Auditing Theory and Practice: Fraud, Aggressive Accounting Policies and Misappropriations

This study focuses on fraud, aggressive accounting policies and other misappropriations in BC Iron Limited. It discusses the risk assessment procedures used by an audit, audit procedures, and the objectives of an auditor. The study explains each of the audit procedures that relate to fraud, aggressive accounting policies or any of the other misappropriations found in the financial statement of BC Iron Limited.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
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2AUDITING THEORY AND PRACTICE
Table of Contents
Executive Summary.........................................................................................................................3
Introduction......................................................................................................................................4
Methodology....................................................................................................................................5
Findings...........................................................................................................................................8
Implications of findings.................................................................................................................10
Conclusions and Recommendations..............................................................................................12
References and Bibliography.........................................................................................................14

3AUDITING THEORY AND PRACTICE
Executive Summary
In this assignment, proper emphasis has been given to research on issues like Fraud,
aggressive accounting policies and other misappropriations. The company selected for this
assignment is BC Iron Limited that deals in mining, crushing as well as screening and trucking.
The current segment explains about the company, risk assessment procedures used by an audit,
audit procedures. The objective of an auditor is explained in the study where it is the
responsibility of the auditor to engage in obtaining true and fair value and performing audit
procedures. Audit procedures related to fraud, aggressive accounting policies and other
misappropriations. Risk-based auditing approach, auditing concepts as well as auditing standards
and case laws had been used in the report and applied it with the case company (BC Iron
Limited). The requirements of the Australian Auditing Standards are made to help auditor for
achieving the objectives as highlighted in the Australian Auditing Standards and need to follow
the overall objectives of an auditor. The study properly explain each of the audit procedures that
relates to fraud, aggressive accounting policies or any of the other misappropriations found in the
financial statement of BC Iron Limited.

4AUDITING THEORY AND PRACTICE
Introduction
The current study deals with highlighting the key areas of research that should cover
issues such as Fraud, aggressive policies and other misappropriations (Yao, Percy and Hu 2015).
The current segment had selected BC Iron Limited as the case company and the area of research
is to discuss about Fraud, aggressive accounting policies as well as other misappropriations
present in the case company. BC Iron Limited is a smaller mining company where they manage
operations such as mining, crushing as well as screening and trucking (Alles, Kogan and
Vasarhelyi 2018). The report properly introduces the topic and discusses about these research
areas in detail and linking with the company (BC Iron Limited). The Auditing Standard used in
this study is ASA 200 and 240 as it discuss about fraud detection and how to minimize it as far
as possible. Risk-based approach had been used in the study where risk need to be appropriately
identified as well as managed. The information relates with financial, managerial and operational
needs to be accurate and reliable way (Purcell 2016). It is the responsibility of an auditor to
perform the audit in accordance with Australian Auditing Standards as well as auditing standards
for given company and country. Proper application of the requirement of the AAS (Australian
Auditing Standards) by the auditor is expected for providing sufficient basis for achieving the
objectives of an auditor. Due to these audit engagements, it varies largely on the basis of
situations that cannot be predicted in accordance to Australian Auditing Standards (Yang, Brink
and Wier 2018). Therefore, the study had been conducted to discuss on the issues governing to
fraud, aggressive accounting policies and other misappropriations.

5AUDITING THEORY AND PRACTICE
Methodology
The methods used for collecting data for this study is secondary sources of information.
The data had been collected from case laws, regulations as well as relevant accounting standards
(ASA 200 and ASA 240) in order to arrive at the conclusions at the end (Yan and Luo 2016). In
this case, BC Iron Limited had been selected that operates in mining sector. There are five broad
types of fraud that can be identified from a given company and these are improper recognition of
revenues or incomes for given period of time, overstatement of assets, understatement of
expenses or liabilities, assets misappropriation and inappropriate disclosure. Fraudulent financial
reporting- On analysis, it is noted that most of the fraudulent financial reporting takes into
consideration earnings management and due to that Securities and Exchange Commission had
stated that the use of misstated figures will distort in getting true and fair value of the financial
performance at BC Iron Limited and it will be difficult to achieve the desired result (Amir-
Mohammadian, Chong and Skalka 2016). Statement on Auditing Standards (SAS 99) needs
auditors who should put emphasis upon two major areas of fraud. The first one is fraudulent
financial reporting and the second one is asset misappropriation. On considering the same, both
have a multitude of fraud schemes. Addition to that, Earnings management mostly does not get
included towards violation of Generally Accepted Accounting Principles. Most of the business
enterprise aims at managing earnings by selecting the accounting policies that bend GAAP for
attaining future earnings targets (Waldman and Jensen 2016).
The main objective of ASA 200 is to conduct an audit of a financial report of any
company (BC Iron Limited in this case). In addition, the overall objectives of the auditor is to
obtain reasonable assurance on matters relating to whether the financial report as a whole is free

6AUDITING THEORY AND PRACTICE
from material misstatement or because of fraud or preparation of financial report in all material
respects in accordance with an applicable financial reporting framework (Amir-Mohammadian,
Chong and Skalka 2016). In order to work on these objectives, the auditors communicate it with
the respective companies and perform audit functions as needed by the Australian Auditing
Standards in accordance with findings of the auditor. It is the responsibility of the auditor to
determine the audit procedures for fulfilling the requirements of the Australian Auditing
Standards as well as achieving the objectives in the near future. Due to such situation, there may
be specific matters that need the auditor for performing audit procedures in accordance to
Australian Auditing Standards for meeting the objectives as mentioned in the Australian
Auditing Standards (Stewart and Shamdasani 2014).
Auditing procedures for Fraud detection
In accordance with ASA240, the main objective of an auditor is to evaluate as well as
assess the risk associated from material misstated figures present in the financial report because
of any types of fraud (Rosenberger and Lachin 2015). In order to assess sufficient audit evidence
on matters relating to assessed risks, it is needed for an auditor to design and implement suitable
responses. Furthermore, the auditor need to respond appropriately to fraud or suspected fraud at
the time of audit practices.
Auditing procedures for aggressive accounting policies
Most of the Business Corporation involves in conducting tax transparency measures into
their Corporate Social Responsibility agenda that get along with other relatable charitable
activities as well as affirmative action employment policies and other environmental initiatives

7AUDITING THEORY AND PRACTICE
(Power and Gendron 2015). In order to prevent risk, company need to transfer payments as well
as create document that explain how it is arrived at particular market value. In order to deal that,
company need to conduct an economic analysis of its industry as well as aim at offering market
research data in displaying the fact that price is justified. Therefore, market research firms need
to work upon creation of compliance tax planning strategies in order to reduce money owning
(Alles, Kogan and Vasarhelyi 2018).
Auditing procedures for any other misappropriations
In accordance to International Standard on Auditing 240, the main objective of an auditor
is to evaluate as well as assess risk occurred from material misstated figures present in the
financial statements because of fraudulent activities (Lin et al. 2015).
The nature of Australian Auditing Standards are taken together to look at the work of the
auditor that aims at fulfilling the overall objectives of the auditor (Amir-Mohammadian, Chong
and Skalka 2016). In addition, the Australian Auditing Standards deals with general
responsibilities of the auditor and even considering facts relevant to the application of those
responsibilities relating to appropriate topic. At the time of conducting audit practices, it is the
responsibility of the auditor to comply with legal as well as regulatory requirements in
accordance to the Australian Accounting Standards. Furthermore, the Australian Auditing
Standards fails to override any law or regulation that is needed for governing audit function as
presented in the financial report. As far as event is concerned, such law deals with complying
with the Australian Auditing Standards (Kang, Trotman and Trotman 2015).

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Findings
On analysis, it is found out that the shareholders of BC Iron Limited and even the
potential investors understand about the risk involved in the stock and the features that can affect
the portfolio. It is necessary for an investor to deal with two types of risk that affect market value
of BC Iron Limited (Hargie 2016). To analyze both the risks, the first risk is company specific
that has the potential to get diversified away and this can be done by investing in other company
for lowering exposure to one specific stock. On the other hand, the other risk that needs proper
attention on market risk that cannot be diversified and lead to consider macroeconomic factors
that affects overall stock in the marketplace (Amir-Mohammadian, Chong and Skalka 2016).
There are various features of stock expose to different levels of market risk. In that, commonly
used metric will be used to measure the market risk and even the broad market index as it shows
beta value for the same. Furthermore, any stock with a greater than one is treated more volatile
by nature as compared to beta that is less volatile at the same time (Harding et al. 2016).
From the above methodology section, it is now important to highlight the findings in
accordance to ASA 200 for BC Iron Limited. In order to attain objectives, the auditor need to use
the objectives as mentioned in relevant Australian Auditing Standards at the time of planning as
well as performing the audit function (Harding and Trotman 2016). This will help in maintaining
interrelationships among Australian Auditing Standards for determining whether any of the audit
procedures need in AAB is compulsory in pursuance of the objectives as mentioned in the
Australian Auditing Standards. All the information is gathered from the auditing standards that
states about fraudulent activities that takes place in the companies. It is the responsibility of the
auditor to identify risk or assess it so that companies can involve in practicing ethical practices.

9AUDITING THEORY AND PRACTICE
Improper evaluation of fraudulent activities by the management can be a reason why companies
deal with different types of fraud.
On the other hand, if an auditor fails to comply with suitable alternative audit procedures,
then it is needed to consider the requirement as mentioned the Auditing Standard. In Para 24, it
states that if an objective of appropriate Auditing Standard cannot be achieved, then the auditor
need to evaluate whether this restricts the auditor from attaining future objectives of the auditor
as well as in accordance with Australian Auditing Standards for bringing modification in the
audit opinion or withdrawing from the engagement (Freeman et al. 2017). Therefore, failure to
follow this objective show significant matter needed document as mentioned in ASA 230.
Professional skepticism takes into consideration audit evidence that lead to contradiction
of other obtained audit evidence (Alles, Kogan and Vasarhelyi 2018). It is needed to highlight
the information that is gathered to check the reliability of documents as well as responses needed
at the time of enquiry as used in audit evidence. There are several situations that reveal the fact
that there is a need for audit procedures in accordance by the Australian Auditing Standards. In
order to reduce risks, an auditor need to maintain professional skepticism and this can be done by
overlooking unusual circumstances, over generalizing at the time of deriving at conclusions from
audit observations, make use of suitable assumptions in understanding the nature, extent of audit
procedures as well as timing and evaluating the results at the same time (Free and Murphy 2015).
Due to inherent limitations of an audit, there are several unavoidable risks where material
misstated figures in the financial statement may not be detected as and when required (Alles,
Kogan and Vasarhelyi 2018). These misstated figures cannot be figured out even if audit is
planned properly as well as in accordance to Australian Auditing Standards. In addition to that,

10AUDITING THEORY AND PRACTICE
discovery of material misstatement of the financial statement result from detection of fraud or
error that does not show failure for conducting an audit in accordance with Australian Auditing
Standards. Furthermore, the inherent limitations of an audit cannot be treated as justification for
the auditor where they can be satisfied with less-than-persuasive audit evidence (Craig,
Smieliauskas and Amernic 2017).
Implications of findings
From the above section, findings had been highlighted that make it evident that how far
auditor can help in detecting any fraud or material misstatement present in financial reporting
(Collins 2017). It is not possible for an auditor to reduce audit risk to zero as well as cannot even
obtain absolute assurance to the fact that the financial statement is free from material
misstatement because of fraud or error. In that case, there are several limitations present in audit
that leads to most of the audit evidence where auditor draws conclusions on the basis on an
opinion by an auditor. There are several inherent limitations of an audit that include nature of
financial reporting, nature of audit procedures as well as conducting audit for specified period of
time and even at a reasonable cost (Alles, Kogan and Vasarhelyi 2018).
As far as nature of audit procedure is concerned, there are several legal limitations
present on the auditor’s ability for obtaining audit evidence. In most of the cases, it happens that
the management of any company may not render complete information and this may be
intentionally or unintentionally (Christopher, Leung and Leong 2017). The information that is
hidden may be is relevant to the preparation of financial report or that can even be requested by
the auditor. It is not possible for an auditor to perform audit procedures to obtain assurance even
if all the relevant information is given to them. As described in Para 49 of Australian Auditing

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Standards, it includes requirements for the planning as well as performance of audit as evaluated
by an auditor (Amir-Mohammadian, Chong and Skalka 2016). It is needed to use testing as well
as other means to examine population in a way that provides reasonable basis for the auditor to
draw conclusion about the population. The auditor need to conduct judgment on the basis of facts
and any material misstated figures found in the financial report as well as assertion levels at the
time of conducting risk assessment procedures and other related activities (Chen, Khalifa and
Trotman 2014).
As far as certain assertions or subject matters are concerned, there are potential effects
present to judge the ability of the auditor to detect any material misstatement figures to those that
is significant by nature. Furthermore, such assertions relates to fraud where it involves senior
management or collusion as mentioned in ASA 240. There are several relevant Australian
Auditing Standards that is needed for identifying specific audit procedures as it assist in reducing
the effect of inherent limitations (Chan and Vasarhelyi 2018).
Fraud takes into consideration sophisticated as well as carefully organized schemes as
design for concealing it (Alles, Kogan and Vasarhelyi 2018). In addition, audit procedures can be
used for gathering audit evidence as it may sound ineffective at the time of detecting intentional
misstated figures that involves either collusion to falsify documents. These misstated figures will
lead the auditor to believe the fact that audit evidence is valid when it is actually not. Therefore,
the auditor are not trained or expected to work like an expert in the authentication of documents.
Few of the personnel should be engaging in performing wide range of duties (Axelsen, Green
and Ridley 2017).

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For purposes of specifying additional considerations conducted for audit of mining
company (BC Iron Limited), the auditor need to identify straightforward or uncomplicated
transactions from the financial report of the company. They should engage in simple record-
keeping activities (Andon, Free and Scard, 2015). They mostly posses few internal controls as
well as few levels of management who are responsible to carry out broad range of controls
On critical analysis, it is found that an audit is not treated as an official investigation into
alleged wrongdoing of activities. Furthermore, auditors have no such legal powers like power of
search that is always important at the time of conducting an investigation (Amir-Mohammadian,
Chong and Skalka 2016).
Conclusions and Recommendations
At the end of the study, it is concluded that the auditor should engage in identifying
fraudulent activities as taken place at BC Iron Limited. The fraud can be detected by monitoring
the financial statement of BC Iron Limited. If there is any sudden increase or decrease
percentage present during 3 financial years, there is always a doubt of fraud practices or
misappropriation of figures. The responsibility of an auditor is to find fraud in an audit after
viewing the financial report of company. Constant monitoring of financial report of any company
will lead to find ways on how to reduce fraud in the upcoming financial years. It is the
responsibility of the auditor to plan the audit of BC Iron Limited in an effective way. They
should involve in testing as well as using other means of examining the populations for misstated
figures present in the financial statements of BC Iron Limited. It is the responsibility of the
auditor to make use of objectives for evaluating the appropriate audit evidence as derived in the
context of the overall objectives of an auditor. As a result, the audit concludes by saying that the

13AUDITING THEORY AND PRACTICE
audit evidence is not sufficient as well as appropriate, then the auditor need to follow one or
more of the various approaches for meeting the requirements in the most effective way. The
auditor needs to evaluate whether further relevant audit evidence has been obtained in
accordance to Australian Auditing Standards. The auditor need to extend the work performed at
the time of applying one or more requirements. Therefore, the auditor need to perform other
procedures as judged by the auditor as needed for handling situations in any company. It is
recommended that companies should engage in ethical practices so that they face no issue at the
time of audit activities. The management should not hide any important information from the
auditors as the company can face consequences in the future.

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References and Bibliography
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and practice. In International Conference on Principles of Security and Trust(pp. 139-162).
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analysis. Accounting Research Journal, 28(1), pp.10-44.
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Collins, H., 2017. Creative research: the theory and practice of research for the creative
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Lin, C.C., Chiu, A.A., Huang, S.Y. and Yen, D.C., 2015. Detecting the financial statement fraud:
The analysis of the differences between data mining techniques and experts’
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