HI6026 Audit, Assurance and Compliance: Auditor Responsibilities

This report examines the auditor's public interest responsibilities and audit quality, focusing on the impact of material misstatements on Wesfarmers' stakeholders, including shareholders, employees, suppliers, and the government. It delves into auditor independence, whistleblowing, and the public interest requirements outlined in APES 110, highlighting the importance of ethical conduct and adherence to auditing standards. Furthermore, the report analyzes the lessons learned from the Enron collapse and the role of Arthur Andersen, emphasizing the need for robust accounting standards, fraud prevention, and auditor oversight. Finally, it addresses the steps auditors need to take to enhance audit quality and mitigate risks, drawing on insights from regulatory warnings and professional standards. The document is available on Desklib, a platform providing study tools and resources for students.

Running head: AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Auditor’s Public Interest Responsibilities and Audit Quality
Name of the Student
Name of the University
Author’s Note

1AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Executive Summary
It can be seen from the findings of the report that Wesfarmers Limited has certain key
stakeholders like shareholders, suppliers and others who will be affected in the presence of
material misstatements in the financial statements. After that, it is important for the
auditors to consider the aspects like independence and whistleblowing in auditing. At the
same time, the auditors are needed to consider the lessons of Enron collapse for avoiding
this kind of collapse in Australia.

2AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Table of Contents
1. Introduction............................................................................................................................3
2. Key Stakeholders Analysis of Wesfarmers.............................................................................3
3. Indepdence, Whistleblowing and Public Interest Requirement as per APES 110.................5
3.1 Independence..................................................................................................................5
3.2 Whistleblowing................................................................................................................5
3.3 Public Interest Requirements of APES 110......................................................................6
4. Lessons from Enron Collapse and Arthur Anderson..............................................................6
4.1 Lessons from Enron..........................................................................................................6
4.2 Lessons from the Behaviour of Arthur Andersen............................................................9
5. Audit Quality and Steps Auditors Need to Take to Address the Warning.............................9
6. Conclusion............................................................................................................................12
7. References............................................................................................................................14
8. Appendices...........................................................................................................................17

3AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
1. Introduction
Auditing is considered as such a profession where the main job responsibility of the
auditors is to perform various substantive and analytical procedures on the financial
statements of the companies with the aim to find any kind of material misstatements in
them (Chen et al. 2013). There are certain responsibilities on the auditors while performing
the audit procedures and one of them is to comply with the public interest requirements
(Knechel and Salterio 2016). The public interest requirement states that the auditors are the
representatives of the public. In Australia, the presence of APES 110 can be seen that
provides the necessary guidelines to the auditors to consider the public interest
requirements (Martinov-Bennie and Mladenovic 2015). The first part of the report discusses
about the impact of material misstatements in the financial statements on the key
stakeholders of Wesfarmers. The next parts discusses about the public interest
requirements of auditor considering the aspects like audit independence and
whistleblowing. The next parts sheds light on the major audit lessons from the Enron
Scandal and the auditor’s behaviour. The last part discusses about the audit strategies need
to be taken to address the warning of Greg Medcraft.
2. Key Stakeholders Analysis of Wesfarmers
The below discussion shows the impact of material misstatements on these key
stakeholders of Wesfarmers:
Shareholders: As per Appendix 1, Wesfarmers considers their shareholders as a key
stakeholder group and the shareholders need up-to-date financial information about the
company to make effective investment decision about the company
(sustainability.wesfarmers.com.au 2019). In this position, the improper identification,

4AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
disclosure and adjustment of material misstatements can misguide these investors with
materially affected information about the financial performance and position of the
company (Bridoux and Stoelhorst 2014).
Employees: As per Appendix 1, employees are considered as one key stakeholder group of
Wesfarmers and the aim of the company is to empower and encourage their employees
with career development opportunities (sustainability.wesfarmers.com.au 2019). Hence, in
appropriate documentation, disclosure and adjustments of material misstatements can
affect Wesfarmers’s ability in providing the career development opportunities to their
employees (Gonzalez-Zapata and Heeks 2015).
Suppliers: According to Appendix 1, Wesfarmers considers their suppliers as another key
stakeholder group and the company is committed towards providing the long-term benefits
to their suppliers (sustainability.wesfarmers.com.au 2019). For providing credit, the
suppliers are needed to assess Wesfarmers’s liquidity position for repaying the credit of the
suppliers. Hence, the presence of material misstatements can provide the suppliers with
materially misstated information about the company’s liquidity position.
Government: As per Appendix 1, Wesfarmers considers the Australian Government as a
crucial key stakeholder group and the company has to ensure the payment of tax to the
government (sustainability.wesfarmers.com.au 2019). The presence of material
misstatements in the financial statements of Wesfarmers can affect the company’s ability to
make the tax payment in timey basis (Córcoles and Ponce 2013).
The above discussion indicates towards the crucial fact that the inappropriate
recognition, disclosure and adjustments of material misstatements can create the risk of
affecting the processes of decision-making by the key stakeholders. In the presence of this

5AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
risk of material misstatements, Wesfarmers’s shareholders will not be able to assess
whether the company is performing well or not. After that, the risk for the employees will
be the uncertainty about their futures in the company. For the suppliers, they can face the
risk of business loss due to incorrect liquidity decisions. For the government, non-payment
of tax will create loss for them (Butler et al. 2013).
3. Indepdence, Whistleblowing and Public Interest Requirement as per APES 110
3.1 Independence
Auditor indepdence is considered as a major aspect for increasing the audit quality
and it refers to the independence of the external auditors from the events or parties that
may have financial or non-financial interest in the business of the audit client (Tepalagul and
Lin 2015). With the aim to maintain the required independence, it is needed for the auditors
to maintain the audit integrity so that the audit processes can be performed in the most
objective manner. It is possible for the auditors to avoid any kind of conflict of interest and
influence on the development of the audit opinion in the presence of the required
compliance with the audit independence (Mostafa Mohamed and Hussien Habib 2013).
3.2 Whistleblowing
The process of whistleblowing is considered when a specific supplier, employee,
contractor or other from the organisation select the outside management channels with the
aim to report any suspected misconduct or wrongdoing within the organization for example
speaking out of the confidential manner and others (Zhang, Pany and Reckers 2013). The
process of whistleblowing can be done in internal procedures set up by the company or with
the assistance of the external body such as regulatory bodies. In addition, public disclosure

6AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
to the media can also be considered as the process of whistleblowing (Soni, Maroun and
Padia 2015).
3.3 Public Interest Requirements of APES 110
The presence of specific standards and principles can be seen in the documents of
APES 110 Code of Ethics for Professional Accountants that the auditors are needed to
follow for the public interest requirements. The presence of certain regulations can be seen
in APES 110 for providing the necessary safeguards to the internal whistle-blowers
(apesb.org.au 2019). They are discussed below.
As per Section AUST210.11.1 of APES 110, when there is an instruction on an auditor
to get the audit nomination for the replacement of the current auditors of the client, it is
needed for the auditor to request the audit client so that the auditor can get the nomination
related information from the existing auditor (apesb.org.au 2019). It is needed for the
auditor to request for the nomination related information to the existing auditor in writing if
the client accepts the request. However, it is needed to reject the audit nomination in case
the client disapprove the request of the auditor (apesb.org.au 2019). This regulation is
essential for the whistle-blowers. At the same time, it can be found from Section 100.1 of
APES 110 that under the audit profession, the auditors accept the responsibility of acting in
the favour of the public as they should not solely act in the favour of the audit client
(apesb.org.au 2019).
4. Lessons from Enron Collapse and Arthur Anderson
4.1 Lessons from Enron
The collapse of Enron provides the auditors and the audit profession with certain
lessons and they are discussed below:

7AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Standards of Audit and Accounting: It can be seen from the Enron scandal that there were
certain major issues in the accounting as well as auditing standard of the company which
contributed hugely towards the collapse of the firm. In order to address this concern, there
is a desperate need for the introduction of correct as well as appropriate accounting and
auditing standards; and thus, the adherence with the global accounting and auditing
standards is needed (Jones and Stanton 2013).
Fraudulent Activities in Accounting: As per the information from the Enron scandal, Arthur
Andersen, the auditor of Enron provided major assistance to the management of the
company for the falsification of the accounting books for both of their own benefits; and
this was one major reason for the appointment of Arthur Andersen in Enron. Hence, in
order to address this, the government agencies need to be provided with the audit
responsibilities of the companies instead of the private accounting firms. After that, there
must be restriction on the authority of the auditors to provide non-audit and consultancy
services to the audit clients due to the fact that this can lead to the creation of self-interest
threat of audit indepdence (Alleyne and Elson 2013).
Motivation for the Auditors: The scandal of Enron has helped the whole audit profession in
informing the fact that the imposed penalties on the auditors can create dissatisfaction
among them when the audit quality can be improved in the presence of proper incentives
for the auditors. This can be done in the presence of the compliance of the auditors with the
principles of integrity and professional competence and due care. In this purpose, one major
way to increase the audit quality is the application of auditor independent insight as it plays
a crucial role in the identification of the strengths and weaknesses of audit operations (Bean
2018).

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Role of Auditor Independent Oversight: The collapse of Enron has provided the auditors
with a crucial lesson that the quality of audit can be enhanced in the presence of auditor
independent oversight and this oversight can be developed by the auditors in gaining the
needed skills, experience and knowledge. At the same time, the application of the auditor
independent oversight needs the required inspection on the applied audit judgements by
the auditors for expressing the audit opinions on the presence of material misstatements
(van Rinsum 2017).
Auditor and Audit Committee: The audit clients have received one major lesson from the
scandal of Enron that it is their utmost priority to ensure the true and fair disclosure of the
financial information of their companies as this aspect is needed for the application of the
auditor independent oversight. With the aim to achieve this, the companies are needed to
ensure the presence of amity between the external auditors and the audit committee as the
members of the audit committee can get valuable advises from the external auditors on
how to maintain the true and fairness of the financial information disclosure (Okezie 2016).
Internal Control: Another major lesson that can be obtained from the collapse of Enron that
the audit clients can re-gain the confidence of the shareholders by strengthening the
internal control related to financial reporting. The presence of strong internal control assists
the companies in the true and fair disclosure of all of their accounting and financial
information. For this, the external auditors must gain understanding about the clients’
internal control strengths and weaknesses by discussing with the internal control members
(Markham 2015).

9AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
4.2 Lessons from the Behaviour of Arthur Andersen
Arthur Andersen was the auditor of Enron at the time of the company’s collapse. At
that time, Arthur Andersen had the reputation of being the second oldest audit firm. As per
the audit responsibility in Enron, Arthur Andersen was liable to provide assurance on the
fact that whether there was any material misstatements in the company’s financial
statements or not as the key stakeholders of the company were supposed to consider that
report for making the investment decision (Isaacs 2013). However, major audit failure can
be seen from the side of Arthur Andersen in fulfilling this responsibility. The Enron case
shows that there were major business relationships between Arthur Andersen and Enron as
the company employed jobs to some of the employees of Enron and it implied the presence
of self-interest threat for Arthur Andersen in Enron. In the presence of self-interest, Arthur
Andersen did not ask for the information related to audit nomination to Enron. At the same
time, some of the crucial documents were destroyed by certain audit members of Arthur
Andersen before the investigation of the federal government agencies. Based on the above
discussion, it can be said that Arthur Andersen was dishonest and did not comply with the
audit standards and requirements (Davies 2016).
5. Audit Quality and Steps Auditors Need to Take to Address the Warning
There is not any specific definition of Audit Quality as per the global auditing
standards, but the Australian Securities and Investment Commission has been able to
provide a specific definition of audit quality. It can be seen from the ASIC definition that
audit quality can be regarded as the substances or mattes that provide the auditors with
major assistance in conducting the audit works in the most objective manner that is to
identify the presence of any material misstatements in the financial statements (asic.gov.au

10AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
2019). After that, the auditors are needed to commutate the discovered disputes in the
financial statements. The insight that can be obtained from the warning of Greg Medcraft is
that it is needed for the auditors of the big four audit firms in Australia to enhance their
audit quality in order to avoid the occurrence of another Enron scandal (abc.net.au 2019).
At the same time, Greg Medcraft also put major emphasis on the fact that the
auditors of Australia are needed to be extra careful and responsible while conducting the
audit of large Australian organizations for avoiding the collapses like Enron in the country
(abc.net.au 2019). In order to maintain this, the main requirement for the auditors to
ensure the fact that they have complied with all required ethical and fundamental principles
of audit profession while searching for the material misstatements in the financial
statements of the clients. In this context, it needs to be mentioned that Section 2 of APES
110 puts the obligation on the auditors that they are needed to ensure the truthfulness and
fairness of the company’s financial statements (apesb.org.au 2019). Failure in audit can be
considered as a major reason for the collapse of Enron and thus, it is needed for the
auditors to maintain the above-discussed compliance for make their audit successful.
As per the statement of Greg Medcraft, for the period of eighteen months up to
2016 December, ASIC took the initiative to collect the key audit samples of the big four audit
firms and the have found the fact that these big four audit firms failed to provide the
needed assurance on material misstatements in 23% of the cases (abc.net.au 2019). As per
him, one major reason for this failure of the lack of the ability of the auditors to face the
challenging audit circumstances and the main reason for this is the lack of professional
scepticism (abc.net.au 2019). With the aim to address this, it is needed for the auditors of
Australia to develop an attitude that comprises of a questioning mind, being alert to the

11AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
challenging auditing conditions which may indicate that that is material misstatement
because of errors and frauds. It implies that critical assessment of the condition is needed
from the auditors (Quadackers, Groot and Wright 2014).
Greg Medcraft has mentioned the fact that for more than six years, ASIC piloted
7000 high-intensity surveillance and the result contributed towards the confinement of
more than 80 people and the restriction of more than 600 and refunded $1.3 billion to the
victims (abc.net.au 2019). Both the regulatory authorities and the Australian government
decided to impose legal penalties on them as it was evident that civil penalties were not
sufficient (abc.net.au 2019). It indicates towards the necessity of the auditors to maintain
audit independence so that safeguards can be applied to reduce the risks to the safe level.
It is needed for the auditors to comply with the public interest requirement related
principles in APES 110. As per the standard of APES 110, Section 290.155, in case the
company has only few members with the required knowledge and experience to conduct
the audit operations, it may not be possible to apply the safeguard related to the rotation of
key audit staffs (apesb.org.au 2019). As per the same section, in case the regulatory
authority has relieved the company from the process of key audit members’ rotation, then it
is possible for the audit members to continue as a key audit member for more than seven
years (apesb.org.au 2019). The auditors are needed to ensure their compliance with this
particular standard. At the same time, APES 110, Section 100.1 states that an important
aspect of the audit profession is that it demands the commitment of the auditors to act in
the public interest; and thus, it is not the responsibility of the members to exclusively satisfy
the needs of an individual client or employer (apesb.org.au 2019). Thus, it can be seen from