Auditor Independence and Audit Opinion Quality

The assignment delves into the crucial relationship between auditor independence and the quality of audit opinions. It examines how factors influencing auditor independence, such as client persuasion and governance structures, can lead to qualified audit opinions. The analysis focuses on the consequences of qualified opinions, particularly in situations where fair value information is lacking, potentially resulting in a disclaimer of opinion.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

1AUDITING AND ASSURANCE
Table of Contents
Answer for 1st question....................................................................................................................2
(a).................................................................................................................................................2
(b).................................................................................................................................................2
(c).................................................................................................................................................3
(d).................................................................................................................................................3
Answer to the 2nd question...............................................................................................................4
(a).................................................................................................................................................4
(b).................................................................................................................................................5
(c).................................................................................................................................................5
Answer to the 3rd question...............................................................................................................6
(a).................................................................................................................................................6
(b).................................................................................................................................................7
(c).................................................................................................................................................7
References........................................................................................................................................9

2AUDITING AND ASSURANCE
Answer for 1st question
(a)
With respect to the case study it can be stated that tax guarantee is being provide by
Berowra Accountants to their clients with reference to a special advertisement. Thus this
situation mandates the understanding in relation to the tax fund concept. The difference between
tax owed and tax paid is terms as tax refund. In addition tax refund may be availed by an
organization in situation where the tax liability is lower than tax paid by them. The profit ,
income and tax expenses of the organization are used to determine its eligibility for tax refunds.
No auditor can thus make an express guarantee for tax refund. In addition the auditors have the
responsibility of locating any misstatement in relation to financial accounting. Thus in case of
tax refund the service is of non-audit nature. Therefore under APES 110 Code of Ethics for
Professional Accountants, Section 130 actions of Berowra Accountants is a violation of
Competence and Due Care principle. They failed to stay within professional limits in relation to
their actions in accordance to the provisions of the profession al code of conduct.
(b)
It has been stated through the facts of the case study that a local club has asked Jamie to
act as the treasurer of their club. Jamie is also a professional auditor at a charter accounting firm.
He is also accustomed of auditing only large organizations. The categorization of athletic clubs is
done under non-profit societies (Galit and Metaban 2012).. As per the provisions of section 210
APES 110 Professional Appointment when an auditor is accepting an appointment by a new
client it has to be determined by him that whether the appointment is going to be a hindrance in
compliance of basic principles of audit towards ethics. In the given situation no breach of ethical

3AUDITING AND ASSURANCE
principles can be foreseen where Jamie accepts the proposal of the local club. There is no
identified connection between the work of Jamie as an auditor of large public organizations and a
treasurer of the local club. In addition appointment as a treasurer of a nonprofit organization does
not affect any ethical principles. Thus the action of Jamie is to be considered within the limits of
ethics (Han Fan, Woodbine and Cheng 2013).
(c)
The provided situation states that whether or not payment would be made to the auditors
who in this case are Pymble Accountants relies upon the appropriateness of the audit opinion in
relation to the audit clients who in this case are Monlec Ltd. In addition it a demand of an audit
report which is favorable to them has been demanded from the client Monlec Ltd. However the
auditors in this context must consider that through the virtue of their profession they actually
have to represent the shareholders and investors and not their clients. With respect to the
provisions of section 120 of the APES 110 Principle of Objectivity the auditors have the duty of
not manipulating their reasonable judgment under any form or pressure and avoid a situation
resulting in a conflict of interest. Thus the auditors must not change their audit report under any
biasness or influence (Kuan 2014). The principle of objectivity of auditing would be expressly
violated by the auditors in case they indulge in providing a report to the clients which is in their
favor unreasonably. On the other hand no ethical or legal principle will be violated if the auditors
act with integrity and make a reasonable and correct audit.
(d)
In relation to this part it has been given through the facts of the case that all papers and
report of Motoring services have been provided by Winton Accountants to Chadwick Chartered
Accountants. In this situation it is the responsibility of Chadwick Chartered Accountants to

4AUDITING AND ASSURANCE
review the quality of audit in relation to Winton Accountants. Section 140 of the APES 110
Principles of Confidentiality expressly states that it is the responsibility of the auditors of
maintaining confidentiality in relation to the acquired information of the auditing clients
(Athanasiou 2014). According to these provisions it can be derived that no auditor has the right
to disclose to any third party the information acquired from a client. However as stated in the
situation all confidential information in relation to Motoring services have been provided by
Winton accountants to Chadwick Chartered Accountants as they have given them all the audit
papers. Therefore it can be stated evidently that the principles of confidentiality in relation to
auditing have been violated by Winton Accountants.
Answer to the 2nd question
(a)
It has been given to us through the case study that as Leona is ill Jane Davis has been sent
as her replacement for the purpose of auditing Jenkins Ltd by Thornleigh Accountants. In
addition the intention of including Jane to the audit team of Jenkins Ltd by Thornleigh
Accountants is from middle of July. The situation therefore poses a threat towards the
independence of audit in relation to Thornleigh Accountants. As per section 100.12 of APES
110, Self-review Threat, there is a restriction imposed upon the member of the audit team of
using information from an audit conducted by another person belonging to the team. There is
also a restriction upon members towards using the result produced by the work of another
member(Carey, Monroe and Shailer 2014). In the given situation it is evident that the these
principles would be applicable on the situation of Thornleigh Accountants as there is a plan of
utilizing the information which Jane has in relation to Jenkins Ltd in relation to the accounts of

5AUDITING AND ASSURANCE
the company. Thus the situation triggered self-review threat of auditor’s independence where the
inclusion of Jane is done by Thonleigh Accountants to the audit team.
(b)
In relation to this part it has been given through the facts of the case that the
responsibility of conducting Winmalee Ltd’s Audit operation has been imposed on John Darrow.
For the purpose of providing support the valuation of their intangible assets John has been
presented with all the accounting paper copies which included computer files and accounting
standards by Winmalee Ltd. However in relation to the situation in hand it has to be stated that
the auditors have the responsibility of deriving the valuation of assets through the assessment of
different accounts and not take into consideration any document provide by the client. Here John
is under pressure of accepting the documents provided by Winmalee Ltd in relation to the
valuation. This pressure has been created in an indirect manner by Winmalee Ltd on John
through providing him with the document towards a favorable report of audit. According the
provisions of section 200.8 of APES 110 a treat to the auditors’ independence may be created by
the situation (DeFond and Zhang 2014).
(c)
It has been given to us through the case study that the auditors have been invited by the
chocolate company to a social club owned by the company and a chocolate show. In this
situation it would be appropriate to mention the fact that the auditors are required not to indulge
in any form of social entertainment provided by the clients. According to the provisions of

6AUDITING AND ASSURANCE
section 100.12 of the APES 110, Self-interest Threat, the independence of auditor would be put
to threat in case the auditor has any form of interest in the client which could have an impact on
their opinion(Ojo 2013). It may be evidently stated in the situation that there is an attempt on the
part off the chocolate company towards influencing the auditor so that they provide a favorable
audit report by inviting them to social functions. Thus a self interest threat in relation to auditors
independence is going to be created where he accept any of the invitation provided by the
chocolate company in relation to the social gatherings.
Answer to the 3rd question
(a)
The primary duty of an auditor is to ensure that he appropriately examines the financial
statement of an organization so that it can be ensured that there is no material misstatements
which exists in relation to the financial statements. In addition it is also their duty to ensure that
the financial statement is in accordance with existing ethical and legal provisions. The auditors
are also restricted from commenting on the financial statement of the company in case there is no
fraud involved (Deumes et al. 2012). In the given situation it is evident that Connor company
heavily relies upon a band overdraft to get off their loan as they are left with no other financial
resources. The time which has been allowed by the bank for the repayment is one month. The
vulnerable financial position of the company is depicted through the situation. However
materiality does not get affected through this aspect. No financial statement has been
manipulated by the company with respect to not disclosing their liabilities. Therefore an
unqualified audit opinion would be issued by the auditor (Tsipouridou and Spathis 2014).

7AUDITING AND ASSURANCE
(b)
The companies are imposed with a duty to present and prepare the financial statement in such a
way that they are in compliance with standards of accounting which are generally accepted.
Moreover it is also the duty of the company to act in compliance with the country’s accounting
regulations were its operations are based. In the situation which has been provided it is evident
that there is a requirement on the part of the company to follow FIFO method in relation to
inventory valuation. However the company is actually following the LIFO method which is used
by their parent company based in America. The situation is therefore going to result in a material
misstatement in relation to the financial statement as there is a differential effect between the
adaptation of LIFO AND FIFO method. Therefore in this context there is a right provided to the
auditor of issuing an adverse opinion as the issue is in relation to both material misstatement as
well as regulatory compliance. However no sign of material misstatement or compliance issue is
present in the financial statement other than in the situation of inventory. Thus a Qualified Audit
opinion may be issued. The opinion would be similar to each other however an additional
paragraph has to be added to state why the decision of the auditor is unqualified (Kachelmeier,
Schmidt and Valentine 2016).
(c)
The companies are required to conduct valuation in relation to their fixed assets such as land,
plant and machinery and building regularly as the market price is subjected to change. It has
been provided that no valuation has been done by Victorian Manufacturing Company with
respect to their factory in Melbourne as they feel that the price is not going to change. Thus this
assumption on the part of the directors may be inaccurate and therefore result in a material

8AUDITING AND ASSURANCE
misstatement. When the audit preparation is conducted the current fair value of land and
building is required by the auditor. However where such information is not present a correct
audit opinion would not be able to be provided by the auditors as the examination process would
be limited. Thus a disclaimer of opinion would be issued by the auditors as the audit cannot be
completed by the accurately (Rahimian, Tavakolnia and Karamlou 2014).

9AUDITING AND ASSURANCE
References
Athanasiou, A., 2014. Avoiding client persuasion. Taxation in Australia, 48(10), p.601.
Athanasiou, A., 2014. Boy, you're gonna carry that weight a long time!. Taxation in
Australia, 49(2), p.106.
Carey, P.J., Monroe, G.S. and Shailer, G., 2014. Review of Post‐CLERP 9 Australian Auditor
Independence Research. Australian Accounting Review, 24(4), pp.370-380.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting
and Economics, 58(2), pp.275-326.
Deumes, R., Schelleman, C., Vander Bauwhede, H. and Vanstraelen, A., 2012. Audit firm
governance: Do transparency reports reveal audit quality?. Auditing: A Journal of Practice &
Theory, 31(4), pp.193-214.
Galit, S.H. and Sorbe, T., Metabank, 2012. Computerized extension of credit to existing demand
deposit accounts, prepaid cards and lines of credit based on expected tax refund proceeds,
associated systems and computer program products. U.S. Patent 8,090,649.
Han Fan, Y., Woodbine, G. and Cheng, W., 2013. A study of Australian and Chinese
accountants’ attitudes towards independence issues and the impact on ethical judgements. Asian
Review of Accounting, 21(3), pp.205-222.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.

10AUDITING AND ASSURANCE
Kuan, K.T.C., 2014. Auditor independence: an analysis of the adequacy of selected provisions in
CLERP 9 (Doctoral dissertation, Queensland University of Technology).
Ojo, M., 2013. Audits, audit quality and signalling mechanisms: concentrated ownership
structures.
Ottaway, J., 2014. IMPROVING AUDITOR INDEPENDENCE IN AUSTRALIA: IS
‘MANDATORY AUDIT FIRM ROTATION’THE BEST OPTION?.
RAHIMIAN, N., TAVAKOLNIA, E. and KARAMLOU, M., 2014. Qualified Audit Opinion and
Debt Maturity Structure.
Trung, N.K., 2015. Ethics Education In The University. International Journal of Scientific &
Technology Research, 4(8), pp.5-10.
Tsipouridou, M. and Spathis, C., 2014, March. Audit opinion and earnings management:
Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.