Auditor’s Public Interest Responsibilities and Audit Quality | Desklib

This report takes into consideration performing the key stakeholder analysis of Woolworths Limited for the analysis of the effects of material misstatements on them. This report also considers the concepts of independence and whistleblowing in relation to the public interest requirements of auditors. After that, the major lessons from the Scandal of Enron can be seen in the report. Lastly, this report analyses audit quality in respect to the warning note.

Running head: AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Auditor’s Public Interest Responsibilities and Audit Quality
Name of the Student
Name of the University
Author’s Note

1AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Executive Summary
This report takes into consideration performing the key stakeholder analysis of Woolworths
Limited for the analysis of the effects of material misstatements on them. This report also
considers the concepts of independence and whistleblowing in relation to the public
interest requirements of auditors. After that, the major lessons from the Scandal of Enron
can be seen in the report. Lastly, this report analyses audit quality in respect to the warning
note.

2AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Table of Contents
1. Introduction............................................................................................................................3
2. Effects of Material Misstatements on the Key Stakeholders.................................................3
3. Independence, Whistleblowing and Public Interest Requirements......................................5
4. Lessons from Enron Scandal and Arthur Andersen...............................................................6
5. Audit Quality and Audit Strategies to Address Warning........................................................9
6. Conclusion............................................................................................................................12
7. References............................................................................................................................13
8. Appendices...........................................................................................................................16

3AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
1. Introduction
The definition of auditing can be given as the on-site verification activities, such as to
inspect, examine or verify, of certain processes or quality system related to accouts and
finance, with the aim to ensure the needed compliance (Eilifsen et al. 2013). For this reason,
it is needed for the auditors to perform the needed audit procedures for gaining the needed
audit evidences. While performing the audit operations, the auditors of the companies must
consider their compliance with certain principles and standards like audit independence,
professional scepticism and others (Christensen, Glover and Wood 2013). At the same time,
the auditors are needed to provide utmost attention to the public interest requirements of
audit profession (Chou 2015). First objective of this report is the analysis of the impact of
material misstatements on the decision-making process of the key stakeholders. The next
objective of the report is to discuss about the public interest requirements of the auditors.
The report also provides the discussion on the collapse of Enron for deriving its teachings for
the auditors. The last part discusses about the procedures to improve the audit quality.
2. Effects of Material Misstatements on the Key Stakeholders
The aim of this part is to measure the impact and risk of material misstatements on
the key stakeholders of Woolworths Limited (Woolworths). There are certain key
stakeholders who will be impacted with the presence of material misstatements in the
financial statements; they are Shareholders, Deb Funders, Employees and Suppliers.
Shareholders: It can be seen from the appendix that Woolworths has numerous number of
shareholders and the range of these shareholders start from different institutions to
individual (woolworthsholdings.co.za 2019). As they have stake in the company, they largely
depends in the financial statements to obtain the needed information for making the

4AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
correct investment decision. The risk of inappropriate investment decision is created when
the auditors of the company fail to identify, disclose and adjust the material misstatements
in the financial reports (Backof, Bowlin and Goodson 2017).
Debt Funders: It can be seen from the appendix that debt funders are a major source of
capital for the company as this group provides the company with the required capital as
loan or borrowings (woolworthsholdings.co.za 2019). For this reason, they must ensure the
company’s ability of repaying the borrowed money. For this purpose, they extract
information from financial reports. In case the auditors fail in identifying, disclosing and
adjusting the material misstatements, the risk is created where these stakeholders will not
be able to assess the company’ ability to pay off all the debts (Keune and Johnstone 2015).
Suppliers: As per the appendix, Woolworths deals with many direct as well as indirect
suppliers and the company wants to provide them with favourable terms as well as support
(woolworthsholdings.co.za 2019). In case, the suppliers of this firm have the knowledge
about the liquidity position of the firm, they can make effective decision on whether to
provide credit to the firm or not. In this position, in case the auditors of the company fail in
effectively identifying, disclosing and adjusting the material misstatements, the risk of
ineffective judgment of the company’s liquidity position is created (Ruhnke and Schmidt
2014).
Employees: As per the appendix, Woolworths has an employee base of 46000 people and it
is needed for the company to ensure their wellbeing (woolworthsholdings.co.za 2019). In
this situation, the auditors’ inability to effectively recognize, disclose and adjustment of the
material misstatements can affect the company’s ability to continue as a going concern. This
aspect creates the risk of losing the jobs of these employees in future (Suseno 2013).

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3. Independence, Whistleblowing and Public Interest Requirements
Auditor independence can be considered as the independence of the external
auditors. The auditor independence can be characterized by the aspects of integrity as well
as an objective approach to the whole audit process (Daugherty et al. 2013). The main
requirement of the concept of auditor independence is to ensure the fact that the auditors
perform their work freely and in an objective manner. As per the concept of auditor
independence, the auditors must be independent from the parties that have interest in the
audit client (Sultana, Singh and Van der Zahn 2015).
It needs to be mentioned that the auditors are needed to consider the concept of
audit whistleblowing. In case the auditor concludes that there has been occurrence of
fraudulent or unethical behaviour within the organization, he/she needs to consider the fact
that whether there is a necessity of whistleblow on the lawbreaker and to whom it needs to
be reported (Ismail 2013). As per the definition of whistle-blower, it can be considered as a
person who reveals information he/she rationally believes evidence a breach of any law,
regulation or rule, or mismanagement, or gross waste of public funds, authority misuse and
others. As the example of whistle-blower, the name of Sherron Watkings can be mentioned
as he became concerned about Enron’s off balance sheet accounting treatments and
reported this matter to the Chairman of Enron, Key Lane in August 2001 (Yee et al. 2017).
In order to maintain independence and to whistleblowing, it is needed for the
auditors to follow the regulations mentioned in APES 110 Code of Ethics for Professional
Accountants. APES 110 has mentioned the requirements for the auditors for audit
nomination (apesb.org.au 2019). It is given under Section AUST210.11.1 of APES 110 that
the present auditor of a firm can help the new auditor by providing certain crucial

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information on audit proposal and to obtain this particular information from the present
auditors, the new auditor must replace the audit nomination and obtain the permission of
the client to demand the information from the current auditor (apesb.org.au 2019). The
auditors must reject the audit nomination if the client declines the permission. The potential
auditor is needed to follow certain procedures where the obligation is on them to collect
the information from the current auditor on nomination by lettering when the permission
comes from the audit client (apesb.org.au 2019). The presence of this regulation is needed
as it provides the required safeguard to the whistle-blowers. It is also written under Section
100.1 of APES 110 that there is a restriction on the auditors to perform audit for only
fulfilling the needs of the client, but the ruling states that the auditor should audit in the
best interest of the public (apesb.org.au 2019).
4. Lessons from Enron Scandal and Arthur Andersen
Accounting Fraud: The information of Enron collapse helps to know the fact that the
management of the company was involved in major accounting frauds in the forms of off-
balance sheet financing, creation of false value of the assets and the generation of false
financial gains; and the appointment of Arthur Andersen was done so that the management
can get assistance from them to continue these accounting frauds. The main lesson that can
be obtained from this is that the responsibilities and authorities for auditing the company’s
financial statements must stay in the hands of the government agencies instead of the
private audit firms. Moreover, the audit regulatory bodies need to ensure imposing a ban on
the auditors to provide non-audit services and consultancy services to the audit client as it
can lead to self-interest threat of audit independence (Lennox, Lisowsky and Pittman 2013).

7AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Statutory Audit and Accounting Standards: The auditor of Enron along with the
management of the company did not consider this necessary to comply with the accounting
and auditing standards; and this aspect contributed towards the development of disputes in
the accounting books and audit statements. Hence, the lesson that the auditors can get
from this aspect is that it is needed to have certain statutory regulations in both the
accounting and auditing profession that will prevent the auditors in involving in any kind of
unethical actions (Hosseini and Mahesh 2016).
Auditor Incentives: The collapse of Enron has been able in conveying the specific fact that
the presence of immense penalties affects the motivation of the auditors as this motivation
can be retained by introducing certain incentives for the auditors due to the fact that
majority portion of the auditors have compliance with the principles of objectivity and
professional competence and due care (Merkel 2017). For this reason, auditor independent
oversight can be used as a major promoter of the audit quality due to the fact that the
strengths and weaknesses of the audit operations can be identified with this. Sarbanes-
Oxley Act can be considered as an example in this aspect as it has put a ban on the
companies’ practice to publish the audit inspection report that criticises the audit works.
Auditor Independent Oversight: The particular insight that can be gained from the Enron
scandal is that one major way to improve the audit quality is the introduction of auditor
independent oversight (Haswell and Evans 2018). However, for the application of the
auditor independent oversight, it is needed for the auditors to acquire the needed skills,
knowledge and experience. Another way to improve the auditor independent oversight is
the introduction of the audit inspection program where the main aim will be the inspection

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of the used audit judgements that the auditors have used for the development of audit
opinion.
Connection between External Auditors and Audit Committee: Another major insight that
can be gained from the collapse of Enron is the maintenance of the true and fair disclosure
of the financial information by the companies as only then auditor independent oversight
will be useful for enhancing the audit quality (Peng and Talib 2017).
Internal Control: Internal control is essential for the companies and the Enron scandal has
conveyed this particular lesson. Shareholders want to assess the strength of the company’s
internal control for financial reporting as string internal control prevents frauds and errors in
accounting. For this reason, the companies must ensure the true and fair disclosure of the
financial information that the shareholders obtain from the financial statements with the
aim to make proper investment decisions. It also requires the compliance with the
necessary financial reporting regulations and rules (Ewelt-Knauer, Gold and Pott 2013).
Behaviour of Arthur Andersen: It needs to mention the fact that Arthur Andersen has the
responsibility of auditing the financial accounts and financial statements of Enron. Providing
the necessary assurance on the true and fair view of the financial statements of Enron was
the one major part of the job responsibilities of Arthur Andersen (Springate 2013). The
shareholders of Enron considered the audit report of Arthur Andersen correct and they
invested money in the company. However, it was later disclosed that Arthur Andersen was
majorly involved in the business relationship with Enron. In addition, some audit executives
of Arthur Andersen received job from Enron. This aspect created severe self-interest threat
of audit independence. In the presence of major personal interest and business relationship,
Arthur Andersen did not obtain the needed information on the audit nomination before

9AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
being appointed as the audit partner of Enron. In addition, certain auditors of the company
were held accountable for destroying some of the crucial audit documents before the
investigation of the federal government agency. All these aspects indicate towards the
aspect that Arthur Andersen did not comply with the needed audit standards and were
majorly unethical in the profession (Springate 2013).
5. Audit Quality and Audit Strategies to Address Warning
It is not easy to define the audit quality as certain aspects need to be considered for
this. As per the definition of ASIC, audit quality can be considered as certain substances or
matter that help the auditors to accomplish the audit objectives in the objective manner and
this objective is the recognition of the material misstaments in the financial reports by
acquiring the needed audit evidence and information (asic.gov.au 2019). As per ASIC, to
maintain the audit quality, the auditors are needed to convey the disputes in the financial
statement through audit report (asic.gov.au 2019). In the recent time, the outgoing
Chairman of ASIC, Greg Medcraft, expressed his opinion on the collapse of Enron and the
overall quality of audit. As per him, possibility is there where Australia could face an Enron-
style corporate collapse except the big four audit companies radically increase their
standards of audit (abc.net.au 2019). For this reason, the auditors from these firms must
develop as well as implement strategies for the improvement in audit quality.
He has also mentioned the fact that it is needed for the auditors in Australia to
perform the audit operations of the large Australian corporations in the most responsible as
well as accountable manner with the aim to find major accounting manipulation in their
accounts. Thus, with the aim to address the warning note of Greg Medcraft, the auditors of
Australia need to ensure the fact that they have proper compliance with all the required

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fundamental, ethical as well as statutory auditing principle and standards. It is written in
APES 110, Section 2 that it is the responsibility of the auditors to include any materially false
statement, false information and other omission of information in the auditor’s report
(apesb.org.au 2019). In Enron, due to the close association of the auditor with the
management of the company, they did not put the materiality related information in the
auditor report and it pushed the company one step towards the collapse.
It can be seen from the statement of Greg Medcraft in ABC News that ASIC
investigated the key audit samples of the big four audit companies in Australia for certain
period of the year so that they can check the overall audit quality of these companies
(abc.net.au 2019). It can be seen from the result that the auditors of the big four audit firms
fails in providing the necessary assurance on the true and fair view of the financial
statements in 23 percent of cases and this aspect indicates towards the failure of the
auditors of these companies to face the critical audit situations. At the same time, the lack
of professional scepticism can be considered as the reason for this audit failure. It needs to
be mentioned that lack of scepticism was a vital part in the collapse of Enron. This aspect
demands the commitment of the auditors to maintain the needed professional scepticism in
audit.
Over the period of six years, ASIC conducted numerous amount of surveillance along
with huge number of investigations. The outcome of these surveillances and investigations
contributed towards the imprisonment of more than 80 people along with the restriction of
more than 600 people (abc.net.au 2019). At the same time, ASIC was able to return more
than $1.3 billion to the investors.

11AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
As per Section 290.155 of APES 110, the requirement for the companies is to have
certain specific number of professionals and these professionals must have the needed
skills, knowledge and experience to perform the audit processes; otherwise, the is no scope
for the application of the safeguard of the rotation of the audit partners (apesb.org.au
2019). However, there are some situations where the audit authority does not put any
obligation on the companies to rotate the audit partners; for this reason, the audit partners
can serve the audit client for longer period of time. It is needed for the auditors to consider
this aspect effectively (apesb.org.au 2019). Apart from this, it is written in Section 100.1 of
APES 110 that the standards and regulations of the auditing profession states that the
auditors must put focus on the interest of the common public (apesb.org.au 2019). Due to
this, exclusive consideration of the demands and interest of the clients and employers is not
the appropriate responsibility of the auditors. It needs to be mentioned that it is needed for
the Australian auditors to maintain this regulation of APES 110 while considering the public
interest requirements of the profession. This aspect helps in reducing the self-interest
threat of audit independence.
For addressing the concerns or the warning note of Greg Medcraft, the auditors of
Australia must ensure the fact that they adhere to the fundamental, ethical and statutory
principles of the audit profession (abc.net.au 2019). It puts the obligation on the auditors to
ensure adherence with the principles related to ethics of APES 110; these principles are
integrity, objectivity, professional competence and due care, confidentiality and
professional behaviour (apesb.org.au 2019). Apart from this, with the aim to avoid the
reoccurrence of the scandals like Enron in Australia, the requirement for the auditors of the
big four audit firms is to enhance the audit quality by being more responsible as well as
accountable in the audit procedures of the large Australian companies as it will help them in

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gaining effective insight about the presence of any kind of accounting and financial frauds in
the financial statements of these large companies. All these aspects need to be ensures to
avoid the Enron like scandal in Australia (Gul, Wu and Yang 2013).
6. Conclusion
It can be seen from the above discussion that the failure of the auditors in effectively
identifying, disclosing and adjusting the material misstatements can create severe risk for
the key stakeholders of Woolworths due to the fact that it can provide them with materially
affected financial information about the company. After that, it can be seen that both the
auditor independence and whistleblowing has large role to play in the audit profession. The
process of whistleblowing helps in reporting any illegal business activities within the
companies where the requirement of audit independence put the obligation on the auditors
to carry out the audit procedures in the most objective manner. It can be seen from the
report that the collapse of Enron has provided the auditors with major lessons like the need
for statutory audit regulations, audit responsibilities to the government agencies,
Importance of internal control and others. As per the above discussion, the auditors of the
big four audit firms need to ensure the increase in the audit quality by maintain their
compliance with the required audit standards, codes of APES 110 and others. All these
aspects can avoid the occurrence of another Enron in Australia.

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7. References
ABC News. 2017. Poor auditing could be 'canary in the coal mine' for financial crisis: ASIC.
[online] Available at: https://www.abc.net.au/news/2017-11-03/asic-boss-concerned-over-
poor-auditing/9114490 [Accessed 20 Jan. 2019].
Apesb.org.au. 2019. [online] Available at:
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed
20 Jan. 2019].
Asic.gov.au. 2019. Audit quality - The role of others | ASIC - Australian Securities and
Investments Commission. [online] Available at:
https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/audit-
quality-the-role-of-others/ [Accessed 20 Jan. 2019].
Backof, A., Bowlin, K. and Goodson, B., 2017. The impact of proposed changes to the
content of the audit report on jurors’ assessments of auditor negligence.
Chou, D.C., 2015. Cloud computing risk and audit issues. Computer Standards &
Interfaces, 42, pp.137-142.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and
audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Daugherty, B.E., Dickins, D., Hatfield, R.C. and Higgs, J.L., 2013. Mandatory audit partner
rotation: Perceptions of audit quality consequences. Current Issues in Auditing, 7(1), pp.P30-
P35.

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Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance
services. McGraw-Hill.
Ewelt-Knauer, C., Gold, A. and Pott, C., 2013. Mandatory audit firm rotation: A review of
stakeholder perspectives and prior research. Accounting in Europe, 10(1), pp.27-41.
Gul, F.A., Wu, D. and Yang, Z., 2013. Do individual auditors affect audit quality? Evidence
from archival data. The Accounting Review, 88(6), pp.1993-2023.
Haswell, S. and Evans, E., 2018. Enron, fair value accounting, and financial crises: a concise
history. Accounting, Auditing & Accountability Journal, 31(1), pp.25-50.
Hosseini, S.B. and Mahesh, R., 2016. THE LESSON FROM ENRON CASE. Journal of Current
Research, 8(08), pp.37451-37460.
Ismail, Z., 2013. Internal whistleblowing intentions by internal auditors: A prosocial
behaviour perspective.
Keune, M.B. and Johnstone, K.M., 2015. Audit committee incentives and the resolution of
detected misstatements. Auditing: A Journal of Practice & Theory, 34(4), pp.109-137.
Lennox, C., Lisowsky, P. and Pittman, J., 2013. Tax aggressiveness and accounting
fraud. Journal of Accounting Research, 51(4), pp.739-778.
Merkel, K., 2017. The importance of ethics in auditing: fraud and ethical breakdowns.
Peng, S.C.S. and Talib, A.A., 2017. A Note on Lessons from Past Corporate Governance
Failures.
Peterson, J., 2018. Auditor Independence: Does the Gate-Keeper Function Retain Its
Value?. Business and Professional Ethics Journal, 37(1), pp.45-66.

15AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Ruhnke, K. and Schmidt, M., 2014. Misstatements in financial statements: The relationship
between inherent and control risk factors and audit adjustments. Auditing: A Journal of
Practice & Theory, 33(4), pp.247-269.
Springate, D.J., 2013. The Enron/Andersen Collapse: Ongoing Implications for Executive
MBA Programs. Journal of Executive Education, 1(2), p.1.
Sultana, N., Singh, H. and Van der Zahn, J.L.M., 2015. Audit committee characteristics and
audit report lag. International Journal of Auditing, 19(2), pp.72-87.
Suseno, N.S., 2013. An empirical analysis of auditor independence and audit fees on audit
quality. International Journal of Management and Business Studies, 3(3), pp.82-87.
Woolworthsholdings.co.za. 2019. Our Stakeholders – Woolworths Holdings Limited. [online]
Available at: https://www.woolworthsholdings.co.za/overview/our-stakeholders/ [Accessed
24 Jan. 2019].
Yee, C.S., Sujan, A., James, K. and Leung, J.K., 2017. Perceptions of Singaporean internal
audit customers regarding the role and effectiveness of internal audit. Asian Journal of
Business and Accounting, 1(2), pp.147-174.

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8. Appendices