Modern Auditing and Assurance Services

This document discusses modern auditing and assurance services, changes in AASB 1031, definition of materiality, perceived and actual independence, internal control weaknesses for cash receipts, internal control weaknesses in context of purchase and payments, and more.

Running head: MODERN AUDITING AND ASSURANCE SERVICES
Modern auditing and assurance services
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1MODERN AUDITING AND ASSURANCE SERVICES
Table of Contents
Question 1........................................................................................................................................2
Part 1............................................................................................................................................2
Part 2............................................................................................................................................2
Part 3............................................................................................................................................3
Question 2........................................................................................................................................4
(a) Perceived and actual independence and their importance................................................4
(b) Professional standard and regulatory requirements..........................................................4
Question 3........................................................................................................................................7
Question 4........................................................................................................................................9
Question 5......................................................................................................................................11
Answer (a).................................................................................................................................11
Answer (b).................................................................................................................................12
Reference.......................................................................................................................................14

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Question 1
Part 1
Changes in AASB 1031 from 1995 to 2015
At the time when AASB 1031 issued framework for preparing an presenting the financial
statement included limited guidance on materiality as compared to the latest issue in 2015. As
per initial implementation of the policy of financial reporting council to adopt the standard of
IASB in context of application of reporting periods starting after 1st January 2005, it was decided
by AASB for retaining AASB 1031 in revised format for assuring that meaning of the term
materiality will be well explained (Aasb.gov.au 2019). However, in absence of the provision of
local guidance it was decided by AASB to withdraw AASB 1031 and in December 2013 re-
issues the same as interim standard for cross reference in context of other pronouncements.
AASB 2014-1 that is amendments to AAS deleted some of the references of AASB 1031 and
finally AASB 2015-3 completed withdrawal of the references related to AASN 1031 in context
of all AAS as well as interpretations and allowed the standard to be withdrawn
(Legislation.gov.au 2019).
Part 2
a. Definition of materiality
In context of information, materiality determines that the information that is misstated
omitted or has not been disclosed has potential to impact the decision adversely regarding
allocation the limited resources made by the users of financial report or discharging

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management’s accountability or the entity’s governing body (Lai, Melloni and Stacchezzini
2017).
b. Quantitative as well as qualitative guidelines of materiality
Qualitative guidelines – accounting information is accounted as material if the misstatement or
deletion of same will impact or change judgment of any individual who is reasonably relying on
those information. Hence, the term materiality provides guidance to the accountants regarding
determination of the information those shall be disclosed (Abou-Seada and Abdel-Kader 2017)
Quantitative guidelines – without the externally developed criteria for materiality, accountants
need to depend on the professional judgments or the rules-of-thumb generated internally. The
said rules are developed through the years of practice. These thumb-of-rules are as follows –
 5% of the normal pre-tax income where income is more than $ 2 million
 5% to 10% of the normal pre-tax income where income is less than $ 2 million
 1% of the gross revenue (Edgley 2014)
However, for the non-profit entities, ½% of the normal gross revenue is generally used as
normal rule-of-thumb.
c. Materiality concept’s influence on the professional judgments of auditors
Materiality concept is directly associated with the professional judgments of the auditors.
If the materiality level is high the auditors will carry out the audit procedure for more items and
vice versa. On the other hand, level of materiality helps the auditors to plan the audit accordingly
and the level to which they can rely on the data provided by the entity (Aasb.gov.au 2019).

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Part 3
As after the withdrawal of AASB 1031, new standard is expected to match with the
international standard of reporting, it is expected to bring harmonisation among the assessment
criteria of materiality misstatement by the auditors. It is further expected that the new standard
will state some qualitative as well as quantitative guidance to apply materiality on universal basis
(Abou-Seada and Abdel-Kader 2017). This will lower the disparity among the auditors while
assessing the misstatement. This will have an impact on the auditor’s judgments as using the
quantitative guidance the auditor will be able to create a base for the audit plan and will carry out
the audit procedure accordingly (Legislation.gov.au 2019)
Question 2
(a) Perceived and actual independence and their importance
Perceived independence – it determines the belief of the users of financial report that the actual
independence has been obtained. It may be the case that even when the actual independence has
been preserved, the perceived impendence may not have been obtained owing to confusion
regarding the situational fact or lack of the understanding by the users regarding the auditor’s
role (Tepalagul and Lin 2015)
Actual independence – it is obtaining of actual freedom from personal interest, bias,
susceptibility to the pressure or undue influence and prior commitment to the interest. It is the
attitude of auditor’s mind dependent on their objectivity, integrity and strength of the character.

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Both these independence are important for achieving the credibility of reporting function
that will signify that the users of financial statements are satisfied with achievement of both
actual as well as perceived independence (Dogui, Boiral and Heras‐Saizarbitoria 2014)
(b) Professional standard and regulatory requirements
Case (i)
As the audit assistant Bob did not maintain audit integrity. However, it is important while
carrying out the audit for any entity’s financial report that the auditor maintains his integrity and
does not compromise. As a student Bob shall prepare his data based on financial information
those he can use for university assignment. Hence, as per the APES 110 Bob violated the
integrity approach. Further, as an audit assistant Bob shall maintain the confidentiality of client’s
data and shall not use the same for his personal purpose or 3rd party’s use without proper
authorization. Hence, Bob violated the confidentiality of the client (Ningrum and Wedari 2017).
Case (ii)
As an audit engagement partner of Ace Limited, Wendy shall not provide any non-audit
service. By providing the service of company secretary Wendy violated the professional
behaviour as per APES 110. Further, it is noteworthy that as an engagement partner Wendy is
not supposed to perform the duties of company secretary even for the period of 6 months. Hence,
carrying out the duties of company secretary by Wendy will violate the professional behaviour.
Further, the entity’s secretarial duties include management of administration and providing
assurance for the decision taken by the board of directors those shall be implemented in
compliance with the law. Moreover, they are representative on part of the entity in context of
legal papers and hence, it is their duty to provide assurance that the entity as well as the board of

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director are carrying out their functions within the law. Hence, Ace Limited’s decision for
requesting Wendy in context of performance of duties on behalf of company secretary in not
valid as there is huge gap in the role of company secretary and the engagement partner those
cannot be carried out by single person (Sharma 2014)
Case (iii)
No professional behaviour has been violated in the given case. In case of any profession,
freedom, independence and honesty play crucial role and is more significant for carrying out the
profession of auditing. Any professional shall not be appointed as the company’s auditors in case
he is the –
 Officer or employee of the entity
 Associated with any person who is serving the entity as an officer or worker in the entity
In the given case, Leo is factory foreman’s son who does not have substantial interest in
the entity. Hence, appointment of Leo as the auditor of Precision Machinery Limited for
carrying out its audit including testing of cash payment’s internal control will not violate the
professional standards (Svanberg and Öhman 2016).
Case (iv)
In accordance with the auditing regulations and standards the auditor is not allowed to
accept anything from the client entity except his fees. Further, it will violate the ethics if the
client entity does not make payment for the auditor’s fees. Hence, the entity shall pay the fees
immediately to the auditors. The entity, Classic Reproduction Pty further violated the auditing
standards and professional behaviour offering the audit firm to supply office furniture and

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another company’s share. Further, the auditor also violated professional behaviour by accepting
the offer in exchange of the fees due and shares. Though the audit firm does not work as the
auditor of the entity whose share has been offered to them, accepting anything other than the
audit fees itself will violate the professional behaviour of the auditor (Jefrey 2018).
Question 3
Internal control weaknesses for cash receipts
1. Inappropriate process for approval of credit
It is found that the credit manager approves the credit facility to the contractors on the
basis of the familiarity of credit manager in context of the reputation of the contractor. Approval
for credit is made on ad-hoc basis without considering the credit check with the external party
like credit rating agency or bank of the contractor. Further, any reference is not made to the
credit limit of contractor or the record for past period. Credit manager shall read have read only
access to subsidiary ledger of account receivable. Procedure of credit approval is not appropriate
and it may result into credit extension in context of high-risk credit customers and eventually the
high level for the bad debts (Azim and Azam 2016).
2. Usage of control for comparing the charge forms with invoices
No control is there that can assure that daily total of dollar amount of charge forms are
reconciled with the total value of daily invoices prepared. In case of any difference among the
control total related to change forms and invoices shall be determined through corrections of
errors those can be verified independently. Hence, any genuine discrepancy among the change
forms and the invoice owing to fraud or error are not recognised, followed up and made

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corrections. Reconciliation of the control total regarding charge forms and invoice shall be
carried out by the independent person those are not engaged in supervising sales and account
receivables (Ardelean 2015).
3. No segregation of duties for account receivable
Person accountable for supervising account receivable is responsible for verifying details
on charge forms and correction of errors including the pricing error, if any as well as preparing
the invoices. No independent computer or manual check for the details in context of the
corrected charge forms are prepare before the invoice. Hence, it is likely that the supervisor
responsible for account receivables may fraudulently change the details provided in the charge
form that is prepared by sales associates and using the same for preparing invoices. It will lead to
charging lower prices to the customer based on the altered account receivable in return of the
lower prices (Svanberg and Öhman 2015)
4. No reconciliation of the subsidiary ledger for accounts receivable with the control
account
Accounts receivable subsidiary ledger are not reconciled as against the accounts
receivable control account that may assure that total value of subsidiary ledger matches with the
balance of control. Reconciliation of the subsidiary ledger with the control account shall be
carried out by any independent person who is not responsible for supervising the accounts
receivable. Hence, in case of any discrepancy among subsidiary ledger and control account
owing to fraud or error will not be recognised and will not be corrected. It is also likely that the
supervisor of accounts receivable may post unauthorised credit in the accounts of any specific
debtors or customer (Svanberg and Öhman 2015)

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5. Improper segregation of the duties of cashier
Cashier is responsible for opening the mail, listing enclosed cheques for the purpose of
deposits and depositing the cheques. No independent check is carried out in context of
completeness of cheque those are deposited in the bank account of the entity. Hence, it is likely
that the cashier may misappropriate the cheque through no including the same in list of the
deposit cheques, not communicating the advice for remittance to bookkeeper and depositing the
same to the bank account of the cashier (Svanberg and Öhman 2016)
Question 4
Internal control weakness in context of purchase and payments are as follows –
1. While any requirement is there for purchase of item, the store department issue 3 part
purchase requisition those are pre-numbered and sent to department of accounts payable,
department of purchase and files with the same with store department. However, before
placing the order no requirement or assessment of requirement is confirmed with the
production department. Hence it may happen that the order place for purchasing such
item those have no requirement at present for the production department. Hence the
goods may be overstocked those in turn will be obsolete and loose its value (Chiang
2016).
2. While the approved purchase requisition is approved, purchase department issues 5 part
pre-numbered purchase order to different departments including the supplier, receiving
department, department of accounts payable and purchase department. However, it is
found that no copy is forwarded to production department or store department. Hence,

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likelihood is there that there will be mismatch in number of goods received or purchased
and number of goods sent to the store department (Chiang 2016).
3. Upon receiving the goods the department that receives the goods log into shipment
through stamping as order received on purchase order, one is forwarded to payable
department and another is on receiving record. However, no conformation copy is sent to
the supplier stating the number of units received. This is required to confirm that the units
received match with the units despatched (Chiang 2016).
4. Department of accounts payable checks for the purchase order, purchase requisition,
receiving order for each of supplier invoice and approves the same for payment.
However, the department of accounts payable does not check the unit price of the goods
and does not match the same with the quotation price of each supplier. It may happen that
there is difference in quoted price and billed price (Zahmatkesh and Rezazadeh 2017).
5. Department of accounts payable prepares the disbursement voucher those are pre-
numbered and forward the same with invoice of supplier, purchase order, purchase
requisition and the receiving record to financial accountant. However, as the
disbursement vouchers are pre-numbered, it is expected that the payment is made in same
order. However, while making payment credit period plays important role. Chances are
there that the suppliers with long credit period are paid early and supplier with short
credit period may be processed for payment afterwards which in turn may charge penalty
(Zahmatkesh and Rezazadeh 2017).
6. The financial accountant only is responsible for preparing the cheques for the suppliers as
well as signs the same with recording in the cash disbursement journal. However, there
shall be proper authorisation at least for the cheques including big amounts. In the given

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case of Retro Pty Ltd, the financial accountant has all the chances to misstate the check
amount and credit the misstated amount into his personal bank account (Zahmatkesh and
Rezazadeh 2017).
7. All forms those are accountable are checked on sequentially at the closing of month. In turn
the financial accountant gets the bank statement for the month, prepares the bank
reconciliation along with investigation of reconciling the items. However the reconciliation
on monthly basis leaves wide scope for error, fraud or misstatement as if any fraud or error
takes place at the beginning of month it is less likely that the same will be recognized at the
end of the month. Hence, the reconciliation frequency shall be increased and the same shall
be carried out at least once in a week (Zahmatkesh and Rezazadeh 2017).
Question 5
Answer (a)
Different weaknesses in context of internal control for while carrying out the audit of MyPet
Pty Limited found are as follows –
1. Computer automatically generates the purchase orders while the stock falls below the
level of 70% as compared to the usage of prior months. However, it is highly unlikely
that the demand will remain same as previous months and there may be high demand or
low demand or urgent orders. Hence, before placing the order, requirement of goods must
be confirmed with the production department. Hence it may happen that the order place
for purchasing such item those have no requirement at present for the production
department or there is high demand or urgent order that requires immediate supply of
goods even if the stock does not fall below 70%. Therefore in such case it is likely that

12MODERN AUDITING AND ASSURANCE SERVICES
the goods may be overstocked those in turn will be obsolete and loose its value or the
entity may lose the urgent order in absence of goods (Broberg et al. 2014).
2. Purchase orders are sent to warehouse, filed by the accounts clerk and sent to the
supplier. However the same is not sent to the receiver and hence, the receiver will not be
able to match the receipt goods against purchase order.
3. Upon receiving the materials, bar codes are scanned those are attached with the delivery
boxes and in case the codes do not match with the master file the scanning process is
terminated. However, there shall be manual system to check the codes of boxes in
addition to bar code scanning as if the scanning process is terminated there is no other
way to check the delivery boxes. It may lead to unnecessary delay in receiving process of
boxes (Broberg et al. 2014).
4. Production orders are generated automatically while the finished goods fall below the
level of 60% as compared to the sales of prior months. However, the Hence it may
happen that the order place for purchasing such item those have no demand at present in
the market or there is high demand or urgent order that requires immediate supply of
goods even if the stock does not fall below 60%. Therefore in such case it is likely that
the goods may be overstocked those in turn will be obsolete and loose its value or the
entity may lose the urgent order in absence of goods (Broberg et al. 2014).
5. Suppliers are automatically selected based on the latest price and delivery times.
However, the supplier’s reputation, quality of goods and competitive quotation are not
taken into consideration.

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6. Production controller has access for both printing of production order as well as
amending of master file. Access to both these system leaves the scope of misstatement
and hence the same shall be segregated (Broberg et al. 2014).
Answer (b)
Recommended testing control for inventory system shall be as follows –
 Test of control – here the auditor tests the records through referencing the purchase
invoice, production records and receiving reports. In addition, the inventory instructions
are reviewed and inventory taking process is observed
 Substantive procedure – under this, the auditor detects the fraud or material misstatement
at assertion level including existence, cut-off, validity, rights and obligation and
consistency along with checking the physical inventory (Jais, Nawawi and Salin 2016)

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