Auditor’s Public Interest Responsibilities and Audit Quality

It is important for auditors to maintain the audit quality by complying with regulations and standards of auditor independence and professional skepticism. The presence of material misstatements in financial statements can lead to improper decisions by key stakeholders. APES 110 provides necessary safeguards to internal whistleblowers with its standards. Lessons from Enron scandal can be used to increase audit quality. This report discusses public interest requirements of auditors, lessons from Enron collapse, and steps to address warning notes.

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
The finding of the research have helped in showing the fact that the presence of material
misstatements in the financial statements can lead to the risk of improper decisions by the
company’s key stakeholders. After that, APES 110 provides the necessary safeguards to the
internal whistleblowers of the company with the help of its standards. The findings also
state that the Australian auditors are needed to consider the lessons from Enron scandal to
increase the audit quality.

2AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Table of Contents
1. Introduction............................................................................................................................3
2. Key Stakeholders Analysis of Woodside Petroleum Limited.................................................3
3. Public Interest Requirements.................................................................................................5
3.1 Auditor Independence.....................................................................................................5
3.2 Whistleblowing................................................................................................................5
3.3 Public Interest Requirements of APES 110......................................................................6
4. Auditors Lesson from Enron Scandal and Behaviour of Arthur Anderson............................7
4.1 Lessons from Enron Collapse...........................................................................................7
4.2 Arthur Andersen...............................................................................................................9
5. Audit Quality and Required Steps to Address the Warning Note..........................................9
6. Conclusion............................................................................................................................12
7. References............................................................................................................................14
8. Appendices...........................................................................................................................17

3AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
1. Introduction
At the time to take the investment decisions, key stakeholders of the business
organizations consider the report of the auditors to judge the truthfulness and fairness of
the companies’ financial statements (Bentley, Omer and Sharp 2013). In the process of
auditing, the responsibility on the auditors is to carry out the systematic as well as
methodical inspection and examination of the companies’ financial statements so that any
kind of material misstatements can be identified as materiality free financial statements
provide the key stakeholders with the true information about the financial performance and
position of the organizations (Abernathy et al. 2013). For this reason, it is needed for the
auditors to maintain the audit quality by complying with the regulations and standards of
auditor independence and professional scepticism. Moreover, the famous Enron collapse
has provided the auditors with certain major lessons that the auditors can use to increase
the audit quality (Lennox, Wu and Zhang 2014). This report discusses about the public
interest requirements of auditors by focusing on the standards and principles of APES 110.
After that, this report also sheds light on the major auditing lessons that can be obtained
from the collapse of Enron.
2. Key Stakeholders Analysis of Woodside Petroleum Limited
Investors and Finance Providers: It can be seen from the appendix that Woodside
Petroleum considers their investors and finance providers as a key group of stakeholder and
the company ensures effective engagement with them for maintaining a cordial relationship
(files.woodside 2019). This stakeholder group collects the necessary financial information
about the company from their financial statements and other sources with the aim to make
effective investment decision about the company’s resources. In this position, improper

4AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
identification, disclosure and adjustments of material misstatements can create the risk of
affecting the investment decision of these stakeholders (Christensen, Glover and Wolfe
2014).
Joint Venture Participants: According to the appendix, joint venture participants are
another key stakeholder group of Woodside Petroleum as the company ensures reliability
and safety of supply, product quality, cost and delivery and others for maintaining a good
relationship with these stakeholders (files.woodside 2019). Now, in the presence of
materially misstated financial statements, the profitability of the company can be majorly
affected that can eventually affect the business performance. This total situation creates risk
of business loss for the joint venture participants (Knechel and Salterio 2016).
Suppliers and Contractors: According to the appendix, supplies and contractors are
considered as a key stakeholder group in Woodside Petroleum and the company works
together with them in an environment where the existence of joint ownership can be seen
(files.woodside 2019). It is needed for the suppliers and contractors to take the credit
decision about Woodside Petroleum by measuring their liquidity position to repay the
credit. Risk of ineffective credit decision can be created when these stakeholders get
incorrect financial information about the company for the presence of material
misstatements in the financial reports (Cao, Chychyla and Stewart 2015).
Employees: As per the appendix, employees can considered as one of the most important
key stakeholders of Woodside Petroleum and the company ensures the presence of a
productive work environment for them (files.woodside 2019). It is possible for the
employees to create career development opportunities in the company when the company
is performing well financially. However, the presence of material misstatements in the

5AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
financial statements affects the financial progress of the company and creates the risk of a
non-productive work environment within the organization (Lobo and Zhao 2013).
3. Public Interest Requirements
3.1 Auditor Independence
One can describe auditor independence as a major medium that puts the obligation
on the auditors to perform the audit in the most objective as well as correct manner.
Auditor independence refers to the independence of the internal as well as external
auditors from the parties that may have certain financial interests in the audit clients
(Guénin-Paracini, Malsch and Tremblay 2014). The main two requirements of audit
independence are that the auditors must maintain the integrity of the profession and the
auditors are needed to conduct audit in the most objective manner. It is required for the
auditors to stay as independent in appearance and independent in mind. Maintaining the
audit independence leads to quality audit (Kouakou, Boiral and Gendron 2013).
3.2 Whistleblowing
Whistleblowing is considered as a crucial aspect in auditing. Whistleblowing is
considered as the process to report the unethical business operations of the companies by
the internal staffs with the assistance of wither the internal regulatory authorities or the
external regulatory authorities (Smith 2013). It needs to be mentioned that the
responsibility to establish and operate effective Whistleblowing procedures lies with the
executive and reporting of the boards. In addition, the internal auditors play a crucial part in
the whole Whistleblowing process (Smaili and Arroyo 2017).

6AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
3.3 Public Interest Requirements of APES 110
Public interest requirements can be considered as the aspect or the condition where
the professionals are needed to consider the broader demands of the profession as they are
needed to take into account the fulfilment of the interest of the public and the same aspect
is also applicable for auditing profession (apesb.org.au 2019). It provides the necessary
safeguards to the internal whistleblowers of the company with the help of the following
standards.
As per “APES 110, Section AUST210.11.1”, the ne auditors are needed to approach
to the existing auditors of the client so that they can gain the information on the nomination
of audit and the new auditor needs to obtain this information in the permission of the audit
client, otherwise, the new auditor cannot approach the existing auditors of the companies
(apesb.org.au 2019). After the approval of the permission, the auditor is needed to ask the
current auditor in writing about the information related to nomination. However, the
nomination needs to be declines when the client does not approve the permission. This
regulation is crucial for the safeguards of the whistleblowers (apesb.org.au 2019).
It is mentioned in “APES 110, Section 100.1” that public interest requirement is
important for the auditors in the presence of the fact that the auditor must ensure the fair
and true view of the company’s financial statements for the public and it is called pubic
interest requirements (apesb.org.au 2019).Thus, it is a major restriction on the auditors to
put extra focus on satisfying the needs and demands of the client. These are the crucial
factors that the auditors are needed to take into account for maintaining the overall public
requirements of the profession.

7AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
4. Auditors Lesson from Enron Scandal and Behaviour of Arthur Anderson
4.1 Lessons from Enron Collapse
Standards:The manipulative works of the management of Enron as well as the audit partner
was a crucial reason for the company’s collapse where different accounting manipulations
can be seen like off-balance sheet finance, illegal gains and others. Hence, the lesson that
can be obtained from the Enron collapse that there is a desperate need for the problem free
accounting and auditing standards and maintain the adherence to the global standards is
the main way to achieve this (Gordon 2015).
Financial Manipulation: It can be seen from the information obtained from the Enron case
that the auditors were appointed by the senior management team of the company with the
aim to accomplish financial manipulation with the assistance of the auditors for the
fulfilment of self-interest. This aspect indicates towards the lesson that the government
agencies must be responsible for the auditing of the companies instead of the private firms.
At the same time, in order to ensure that the fact that there is not any self-interest threat of
audit indepdence in the audit process, it must be ensures that there is not any non-audit
services and consultation services to the audit clients from the side of the auditors (Merkel
2017).
Auditors’ Motivation:It can be seen from the Enron collapse that there needs to have
certain motivations for the auditors in the form of certain incentives as penalties do not
work as motivation for them. In this aspect, theuse of auditors’ insight can be ensured for
promoting the overall quality of the audit operations. Sarbanes-Oxley Act has been
introduced for this particular reason which puts the restriction on the companies not
disclosing the audit inspection report (Elkins 2014).

8AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Role of Auditor Independent Oversight:As per the earlier discussion, independent oversight
of the auditors can be utilized for enhancing the overall quality of the audit operations.In
that case, there must be the presence of the needed competencies of the auditors in case
the auditors need to apply auditor independent oversight. At the same time, the collapse of
Enron indicates towards the importance of audit inspection program where the respective
authorities will inspect the judgments used by the auditors for the development of audit
opinion whether there is any material misstatements in the financial statements or not
(Johnson, Swicegood and Williams 2013).
Pleasant Relation between Auditor and Audit Committee: the collapse of indicates towards
the fact that it is needed for the business organizations to ensure the true and fair
disclosure of the financial information as only them auditor independent insight can
increase the audit quality. For this reason, it is required to have association as well as
coordination between the external auditors and the audit committee. This particular
awareness can be enhanced by organizing different kinds of audit forums for the auditors
and audit committee members (Lachman 2014).
Impact of Internal Audit: The collapse of Enron has shown the audit profession the
significance of internal audit in regaining the faith of the shareholders. Internal audit plays a
crucial part in the development of effective financial reporting. For this reason, at the time
of performing the audit operations, it is needed for the external auditors to discuss with the
internal auditors about the strengths and weaknesses of the company’s financial reporting.
This aspect assists the auditors in gaining the required audit evidence from the financial
statements (Lachman 2014).

9AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
4.2 Arthur Andersen
At the starting point, it needs to be mentioned that the appointment of Arthur
Andersen was done by the management of Enron so that they can get ease in the process of
the manipulation of the financial books of the company. Arthur Andersen was responsible
for providing their opinion that the financial information of the companies are true and fare
and they are not impacted by any material events or incidents. It needs to be mentioned
that the key shareholders of the company considered the report of Arthur Andersen for the
investment decision in the company. However, the collapse of Enron shows the failure of
audit responsibility by Arthur Andersen (Ardiana 2014). It is visible from the Enron scandal
that that Arthur Andersen was involved with the company by the means of business
relationship and some of the audit members of Arthur Andersen received job from Enron. It
implies that there was a development of the self-interest threat of audit independence in
the presence of financial as well as non-financial interest of Arthur Andersen in the business
of Enron. At the same time, some of the audit members of Arthur Andersen in Enron
destroyed certain crucial documents related to the audit of the company before the
investigation of federal government agency occurred. These aspects indicate that Arthur
Andersen did not perform the audit of Enron in responsible manner by complying with the
required standards and regulations (Clikeman 2013).
5. Audit Quality and Required Steps to Address the Warning Note
It is necessary for the audit companies and the auditors to ensure the performance
of quality audit as it is a major requirement of this profession. The Australian Securities and
Exchange Commission has mentioned that audit quality can be considered as those
substances that assist the auditors to achieve the audit objective that is to acquire the

10AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
sufficient evidence on the fact that whether the financial statements of the companies are
free from material misstatements (asic.gov.au 2019). It is needed for the auditors to report
the material misstatements found in the audit process in the auditor’s report. In one of the
meetings with the ABC News, the outgoing chairman of ASIC, Greg Medctafthas warned the
total audit community of Australia that the high necessity is to enhance the audit standards
by the auditors of big four audit firms as enhanced audit quality can be considered as major
medium for defeating the corporate collapses (abc.net.au 2019).
As per him, the need for the auditors is to carefully audit the financial accounts of
the large Australian corporations in case they do not want the reoccurrence of Enron like
scandals in the country. In addition, it is also needed for the Australian auditors to adhere to
the fundamental and ethical principles of auditing so that they can acquire the required
audit evidence about the presence of material misstatements in the financial statements
(Gunny and Zhang 2013).As per APES 110, Section 2, communicating the correct opinion on
the straightforwardness and equality of the financial statements is one of the prime
responsibilities of the auditors (apesb.org.au 2019). The Australian auditors are needed to
ensure the conduct of quality audit in the presence of full responsibility and
accountability.This aspect will ensure the maintenance of the required audit quality.
It needs to be mentioned that the name of the big four audit firms in Australia are
KPMG, Deloitte, PwC and E&Y. Greg Medcraft has mentioned that ASIC collected the big
four audit firms’ key audit samples for the period December 2016 and the result was not
favourable as the big four audit firms failed in 23% cases in providing the required audit
assurance (abc.net.au 2019). This large failure mainly came from the lack of ability of the
Australian auditors in facing the complex audit situation and this particular inability of the

11AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
auditors came from the lack of scepticism of the auditors. It can be seen from the collapse
of Enron that accounting fraud was a major reason for the collapse of the company. The
collapse of Enron put negative impact on the long standing business reputation of Arthur
Andersen due to the major involvement of the audit firm in the manipulation of financial
accounts. Hence, the auditor must not involve any kind of fraudulent activities of the audit
clients for personal benefits (Tepalagul and Lin 2015).
At the time of the application of the safeguards for the reduction in the audit threat,
the responsibility of the auditors is to assess the whole situation in order to gain insight on
the fact that whether it is possible to apply the audit safeguards in those situations or not.
Application of the correct safeguards provides major assistance to the auditors in the
reduction of audit threats under the safe level. As per APES 110, Section 290.155, the audit
safeguard related to the audit firm rotation may not work in the specific situation when the
company has only few members with the needed acquaintance and understanding to
perform audit (apesb.org.au 2019). However, the application of the safeguard of regular
independent external review needs to be applied in this situation. One interesting fact that
can be obtained from APES 110, Section 100.1 that auditing is considered as such a
profession where the auditors accept the responsibility to act in the best interest of the
public and they must not exclusively satisfy the demands of the audit client and the
employer (apesb.org.au 2019).
Thus, it can be said based on the above discussion that it is needed for the Australian
auditors to enhance the standards of their audit quality by complying with the needed
regulations and standards and these needs to be done by considering the warning note of
Greg Medcraft (abc.net.au 2019). After that, the auditor must have the required skills,

12AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
experience and knowledge with the aim to perform the audit in the most objective manner.
Most importantly, the auditors are needed to adhere to the public interest requirements of
APES 110 due to the fact that it reduces the possibility of self-interest threat of auditor
independence (apesb.org.au 2019). One of the most important need for the auditors is to
ensure the fact that they have complied with all the regulations and principles of APES 110
throughout the audit operations as this compliance ensure the maintenance of the overall
audit quality and reduction of the audit independence related threats (apesb.org.au 2019).
Lastly, it is needed for the Australian auditors to part their ways from the involvement of
fraudulent activities in the presence of self-interest (Tepalagul and Lin 2015).
6. Conclusion
This particular report can be considered as a major tool for gaining insight or
knowledge on the fact that what are the necessary aspects that need to be considered with
the aim to maintain the audit quality and the public interest requirements of audit
profession. Improper recognition, discloser as well as adjustments of material
misstatements in the financial statements can lead to the risk of improper decisions by the
company’s key stakeholders. After that, the report states that auditor independence and the
process of whistleblowing plays a crucial role in unveiling the unethical business operations
in the organizations and for the protection of the whistleblowers, APES 110 has introduced
certain regulations like obtaining information about the audit nomination and others. The
content of the above discussion indicates towards the aspect that the collapse of Enron has
provided the auditors with certain major lessons that the auditors need to consider with the
aim to increase the overall audit quality. It can also be seen from the above discussion that
the Australian auditors are needed to consider the warning of GergMedcraft on serious note

13AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
in order to avoid the reoccurrence of Enron like scandals in Australia. With the aim to avoid
this, it is needed for the Australian auditors to conduct audit operations after ensuring the
compliance with the required auditing standards and regulations with the aim to find
material misstatements in the financial statements.

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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].
Abernathy, J.L., Herrmann, D., Kang, T. and Krishnan, G.V., 2013. Audit committee financial
expertise and properties of analyst earnings forecasts. Advances in Accounting, 29(1), pp.1-
11.
Apesb.org.au. 2019. [online] Available at:
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed
20 Jan. 2019].
Ardiana, P.A., 2014. The Role of External Audit in Improving Firm’s Value: Case of
Indonesia. December, 21, pp.1-15.
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].
Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting
irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), pp.423-429.

15AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Christensen, B.E., Glover, S.M. and Wolfe, C.J., 2014. Do critical audit matter paragraphs in
the audit report change nonprofessional investors' decision to invest?. Auditing: A Journal of
Practice & Theory, 33(4), pp.71-93.
Clikeman, P.M., 2013. Called to Account: Financial frauds that shaped the accounting
profession. Routledge.
Elkins, R.A., 2014. From Independence to Regulation: A Look into Major Accounting Scandals
and the Changes Implemented by the Sarbanes-Oxley Act.
Gordon, C.E., 2015. Behavioural approaches to corporate governance. Routledge.
Guénin-Paracini, H., Malsch, B. and Tremblay, M.S., 2014. On the operational reality of
auditors' independence: Lessons from the field. Auditing: A Journal of Practice &
Theory, 34(2), pp.201-236.
Gunny, K.A. and Zhang, T.C., 2013. PCAOB inspection reports and audit quality. Journal of
Accounting and Public Policy, 32(2), pp.136-160.
Johnson, R., Swicegood, P. and Williams, N., 2013. I Know What Not to Do. Now What?
Rethinking Business Ethics Education. American Journal of Business Education, 6(5), pp.559-
564.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Kouakou, D., Boiral, O. and Gendron, Y., 2013. ISO auditing and the construction of trust in
auditor independence. Accounting, Auditing & Accountability Journal, 26(8), pp.1279-1305.
Lachman, J., 2014. The Millennial Accountant (Doctoral dissertation, City University of New
York).

16AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Lennox, C.S., Wu, X. and Zhang, T., 2014. Does mandatory rotation of audit partners improve
audit quality?. The accounting review, 89(5), pp.1775-1803.
Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report
misstatements: Evidence from quarterly and annual restatements. The Accounting
Review, 88(4), pp.1385-1412.
Merkel, K., 2017. The importance of ethics in auditing: fraud and ethical breakdowns.
Smaili, N. and Arroyo, P., 2017. Categorization of whistleblowers using the whistleblowing
triangle. Journal of Business Ethics, pp.1-23.
Smith, R., 2013. Whistleblowing and hierarchical bureaucracy: Re-thinking the
relationship. E-Journal of International and Comparative Labour Studies.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
Woodside Petroleum Limited. 2019. [online] Available at:
https://files.woodside/docs/default-source/investor-documents/major-reports-(static-
pdfs)/08-03-2018-sustainable-development-report-2017.pdf?sfvrsn=fab13fed_10 [Accessed
21 Jan. 2019].

17AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
8. Appendices

18AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY