Ethical Breaches and Qualified Opinions in Auditing Theory and Practice

This article discusses various ethical breaches and qualified opinions in auditing theory and practice. It covers breaches of APES 110 ethical standards, IFRS violations, GAAP principles, and AASB standards. It also explains the concept of qualified opinions and their impact on financial reporting.

Auditing Theory and Practice

Answer 1
(a)The present situation relates to a breach in the ethical requirements for the professional
accountants as per the APES 110. As per the fundamental principles of professional ethics
established by the APES 110, the principle of integrity implies to all the professional accountants
to be honest and maintain transparency in their all business relationships (Compiled APES 110
Code of Ethics for Professional Accountants, 2013). Thus, as per the integrity principle, the
Mortdale Accounting firm should maintain fair and trustable relationships with their clients and
thus should disclose the reviews of the Penshurst Accountants to them without hiding any
materialistic facts and figures.
(b)The given situation also depicts a non-compliance with the APES 110 ethical standards. The
APES standards advocate professional appointment of the accountants. The standard has
maintained that before acceptance of a new client relationship, it should be ensured by the
appointing firm that the professional accountant should not involve in any illegal activities or
dishonest practices. This is essential because potential threats to professional behavior can be
created if the client is associated with the questionable issues.
(c)The given situation also presents a breach of ethical standards of APES 110. The APES 110
ethical standard has stated that the members in public practice should not provide second opinion
to the client besides the major services provided as it may pose a threat to professional
competence. The auditing firm should render its services to only one client at a time and
therefore the Wendal Sailor is breaching the ethical standard of APES 110 (Compiled APES 110
Code of Ethics for Professional Accountants, 2013).
(d)The situation in the present case is also a breach of ethical requirements for professional
accountants as per the APES 110. The confidentiality standard of APES 110 has stated that the
professional accountants should maintain the confidentiality of the information and should not
use the business information for any personal benefit. However, in the given situation John
Durham is also an audit partner in one firm and also a member of Board of Directors in another
firm which can pose a threat to the confidentiality of information of both the firms.
(e)In the given scenario, the professional accountant has breached the ethical standard of
confidentiality of APES 110. As per the standard, the member in practice is liable to maintain the

confidentiality of information of the client and should not disclose any relevant information to an
outside party without adequate approval and permission. Thus, Ernie Dengate before selling his
accounting practice to the new accountants should obtain proper permission from the client.
(f)The given situation also presents a breach of ethical standard of conflict of interest of APES
110. The conflict of interest may arise in the situations where a professional accountant provides
advice regarding multiple services to same clients or giving advice to two clients at the same
time. As such, there is conflict of interest in the present situation also because Fred Nerk, a
public accountant, is involved in providing multiple services such as tax and advisory services to
the same client and performing auditing for the same. This type of conflict of interest can pose a
threat of objectivity and therefore represent a breach of ethical standard (Compiled APES 110
Code of Ethics for Professional Accountants, 2013).
(g)The given situation is also a breach of ethical standards of APES 110. The APES 110 ethical
standard of custody of client assets states that holding of certain assets of a client without the
permission represents a threat to self-interest and objectivity to the professional behavior (CCH
Australia Limited, 2009).The members in public practice should keep such assets separately
from their personal use and can only avail their use for achieving a specific purpose on obtaining
adequate permission from the client. As such, the Allgood Chartered Accounting firm should not
maintain the accounting records of its client Brach Company on its computers without the
permission of the latter.
(h)The situation in the present case also represents an ethical breach of professional behavior as
per APES 110. As per the principle of professional behavior of APES 110, the member of
practice should not involve in any such actions that can result in discredit of the profession
(International Monetary Fund, 2012). In the given scenario, James Jameson, a public accountant
is involved in drinking and consuming drugs. Besides this, he is also found guilty of involving in
fights and behaving disorderly in the hotel. As such, he has conducted such activities that
represent an ethical breach to the professional standards of accountants and thus sentenced to a
period of 3 month jail as well as having suspension of his license for 1 year.
Answer 2

(a)The present case depicts an unqualified opinion as the auditor is able to obtain verification
from the customers through the use of another method and therefore there is no mis-
representation of material information.
(b)This represents a qualified opinion as it violates the IFRS (International Financial Reporting
Standards) of IASB (International Accounting Standards Board). The GAAP principles state that
businesses are liable to present all the necessary financial information to the end-users. However,
it is necessary for the client to conduct the auditing of the property, plant and equipment by the
auditor as it represents 35% of total assets.
(c)The case depicts a qualified opinion as it violates the GAAP principle as per which it is
necessary for the management of a business entity to disclose all the relevant information to the
end-users as per the fundamental characteristics of the financial reporting (Dagwell, Wines and
Lambert, 2015). The case depicts a situation of excluding some financial information by the
management of a business entity that can have a materialistic impact on the financial report.
(d) The given case also represents a qualified opinion as it depicts a situation of non-compliance
with the IFRS standards. As per the IFRS standard, it is necessary for business entities to carry
out auditing of their business procedures continually in order to maintain transparency (Dagwell,
Wines and Lambert, 2015). However, in this case the retail company does not have adequate
internal controls and also it does not carry out the audit tests properly.
(e)This case presents a qualified opinion as it violates the faithful representation principle of
conceptual framework of financial reporting. As per this principle, it is necessary for the business
entity to provide complete materialistic information to its auditing firm.
(f)This is also the case of qualified opinion as the firm violates the AASB standards effective
since 1991 from its four years of operation.
(g)The method of LIFO is not permissible in the AASB standards for inventory valuation as it
causes reduction in the tax burden of the business entities. Therefore, the present case
representing a use of LIFO method of accounting for inventory valuation on the part of the client
depicts a situation of non-compliance with the AASB standards and Corporations Act 2001
(Fazal, 2011). This is because it can cause material mis-representation of the financial

information and therefore can impact the objectivity of the financial reports. Hence, it represents
a qualified opinion.
(h)This is also the case of a qualified opinion as an auditor in the situation of having a doubt over
an entity’s ability to continue as a going concern in the future period of time should consider its
possible effects on the financial statements. The auditor should state the possible effects of
certain situations on the financial condition of a firm in the future period of time for maintaining
the transparency in the financial operations. As such, in the given case where there is doubt
regarding the future performance of an entity the auditor should clearly disclose such events in
the financial information to secure the interest of the end-users (Dagwell, Wines and Lambert,
2015).

References
CCH Australia Limited. 2009. Australian Master Accountants Guide. CCH Australia Limited.
Compiled APES 110 Code of Ethics for Professional Accountants. 2013. [Online]. Available at:
https://www.publicaccountants.org.au/media/711182/APES-110.pdf [Accessed on: 3 December
2017].
Dagwell, R., Wines, G. and Lambert, C. 2015. Corporate Accounting in Australia. Pearson
Higher Education AU.
Fazal, H. 2011. Why LIFO is not permissible under IFRS? [Online]. Available at:
http://pakaccountants.com/why-lifo-is-prohibited-under-international-accounting-standards/
[Accessed on: 3 December 2017].
International Monetary Fund. 2012. Australia: IOSCO Objectives and Principles of Securities
Regulation—Detailed Assessment of Implementation. International Monetary Fund.