the acceptance
of the appointment would affect the compliance of the basic ethical principles of audit. In this
case, if the proposal of becoming the treasurer gets accepted by the auditor, there would not be
any breach of principles due to some reasons (Ottaway 2014). The reasons are Harvey is the
auditor of a large public concern and there is no relation between the operations of a large
business organization and local clubs. Another reason is that no basic ethical principle will be
affected in case of appointment in the organizations which are of non-profit category (Kuan
2014). These are the reasons that ensure that there will be no issues which are ethical.
1C
In the case provided, there is a situation mentioned where the payment of the auditor,
which is payable Accountants is immensely dependent audit opinion that should be appropriate
to the audit client Monlec Ltd. It explains that Monlec Ltd is asking for a favorable audit report
from the auditors. In this regard, it is worthwhile to mention that the auditors are the
representatives of investors and the stakeholders; not the organizations. As per APES 110
Principle of Objectivity, Section 120, the auditors should not conciliate their professional and
business judgment for any type of biasness, influence or any conflict of interest (Athanasiou
2014). It explains that the judgment of the auditors must not be manipulated by any types of
biasness or influence. As per the situation provided, if the audit report provided by the auditor is
favorable for Monlec Ltd, there will be a breach of objectivity principle of auditing. There shall
not be any violation of ethical principles of auditing if the auditors does not provide an opinion
that is biased (Trung 2015).

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1D
In the case provided, it is evident that Winton Accountants has provided all the papers
and reports of Motoring services to the Chadwick Chartered Accountants. Chadwick Chartered
accountants have the job of reviewing the quality o audit if the Winton Accountants. This
situation shows that the Chadwick Chartered Accountants have to carry out various processes
and tests to check the Winton accountant’s quality of auditing. As per APES 110 Principles of
Confidentiality, Section 140, the auditors have professional obligations to sustain the
confidentiality of the acquired information regarding the auditing clients. It shows that the
auditor should not disclose the information previously acquired regarding the audit clients to any
third party. According to the situation provided, it is seen that Winton Accountants have unveiled
all important data and information regarding Motoring Services to Chadwick Chartered
Accountants by providing them with all the audit papers (Carey, Monroe and Shailer 2014). Thus
in this particular case, Winton Accountants have violated the principles of the confidentiality
regarding auditing with their specified actions.
Answers of Question 2
2 A
From the case study provided, it can be seen that the Thornleigh Accountants have sent
Jane Davis to replace Leona Ng in order to complete the audit work of Jenkins Ltd because of
the illness of Leona. The situation is that the management of Thornleigh Accountants are
inclined to take Jane Davis in the audit team of the organization in order to conduct the audit
works of Jenkins Ltd from the middle of July. This situation enhances the threat of
interdependence of audit for Thornleigh Accountants. As per APES 110, Self-review Threat,

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Section 100.12, a member of an audit team should not possess the right to use the outcomes of
the judgment of previous audit made by any other members of the same audit team. Apart from
that, it also explains that the outcomes of previous judgments of audit by any member of the
same team cannot be used. A same principle is also applicable for the Thornleigh Accountants
because the organization is making plans to use the judgment of audit done by Jane Davis as she
has been the accounts manager of Jenkins Ltd and possesses the knowledge regarding the
accounts of the business organization (DeFond and Zhang 2014). Hence, it can be said that the
self-review threat of the independence of the auditors shall be raised in the case Thornleigh
Accountants involving Jane Davis in the audit team.
2B
According to the situation provided, it can be said that John Darrow is accountable to
conduct the operations of audit of Winmalee Ltd. Winmalee Ltd has provided all the accounting
papers including computer files and accounting standards to John to support their intangible
asset’s valuation. In this regard it is necessary to mention that that it should be the responsibility
of the auditors to attain conclusive evidences by scrutinizing various types of financial accounts
of the audit clients and the auditors should not consider any papers provided to them by the audit
client. According to the situation provided, the auditors can feel pressurized by the audit client to
agree with the audit client’s judgment. Apart from that, by providing the papers Winmalee Ltd
can definitely indirectly pressurize John to give favorable audit report to them. Therefore,
according to APES 110, Section 200.8, the specified situation can definitely create Intimidation
Threat to the independence of the auditors (Ojo 2013).

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2C
In accordance to the case study provided, it can be said that the chocolate company has
invited the auditors to stop over the second chocolate show and also the organization invited the
auditors to the social club of the business organization. In this context, it sould be mentioned that
the auditors should not involve any types of entertaining activities with the audit clients. As per
APES 110, Self-interest Threat, Section 100.12, there should be a threat to the independence of
the auditors in case of any types of nonfinancial or financial interest of the influence of the
auditors regarding their opinion on the audit. In the case study, it can be noticed that the
chocolate company might be trying to manipulate the auditors by inviting them in entertaining
activities with a strong motive of manipulating the outcomes of the audit (Deumes et al. 2012).
Therefore it can be said that if the auditors choose to accept the invitation of the management of
the chocolate company, they shall fall under the self-interest threat of the independence of the
auditor.
Answers of Question 3
3A
The chief responsibility of the auditors are to scrutinize th financial statements of the
business organizations to make sure that the financial statements of the organizations are free
from all types of material misstatements and they are prepared by complying with all major
regulations. Apart from that, the auditors should not make comments on the financial position of
any organization without seeing any fraudulent activities. In the case of Connor organization, it
is seen that the organization is dependent on the bank overdraft to pay off their debts.
Subsequently the bank wants the repayment of the sum within 1 month. It explains the weak

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financial condition of the organization and the auditor has not faced any types of material
misstatement regarding the financial statement of Connor Company. This explains that the
organization did not edit their financial statements to hide their financial condition. Hence the
auditor should issue Unqualified Audit Opinion for Connor Company (Tsipouridou and Spathis
2014).
3B
It should be the responsibility of the organizations to present their financial statements
depending on the accounting principle standards. Apart from that, they should comply with the
regulations of accounting of the country where they are operating. In the case study that is
provided, it is seen that the organization should follow FIFO method for the valuation of
inventory, but currently they are using LIFO method because their parent company back in
United States use that method. Thus the differential effect between FIFO and LIFO has majorly
affected the valuation of inventory making a material misstatement. Thus, in this case, the
auditor has the rights to issue adverse opinion. As apart there are no discrepancies in any
financial statement, there should not be any compliance issues. In this case, the auditor can issue
Qualified Audit Option, where the auditor can add a paragraph highlighting the reason behind
the report being unqualified (Rahimian, Tavakolnia and Karamlou 2014).
3C
The business organizations should do valuation of the fixed assets like machinery,
building, plant and others on a regular basis because of the changing market price. For Victorian
Manufacturing Company, it can be seen that they have not done the valuation of their Melbourne
factory for the last five years as the directors of the organization thought that there are no
changes in the market valuation. This can create major material misstatement. Thus while

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auditing the auditors will not be able to give accurate audit opinions and can issue Disclaimer of
Opinion (Kachelmeier, Schmidt and Valentine 2016).

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References
Athanasiou, A., 2014. Avoiding client persuasion. Taxation in Australia, 48(10), p.601.
Athanasiou, A., 2014. Boy, you're gonna carry that weight a long time!. Taxation in
Australia, 49(2), p.106.
Carey, P.J., Monroe, G.S. and Shailer, G., 2014. Review of Post‐CLERP 9 Australian Auditor
Independence Research. Australian Accounting Review, 24(4), pp.370-380.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting
and Economics, 58(2), pp.275-326.
Deumes, R., Schelleman, C., Vander Bauwhede, H. and Vanstraelen, A., 2012. Audit firm
governance: Do transparency reports reveal audit quality?. Auditing: A Journal of Practice &
Theory, 31(4), pp.193-214.
Galit, S.H. and Sorbe, T., Metabank, 2012. Computerized extension of credit to existing demand
deposit accounts, prepaid cards and lines of credit based on expected tax refund proceeds,
associated systems and computer program products. U.S. Patent 8,090,649.
Han Fan, Y., Woodbine, G. and Cheng, W., 2013. A study of Australian and Chinese
accountants’ attitudes towards independence issues and the impact on ethical judgements. Asian
Review of Accounting, 21(3), pp.205-222.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.

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Kuan, K.T.C., 2014. Auditor independence: an analysis of the adequacy of selected provisions in
CLERP 9 (Doctoral dissertation, Queensland University of Technology).
Ojo, M., 2013. Audits, audit quality and signalling mechanisms: concentrated ownership
structures.
Ottaway, J., 2014. IMPROVING AUDITOR INDEPENDENCE IN AUSTRALIA: IS
‘MANDATORY AUDIT FIRM ROTATION’THE BEST OPTION?.
RAHIMIAN, N., TAVAKOLNIA, E. and KARAMLOU, M., 2014. Qualified Audit Opinion and
Debt Maturity Structure.
Trung, N.K., 2015. Ethics Education In The University. International Journal of Scientific &
Technology Research, 4(8), pp.5-10.
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.