ACC305 Assignment 1: Independence Threats and Audit Opinion Analysis

This assignment solution for ACC305 addresses various aspects of auditing, focusing on identifying and classifying threats to auditor independence, such as self-interest, self-review, advocacy, familiarity, and intimidation, within specific scenarios. It also provides detailed explanations for each classification. Furthermore, the solution covers the appropriate audit opinions (unqualified, qualified, adverse, and disclaimer of opinion) based on different scenarios involving issues like limitations in audit scope, departures from accounting standards, and going concern assumptions. The scenarios include situations with alternative audit procedures, material misstatements, contingent liabilities, inadequate internal controls, and disagreements over accounting policies. Desklib offers this and many other solved assignments for students.

Part 1 Solutions
1. Intimidation
Reason: The auditors will not be able act objectively due to the threats from the CEO
2. Familiarity
Reason: The acceptance of gift will create a situation that is familiar to the auditors. As a result, they will
become sympathetic to the company’s needs.
3. Self interest
Reason: The audit firm has a direct financial interest in the company. This will influence the firm’s
behavior when dealing with the company.
4. Familiarity
Reason: There is a relationship between the director and audit partner. Therefore, the partner will be
sympathetic to the company’s needs.
5. Advocacy
Reason: Given the auditor is promoting the clients interest, they may become too involved which may
compromise their objective views.
6. Advocacy
Reason: By acting as an advocate, the audit firm is becoming involved in the clients operation hence
compromising their objectivity.
7. Intimidation
Reason: The auditors will not be able act objectively following the threats from the CEO to reduce their
hours.
8. Self interest
Reason: By becoming a board member, the audit partner will have a direct financial interest in the
company. This will influence the audit firm’s behavior when dealing with the company as they will be
unable to accept their projects.
9. Self-review
Reason: Since a member of the audit team was recently a director of the company, then the firm may be
unable to evaluate the work objectively as it was performed by their team member.
10. Self-review

Reason: Since the system was recommended by the audit firm, then the firm may be unable to evaluate
the work objectively as it will be providing judgement as part of providing a current service to the
company.
Part 2 Solutions
Threat: Long term service
The firm has been the company’s auditor for ten years. Therefore, there has been a long association
which could lead to threats of familiarity because the auditors are sympathetic to the company.
Threat: Relationship between Robert and the Company CEO
One of the audit partners, Robert, is the son in law of the Company CEO. This relationship can create a
threat of intimidation, self-interest and familiarity to the Robert’s objectivity. This is because Robert
may be sympathetic towards the company and the CEO decisions. Furthermore, this threat of objectivity
is more significant since Robert has a senior position within the audit firm.
Threat: All paid Expense Weekend for Company and Auditors
By offering a weekend away with the auditors, the auditors are faced with a threat of self-interest. This
is because the trip/gift offer can sway their judgment in favor of the client. Furthermore, since this is an
all paid expenses trip with large monetary value, the self-interest effect may be larger.
Threat: Offer as Company director on condition of reduced audit fees
By being offered a job as a company director, there is a threat of self-interest. This is because John will
have a direct financial interest in the company. The effect is it will influence the audit firm’s behavior
when dealing with the company. Furthermore, the job offer comes on condition that audit fees are
reduced. This condition creates a threat of intimidation. This is because John and auditors will not be
able act objectively following the threats of audit fees.
Part 3 Solutions
a) Audit Opinion- Unqualified opinion
The opinion will be unqualified, since our auditor has been able to use an alternative audit procedure,
thereby getting satisfaction on the balance of the account.
b) Disclaimer of opinion
The opinion issued should be a disclaimer of opinion for the following reasons:
a. The Plant, Property and Equipment represents 35% of the company’s assets, therefore it is
pervasive.

b. Also because the auditor cannot verify the value of the PPE or even go with an alternative
procedure to verify, there may be a material misstatement.
c) Audit Opinion- Qualified opinion
Contingent liabilities are potential future obligations which arose from the past. The occurrences of
contingent liabilities depend on the outcome of an event in the future.
AASB 137 says that companies should disclose contingent liabilities which are material. Furthermore, the
value disclosed should be a best estimate of value needed to cover the current liabilities.
d) Audit Opinion- Disclaimer of opinion
The opinion issued should be a disclaimer of opinion because it has been noted that the values cannot
be verified since the internal controls are inadequate. In addition, the auditor is unable to verify the cash
sales amount because there are no alternative procedures. Hence, the cash values may not be a true a
representation of the company because there is no evidence to support it.
e) Audit Opinion- Unqualified opinion
According to ASA 510, an auditor must ensure that a new clients opening balances do not contain
material misstatements. For this case, the auditor has been able to use an alternative means to
ascertain that there is no material misstatement, despite the client not providing the requested
information.
f) Audit Opinion -Adverse opinion
Given they have not yet started using the Australian Accounting Standards; the opinion issued should be
an adverse opinion. The reason for this is there could be a misstatement as the statements don’t show
the firm’s true and fair view
g) Audit Opinion- Qualified opinion
The Accounting Board Standards tells us that companies should disclose on their statements all
departures from the Australian Accounting Standards. Since the company has adopted a LIFO method,
the company’s inventory values do not reflect their true and fair value. Hence, it has created a material
misstatement. However, the auditor has been advised that the effect is only limited to inventory. In
other words the effect is not pervasive. Based on this a qualified opinion should be issued with an
explanatory paragraph.
h) Audit Opinion- adverse opinion
The financial statements of this company have been prepared under a going concern assumption even
though they face losing their main customer. ASA 570 tells us that a business with access to financial

resources is not required to disclose an analysis of their going concern assumptions provided it has a
history of profitable operations.
Since the company faces losing a major revenue source and it’s not disclosed, there could be material
misstatement - its effects are pervasive. Auditor should issue adverse opinion.