Understanding Auditor's Reports and Opinions

The assignment delves into the structure and importance of an auditor's report. It outlines the key components, including management's responsibility for financial statements, changes in accounting principles, and disclosures about inventory valuation. The focus is on understanding the different types of opinions expressed by auditors – unqualified, qualified, and adverse – and their implications for the accuracy and reliability of financial statements.

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Question 1
a) James Bromley disclosing tax information and helpful information to a new account is
not violation of ethical standards. James has permission from his client to reveal the audit
and tax information to the Jayne Godfrey who will be the new auditor. James providing
other information information regarding the client product, services and potential services
is within the auditing standards of professionalism. This practice doesn’t interfere with
the integrity, independence, and objectivity of the auditing standards. James orderly
handover to Jayne will enhance professional competence which is within his due care.
This professional behavior by James to disclose important information about the firm to
be audited is in accordance with Auditing Standards section 304 and 204 on knowledge
of the business and terms of enganagement respectively.
b) Fred Hingarra who is an auditor coming back to practice auditing after spending several
years in another profession is a violation of ethical principles. Fred violets the principle
of being professionally competent after being away from the industry for six years. Six
years is a long time to lose competence in undertaking auditing of a public company.
Secondly, Fred action to get a professional indemnity insurance for his work is against
the due care princinple of auditing. The auditor should be ready to take duty of care of his
actions and opinion (Carey, Subramaniam, and Ching, 2006).
c) Asquith Accountants advertising in a local paper is a violation of auditing ethics and
principles. The firm giving special offer to clients is a form of persuading them to get the
job of auditing. An advertisement in a local paper by an auditing firm to provide tax
refund within 10days violates the principles of integrity through unprofessional behavior.
The advertisement to appeal to a client also violets the principle of objectivity that
cautions auditors from participating in activities that can impair or presume to impair
unbiased assessment.
d) Amy Harris taking a role of treasurer in a local not for profit business is not a violation of
ethical principles. The local athletic club is not audited by the company that Amy works
for. This shows that Amy Harris taking this position will not interference with her ability
to execute her job as an auditor. The independence of an auditor will not be threaten by a
post of treasurer in a not for profit organization. Therefore, there will be no violation of

the auditing ethical principle of Amy taking the position and continuing her job as an
auditor.
e) Simtec Ltd advice to Gordan Accountants firm about the appropriateness of the final
report is a violation of the ethical principles. First, the advise violets the independence of
the auditors. The auditors’ independence to present the true and fair opinion of the
financial statements of the company is threatened. This means that the Gordon
Accountants actions and opinion will be influenced to one side. The auditor will be
required to give a certain opinion in order to get his pay. Secondly, there is violation of
the objectivity principle where the auditor is being involved in activities that are likely to
impair unbiased opinion (O'Leary, and Stewart, 2007). This means that the auditor will
be forced to give a biased opinion. This will also impair the professional judgment of an
auditor. Lastly, the management of Simtec violent the terms of engagement with the
auditing firm as stipulated in the Auditing standards AUS 710.
f) David Dale entering into contact with Cheap Insurance Company is a violation of ethical
principles. David’s action violates the ethical principle of confidentiality. The Cheap
Insurance Company wants David to use the information he has from the auditing process
to recommend clients. First, this will lead to David using the information from the
audited firms without their authority. Secondly, the David uses the audited information
for personal benefits. The Cheap Insurance Company is promising 5% for every client
that David will get. This is against the confidentiality principle that requires respect the
value of information they acquire in the process of auditing (Craswell, Stokes, and
Laughton, 2002). The auditor should protect the information acquired. Lastly, it against
the law and objectives for an auditor to use audit information for personal gain.
Therefore, David will be violating confidentiality ethical principle.
Question 2
a) Ellen Davis taking the role in the audit team that will audit Jenkins Ltd threats the
independence of the auditing process. Ellen Davis worked as a senior accounts
manager for Jenkins Ltd and therefore can be used to audit the financial statements

that she prepared. Using Ellen in this case will lead to conflicts of interests. This
situation will be as a result of a relationship that Ellen had for four months with the
entity that is to be audited. Ellen being part of the team to audit the financial
statement of Jenkins Ltd will be influenced by her to make biased opinion. This will
not necessary represent the true and fair financial position of the company being
audited.
b) John Dargin auditing Winmalee Ltd does not threaten the independence of auditors.
The financial records of Winmalee Ltd have taken an optimistic approach on
valuating their intangible assets which will require the auditor to understand the
approach to give an opinion. Secondly, the Winmale Ltd provided all the details of it
senior staff about their profits performance and all information about the accounting
standards used. Though the approach is sympathetic the auditor independence is not
threatened by it will be difficult to give an opinion based on the accounting standards
set in Australia. John will therefore be require3d to give an opinion according to
company approach or give a qualified opinion that the preparation of the financial
statements were not in accordance with the generally accepted standards of
accounting in Australia.
c) An invite to visit a subsidiary or branch of the company does not threaten an
independence of the auditor. Visiting the shop where defective chocolates are sold at
a discount price increases the auditor’s knowledge of the business that is being
audited. This will allow the auditor to have knowledge of the firm’s disposal of defect
chocolates. Therefore, an invitation to a second shop in the process of auditing will
not interfere with the auditor’s independence (Ye, Carson, and Simnett, 2011).
d) The managing director request for a flexible approach in audit is a threat to the
auditor’s independence. The manager influence on the audit report threatens the
unbiased of the report. The auditor will not be able to give the true and fair state of
the Company’s financial position. This will be as a result of interference on the
process of auditing. The auditor should be the one to choose the approach of auditing
the financial statements of the company. On the other account, it against the law for
the Managing Director to meet an auditor prior to commencement of the auditing
process.

e) Elaine Ong being a senior member of an audit team and having dating the senior
Accountant threatens the independence of the auditing process. Elaine will not be
able to give unbiased opinion about the accounts that are prepared or supervised by an
individual who have an intimate relationship. There will be a conflict of interest in the
process of auditing. First, the Elaine Ong will be biased to protect her relationship
with the Accountant. This will jeopardize the whole process leading to an instance
where opinion is biased. Secondly, the relationship between Elaine and James will
lead to self interests to safe guard the boyfriend job. This will lead to Elaine giving
unqualified opinion. Therefore, the relationship between Elaine and James will lead
to conflict between the shareholders interests and their interests. Elaine will then
work to serve her interest at the expense of the shareholders interests. Elaine should
not be part of the audit team because her relationship with the accountant in the firm
to be audited. Therefore, having a relationship conflicts interests that threatens the
independence of the auditors (Hussey, 2007).
f) Diane Polo playing in the same team with Elise Lift who is a senior Account ant and
several other members of the Rangers Ltd that is to be audited does not threaten the
independence of the auditing report. The relationship between Diane, Elise and other
members of staff of the Rangers is for playing softball. The relationship is of
playmates. This relationship does not have shared interests in business. The auditing
opinion that will be given in the auditing report will not affect Diane in any way. The
independence of Diane to make judgment in this case will not be influenced by the
playmates in the company. The independence can only be threatens when the
relationship between the auditor and a member in the team has vested interests that
can jeopardize shareholder’s interests (van der Wiele et al., 2011).
Question 3
Details of auditor’s report on financial statements
First, the auditor reports contains details on whether the financial statements are prepared
in consistent with the accepted accounting principles. The financial statement in Australia
should be prepared in accordance with Australian Accounting standards (AAS). These
standards are the same as international Financial Reporting Standards (IFRSs). These

standards are to be met in the financial statements for an opinion of unqualified in the
audit report. The compliance with AAS standards makes it easy for an auditor to
understand the financial statement when auditing them.
Second, the audit report contains a statement of financial statements on compliance with
relevant statutory requirement. The audit report shows whether the financial statement
complied with statutory regulations such as taxes. The report shows how if the
compliance of met by the company that was being audited.
Third, audit report gives details about the disclosure of materials that were important to
the process of auditing. This is disclosure require all relevant materials be disclosed for
the purpose of auditing. Disclosure is important for the auditor to establish true and fair
financial position of the company (Stewart, and Subramaniam, 2010). For instance,
disclosure of the inventory helps the auditor understand the methods of valuation used.
Fourth, the audit reports contains changes that were made in the accounting principles or
any other methods used in preparation of the financial statement. The report shows their
effect on the financial statements that that they have been disclosed and properly
determined in the financial statements.
The auditor’s report also contains details that include; a title indicating independent, a
statement that financial statements were audited, a statement indicating that the financial
statements are management’s responsibility and a signature of the auditor which can be
manual or printed.
Lastly, the auditor’s report contains the opinion of the auditor. This is the most important
part of the audit report. It expresses the opinion of the auditor from the auditing process
of an entity. The auditor’s opinion can be qualified, unqualified, or adverse opinion.
Qualified opinion shows that the financial statements of an entity did not follow the
Accounting Standards as contained in AASB standards. Unqualified opinion shows that
the financial statements audited complied with the accounting standards and that they
show the true and fair state of the entity financial position. Adverse opinion shows that
there is misstatement in the financial statement of an entity that affects financial
statements.

References
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