ACT504 Auditing Theory Assignment Solution

Added on - 30 Oct 2019

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Audit theoryAnswer part A-1A whole lot of circumstances should be taken into attention about the client and his business, whenever anauditor fixes up an appointment with a company. The most crucial point that should be taken into account bythe auditor at the earliest is that all the authorized rules are followed by the management of the company. Forinstance, whether the client is keeping a check if his business is in association with the protection of theenvironment and no harm is done to the ecosystem. It is important to stay at the distance from the unauthorizedmeans and manipulative policies (Arens et. al, 2013).As per the details of the case, the Pharmaceuticals Ltd is found to be guiltyofthe charge of dispatching itsharmful chemical wastes into the nearby river and thus contributing to water pollution which is a very unethicalpractice. Involvement of the management is such a practice and the consequences of this matter should be paidfull attention by the auditor while making an auditing appointment (Heeler, 2009).It is the duty of the auditor to highlight all the unethical means followed by the company regarding thedestruction of the environment and shown the same in their reports so as to summon the people at large. So itthe responsibility of the auditor to conclude that is the company guilty of the charges that have been put on thesame.Answer part A-2In cases similar to the one of Pharmaceuticals Ltd, if on knowing the manipulative and the unethical meansfollowed by the company on a large scale, if the management is not getting involved in presuming and settingthings correctly, then the auditor should step forward and take the following actions:First of all the auditor should look into the financial statements of the company so as to detect any falsedata placed in it which did not come into the eye of the management which is enough to fool the shareholders.The auditor should efficiently categorize the false data and measure itseffecton the auditor’s report. If thesituationsare worseningthen the auditor has the full right to undertake assessment procedures to fix theproblems.It is the duty of the auditor to detect any flaws in the financial statements related to the manipulative dataput up by the management. All the concept of theauditshould be thoroughly applied by the auditor under thesecircumstances before questioning the reliability of the management of the company (Black, 2010).2
Audit theoryIt is very obvious that the Pharmaceuticals Ltd would have carried out a number of manipulativetransactions illegally so as to capture and control the seriousness of the matter rather than disclosing ittothepublic. It is thus the duty of the auditor to detect all those transactions and also to find the steps deliberatelyfollowed to record such transactions.Strictness should be maintained by the auditor in each and every flaw made by the company. As in thiscase,it was seen that the management was weak enough so as to control the manipulative steps taken and insuch cases the work of the auditor increases as it is expected that the steps followed by the auditor will bestrictly effective and positive in nature (Messier, 2013).Answer part A-3Reaction Pvt Ltd received the appointment letter for conducting anauditin the Billing & Associates Company.The letter was approved and accepted with respect by the Reaction Pvt Ltd. While carrying out the auditprocedures in order to finalize the report, a situation of absence of documentation aroused which had relationwith the transactional receivables of the company. Under thiscircumstance,it was decided that a manipulatedreport will be shown to the public.It is also possible that the company can cancel the audit letter and ask the latter to only check the position of thecompany which is enough to define its status. This shows that the working of the audit company is very muchconfined. It is also seen that the company now proclaims that no audit is needed at this time. This questions theaudit company as to why it accepted the letter if their no need of it at present. But this also highlights that theBilling & Associates Company is putting effort to conceal its mistakes of theabsenceof documents. This can beguaranteed because of the proclamation made by the company just after all the audit procedures have beenstrictly completed (Wood, 2011). But it is also necessary to issue the finalized report which was made inabsence of the documents on the part of the invitee company.Answer part A-4Manyconditionsarisewhich confine the independence of the auditor with a term involve called “self-review”. If a company has been following manipulative methods then it is the duty of the auditor to inform theeffectsof such practices on the financial statements. But it should be kept in mind that the duty of the auditor isonly to inform the management and not to suggest ways in which the following practices can be controlled andsituations can be made thebatter (Cappelleto, 2010). If this happens then the auditor has no right to check themodified and updated financial statements as he himself had suggested the ways to change it.3
Audit theoryMaintaining the independence of self-review of the auditors is very much important for an auditor so to presenta checked and legal picture of the company without any flaws.A major threat can be a self-interest threat. For instance, if the client asks for the travel servicesrecommendation and the same is not given by the auditors then it can result in the auditor firm losing its client.This can be avoided if the auditor is at par with the client and maintains anonlyprofessional relationship withthem. It must also be seen that the auditor should reject any piece of work whichis not includedin the contract.If any pressure is maintained on the auditor then the audit company must break the contact so as to keep theindependence of the auditor at the first priority (Vause, 2009).Familiarity threat can also be a case with an auditor as the wife of one of the auditors is holding a goodamount of shares in the company. This kind of threat takes place when the auditor pays much affection in theform of affection towards the company so as to safeguard the profits of the ones in close contact (Carcello,2012).This can be avoided if any other charted accountant from any other company is appointed in order to check thereports prepared by the previous auditor who was getting sympathetic towards the company.Intimidation threat arises when the auditor hints the fact that he is not going to be paid for all thehardworkhe has done. Creation of a doubt is the basis of this threat. Though there is no direct action by the client ofnon-payment of the fessthematter is suspected by the auditor due to the course of actions followed by theclient.This threat can be avoided if the auditor demands his fees from the client before submitting the final report tothe company management. This is done so as to guarantee the fees receiving because if the report is submittedthen there can be a chance that the auditor doesn’tgetpaid (Church et. al, 2008).4
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