Semester 2 2019: Advanced Auditing and Assurance Services Report

This report, prepared for Advanced Auditing and Assurance Services (ACC5AAS) at La Trobe University, delves into the critical aspects of auditing and assurance. It begins by emphasizing the significance of ethics for auditors, outlining ethical considerations auditors must address before accepting an engagement. The report then shifts to a practical analysis of auditing, using Mayne Pharma as a case study to illustrate audit risk. The report covers various business risks faced by Mayne Group, including regulatory compliance, international operations, and intellectual property. It also analyzes specific accounts at risk, such as impairments, interest-bearing loans, and sales, and assesses the application of corporate governance principles. Furthermore, the report discusses the selection of an appropriate base for setting materiality, concluding with total assets as the most stable option for Mayne Pharma's 2018 financial year.

1
Advanced Auditing and Assurance Services
Group Members
Group Members
Group Members
Group Members
Word Count: 2008 words

2
Executive Summary
This paper begins with a reflection of the importance of ethics to auditors and the ethical
considerations that auditors have to make before agree to take up an audit assignment. In the
second part, the paper highlights numerous practical aspects of an audit using Mayne Pharma as
a case study. The underlying theme covered in this section is audit risk.
Table of Contents

3
Executive Summary.......................................................................................................................2
PART A...........................................................................................................................................4
Introduction......................................................................................................................................4
Why ethics apply to auditors.......................................................................................................4
Ethical considerations before accepting a new engagement........................................................4
PART B...........................................................................................................................................5
Question 1....................................................................................................................................5
Question 2....................................................................................................................................5
Question 3....................................................................................................................................7
Question 4....................................................................................................................................8
Question 5....................................................................................................................................9
Question 6..................................................................................................................................10
Conclusion.....................................................................................................................................10
Reference List................................................................................................................................11

4
PART A
Introduction
Audit risk has a significant potential effect the quality of an audit. Auditors should therefore plan
their audit with the level of risk in mind. The specific audit approach should select audit
procedures that reduce the chance of issuing an inappropriate audit opinion (Okezie 2012 p.120).
This paper highlights practical aspects of audit risk and ethics considerations.
Why ethics apply to auditors
The primary reason why ethics applies to auditors is because they hold a position of trust which
has been given to them by society. Auditors are expected to act in the best interests of the society
because of the fiduciary responsibility they owe to society (Lovett et al. 2010 p.177). On paper,
it should be easy for auditors to fulfill their fiduciary responsibilities. However, in practice, there
are numerous traps that could potentially detract auditors from delivering their fiduciary
responsibilities. The second reason why ethics apply to is because they help to maintain a
positive reputation for the profession. Auditing scandals that have rocked the profession in the
recent past exemplify why ethical guidance and ethical judgment are important in ensuring that
the public does not lose trust in the profession (Cheffers and Pakaluk 2017 p.293).
Ethical considerations before accepting a new engagement
One of the considerations that need to be made by the auditor before accepting a new
engagement is whether acceptance of the new engagement would violate any of the fundamental

5
ethical principles. The auditor needs to evaluate the potential client to establish whether their
activities are questionable and whether accepting their engagement would create unacceptable
risk (Armstrong 2013 p.88).
Auditors should also consider their suitability for the specific engagement. In particular, the
auditor should consider whether they have the requisite experience and competence to deliver a
quality audit. Certain types of audit require specialist skills and prior experience.
A further ethical consideration that auditors should make is whether there are any threat to
objectivity if the auditor accepted the engagement. An auditor who owns shares in a client for
instance would have a personal interest to preserve the value of his stake and would therefore be
hesitant to issue an adverse opinion if such an opinion is appropriate. These threats to objectivity
should either be avoided by declining the appointment or appropriate safeguards put in place
(Low 2014 p.76).
PART B
Question 1
Maynne manufactures and sells branded and generic drugs for the local Australian and
international markets. Its operations are primarily split into two based on the type of drug:
branded and generic. Mayne’s operations are further divided into local and international markets.
Question 2
Apart from financial related categories of laws, there are labor laws, environmental laws and
prescription drug regulations affect Mayne’s operations. The Workplace Relations Act (WR Act)

6
of 1996, the Therapeutic Goods Act and the Environment Protection and Biodiversity
Conservation Act of 1999 ( EPBC Act) are three particular laws within the three categories
identified above.
The WR Act is currently the main statute that regulates labor in Australia. Prior to this Act, there
were three other acts introduced at different times between 1904 and 1993. The main objective of
the WR Act 1996 is to “to provide a framework for cooperative workplace relations which
promotes the economic prosperity and welfare of the people of Australia”. The Act established
the Australian Industrial Relations Commission (AIRC). The Commission serves as a platform
for averting and deciding on industrial disputes. Prevention is done by setting out minimum
entitlements for employees. The Commission is also available to facilitate negotiation of
individual agreements and collective bargaining agreements between employers and groups
representing employees. The Commission also regulates the activities of employee unions as
well as the activities of employer organizations.
As a producer of prescription drugs, Mayne Pharma follows the directions and regulations set by
the TG Act of 1989. This act seeks to ensure that drugs and medical devices are available in
Australia and meet relevant standards. The TG Act established the Therapeutic Goods
Administration (TGA) which enforces the provisions of the TG Act. TGA regulates prescription
as well as non-prescription drugs in Australia. TGA also regulates medical devices, herbal and
nutritional products. At the moment TGA has a register of more than 48,000 therapeutic goods
which include about 21,000 devices and 27,000 drugs. Of the 27,000 registered drugs, only about
3,500 have are prescription drugs. The TGA therefore has a fairly broad mandate.

7
The EPBC Act is the primary environmental legislation in Australia. The Act is primarily
concerned with environmental protection. It currently deals with such issues as preservation of
national and world heritage sites in Australia, protection of listed species of plants and animals
that are under threat of extinction, water resources and wetlands. One of the requirements of the
EPBC Act that is relevant to Mayne is the EPBC Act’s requirement for entities to make
provisions for restoration of sites they develop or extract resources from. In expanding its
production facilities, Mayne has recently encountered the EPCBA’s requirement to make
provisions for restoration of the environment at the end of life of a project.
Question 3
There are numerous business risks that Mayne Group faces that should be taken into
consideration when preparing for the audit. The first risk is that Mayne Group may not be able to
comply with all regulatory requirements and consequently lose compliance certifications. This is
a serious risk as it could potentially stop operations and threaten the company’s capacity to carry
on its operations (Duska and Duska 2012). The risk is compounded by the fact that there are
numerous laws and regulations that the company has to comply and keep up with. The audit
team will have to review Mayne’s compliance history and evaluate the current steps that the
company has taken to be compliant. One of these steps would involve engaging specialists who
are able to navigate the intricacies of regulation (Rest 2011 p.593).
The second risk that the audit team should consider is the risk posed by the company’s
international operations. These international operations imply that there are foreign exchange
transactions involved. With foreign exchange transactions concerns about pricing and the

8
possibility of forex losses arise (Monroe 2010 p.70). The audit team will need to evaluate steps
taken by Mayne to minimize the effect of foreign exchange transactions on the entity.
The third risk that the audit team should consider is the risk of infringement of intellectual
property rights by Mayne or the risk of loss of benefits due to infringement of one’s intellectual
property by another party. The potential financial and legal impact of infringement of intellectual
property rights is quite significant (Somers 2011 p.189). It can cripple an organization financially
and affect its ability to continue operations and as such there is need to ensure that the company
has a robust strategy for managing intellectual property. There is need to review the company’s
intellectual property strategy as part of due diligence on the client.
Question 4
Impairments is one of the accounts that could be at a significant risk. The first reason for
selecting this account is that there was a significant increase in the value of impairments between
2017 and 2018. An increase of 800% is by all standards a significant increase. The fact that
impairments involve a high degree of judgment suggests that this account may be used by
management for creative accounting purposes (Sadowski et al. 2012 p.12). The initial
recognition of the assets involved and their subsequent revaluation which results in the
impairment may not be supported. In response to this risk, the audit team will therefore need to
increase testing on the account and to gain an understanding of the process of recognizing
impairments to satisfy themselves that the impairments are valid (Kozhan 2010 p11). The key
assertion risk for the impairment account is valuation; that is whether the valuation of the
impairment actually reflects the decline in market value of the relevant assets.

9
The second account that could be at a significant risk is interest bearing loans and borrowings.
The balance on this account is notably significant and material at about 20% of total assets.
Interest in this account is based on the fact that financial obligations related to loans and
borrowings have to be met as a priority before other obligations are met. The company should
therefore be wary of increasing gearing to the point where there are doubts about its ability to
meet loan obligations in the future. Further analytical procedures to determine the company’s
free cash flows in relation to interest payments will need to be carried out (Lemon, Tatum and
Turley 2010 p.39)
The third account that could be at a significant risk is sales. Sales have a considerable effect on
profitability which is one of the most closely watched measures of performance. In situations
where profitability is declining, management may be lured into misstate sales so as to achieve a
desired profitability position. The fact that the sales account has a lot of transactions makes it
easy to conceal misstatements. The key assertions involved in these accounts are accuracy and
completeness.
Question 5
Principle 4 of corporate governance principles issued by the ASX Corporate Governance
Council’s relates to safeguarding the integrity of corporate reports. Corporate reports are
management’s avenue of reporting the outcome of its stewardship to different stakeholders. As
management has control over stewardship and the preparation of the financial statements, there
are concerns about the integrity of these reports. One of the ways of enhancing the integrity of
corporate reports is by subjecting them to audit by an independent auditor or assurance

10
professional. Financial reports of public companies are required by statute to be subjected to an
external audit. As far as the company’s financial reports are concerned, Principle 4 has been met.
There are other reports that listed companies are not obliged to produce but can be produced as
part of transparency or corporate social responsibility (Ndiyo 2015 p.211). These reports include
sustainability reports.
Question 6
An appropriate base for setting materiality should not be affected by one off or transactions or
cyclical trends but rather should be fairly stable over time. There are numerous accounts that can
be used as bases including revenue, profit after tax, total assets and total liabilities. From these
options, total assets is the most stable base for Mayne Pharma for its 2018 financial year. In
addition to its stability, the value of total assets relative to other accounts is neither too small nor
too large. Materiality thresholds are typically set between 10% and 5% of the base. The account
balances are fairly distributed within this range. Total assets is therefore an ideal base for
determining materiality.
Conclusion
From the foregoing discussion, it is apparent that a consideration of audit risk is important in
audit planning. The assessment informs the nature of audit procedures to be employed and the
reliance that auditors can place on information from different sources.

11
Reference List
Armstrong, M. (2013). Ethics and professionalism in accounting education: A sample course.
Journal of Accounting Education11: pp. 77-92.
Cheffers, M. and Pakaluk, M. (2017).Understanding Accounting Ethics. Sutton: Allen David
Press.
Duska, R. and Duska, B. (2012). Accounting Ethics.Blackwell PublishingEthics Toolkit. (n.d.).
Retrieved 12th of March, 2013, from Ethics Resource Center: http://www.ethics.org/
Kozhan, R. (2010). Financial Econometrics – with eviews, Roman Kozhan & Publishing.
www.bookboon.com
Lemon, W., Tatum, K. and Turley, W. (2010). “Developments in the Audit Methodologies of
Large Accounting Firms. Hertford, England: Stephen Austin & Sons.
Lovett, B.J. et al.(2010). Levels of moralisation: a new conception of moral sensitivity.
Journal of Moral Education. Vol. 39, No. 2, June2010, pp. 175–189
Low, K.Y. (2014). “The effects of industry speciliastion on audit risk assessments and audit
planning decisions”, The Internatioanl Journal of Accounting (March): 59-77.
Messier, W. and Austein, L. (2010). “Inherent Risk and Control Risks Assessments: evidence on
the effect of pervasive an specific factors”. Auditing: A Journal of Practice and Theory, 19
(Fall): 119-131.

12
Mock, T. and Turner, J. (2013). “Auditor identification of fraud risk factors and their impact on
audit programs”. Multi-Channel Interation June 15-18, 2009; Bled, Slovenia.
Monroe, G. (2010). “An examination of order effects in auditors’ inherent risk
assessments”.Accounting and Finance, 40(2): 55-74.
Ndiyo, N.A. (2015). Fundamentals of Research in Behavioural Sciences and Humanities,
Calabar: Wusen Publishers.
Nuijten, A., Zwiers, B. and Pijl, G.V.D. (2009). “The effect of IS-Auditors Risk Information on
Perceived Risk”. A Paper presented at the 21st Bled eConference eCollaboration: Overcoming
boundaries through IS-Managers’
Okezie, B.N. (2012). Audit and Assurance Services, Aba: Concept Publishers.
Rest, J. (2011).Morality, in: P. Mussen (Ed.) Handbook of child psychology (New York, Wiley),
pp. 556-628
Sadowski, S. T. et al.(2012). Toward a Convergence of Global Ethics Standards: A
Model from the Professional Field of Accountancy,International Journal of Business and
Social Science Vol. 3 No. 9; May 2012.
Somers, M., J. (2011). Ethical Codes of Conduct and Organizational Context: A Study Between
Codes of Conduct, Employee Behaviour and Organizational Values. Journal of Business
Ethics30, p. 185-195.