Auditing Theory & Practice: Analysis of ASA 315 and Auditor Liability

This report evaluates the case of Miller Yates Howarth (MYH), focusing on auditor responsibilities under ASA 315 concerning client governance, ethical issues using the American Accounting Association Decision Model, and the impact of auditor inclusion and statutory caps on liability. It identifies issues such as unclear top management responsibility, ineffective executive committees, and ethical violations by employees. Recommendations include improved governance processes, stronger internal controls, and ethical training. The report concludes that addressing these issues can mitigate audit risk and enhance the integrity of financial reporting. Desklib provides access to similar solved assignments and past papers for students.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1AUDITING THEORY AND PRACTICE
Executive Summary:
The report has identified various aspects related to ASA 315, American Accounting
Association Model and liability of the auditors. The unclear responsibility from the top
management of CAB, ineffective executive committee and others have been identified as the
significant issues in accordance with ASA 315 for which appropriate recommendations have
been provided to overcome the situation. In the second situation, it has been assessed that John
has not attended his office by giving a fake reason, which has violated the ethical principle
mentioned under the American Accounting Association Model. This mandates the need for
David Little, the senior employee of the organisation, to inform the same to the other team
members for maintaining ethical integrity. Finally, it has been evaluated that the inclusion of
auditors as well as statutory cap would help in minimising the liability of the auditors.

2AUDITING THEORY AND PRACTICE
Table of Contents
Introduction:....................................................................................................................................3
Answer to Question 1:.....................................................................................................................3
Answer to Question 2:.....................................................................................................................8
Answer to Question 3:...................................................................................................................10
Conclusion:....................................................................................................................................12
References:....................................................................................................................................13

3AUDITING THEORY AND PRACTICE
Introduction:
The current report aims to evaluate the case information of Miller Yates Howarth
(MYH), which is an accounting organisation having branches in New South Wales and
Queensland. The first segment of the report would focus on summarising the responsibility of the
auditor for reviewing the governance of the audit client by taking into consideration the standard
called ASA 315. The second segment would highlight the ethical issues by using the American
Accounting Association Decision Model in relation to the provided auditing work. Finally, the
report would shed light on explanation of the role that inclusion of auditors and statutory cap on
the liability of the auditors have on the drawbacks on the liabilities of the auditors.
Answer to Question 1:
When the audit functions of the organisations are conducted, it is necessary for the
auditors to govern various client-related aspects. In this context, the standard that contains
special attention is “ASA 315 Understanding the Entity and Its Environment and Assessing the
Risks of Material Misstatement”. This includes all accountabilities of the auditors in order to
review the client governance.
In accordance with ASA 315, the auditors are obliged to gain fair overview of the
industries of their clients, regulatory authorities in relation to the clients, framework for financial
reporting as well as other external factors (Auasb.gov.au, 2018). Along with this, the auditors are
liable to collect information about the operations, ownership structure, governance structure,
financial sources of the clients. Furthermore, they need to accumulate information for gaining an

4AUDITING THEORY AND PRACTICE
insight of the application and selection of accounting estimates, causes for change and
understanding the suitability for the selected organisations (Wang & Fargher, 2017).
More precisely, the auditors need to be obliged to understand the enforced internal client
control, since the auditors are required to judge whether the internal control is relevant for the
audit risk. At the time to obtain fair overview of internal control, the auditors should take into
account internal control design. Besides, ASA 315 mandates the need for the auditors to gain a
thorough insight regarding the different components of the control environment related to the
audit clients (Contessotto & Moroney, 2014). Hence, all individuals need to be analysed having
roles in the governance process of the organisation and it is a part of the auditors’ responsibility.
Such analysis would assist the auditors in gaining an understanding of the fact whether a culture
of honesty coupled with ethical behaviour exists in the business organisations.
ASA 315 states that it is the duty of the auditors to gain insight regarding the fact whether
the clients possess the needed processes in order to identify the financial reporting risks
(Bagshaw & Selwood, 2014). These risks need to be estimated and they are to be evaluated,
which is a significant duty of the auditors. After conducting such evaluation, they formulate the
necessary strategies for auditing. According to ASA 315, the auditors are responsible to gain
overview of the internal information system of their audit clients and the importance of such
system with financing reporting system of the clients. Henceforth, it is clearly understood that it
is the responsibility of the auditors to review the crucial aspects associated with client
governance for complying with ASA 315.
Issue Impact on raising
audit risk
Recommendations Reduction in audit
risk because of the

5AUDITING THEORY AND PRACTICE
recommendation
The board members
and financial and
audit committee have
not conducted
adequate oversight
(Apra.gov.au, 2018)
This issue has the
potential of raising the
possibility of
manipulation and
financial fraud, which,
in turn, could result in
audit risk
For addressing this
issue, legal
governance processes
could be used for
minimising the scope
of manipulation and
fraud in financial
aspects. Moreover, an
executive committee
and a rigorous board
need to be formed to
ensure that the
financial aspects are
controlled
appropriately.
Such strategy
formulation would
enable the
organisation to govern
the various financial
activities related to
the bank correctly for
assuring that the audit
risk is minimised.
The unclear
responsibility from
the top management
of CAB is identified
as another issue.
Moreover, absence of
ownership of the
When this issue is
inherent, the top
management of the
bank is not liable for
any type of illicit
financial activities,
which increase the
Under this scenario, it
is necessary to
reinforce the different
accounting standards
by seeking assistance
of various types of
management practices
This step would
ensure the higher-
level management of
the bank to be
responsible for its
financial activities and
the process would

6AUDITING THEORY AND PRACTICE
significant risks could
arise from the end of
the executive
committee.
audit risk. (Louwers et al.,
2015).
contribute to fall in
the audit risk of the
bank.
Another issue could
be observed as highly
complex and
bureaucratic
procedure in order to
undertake decisions.
The audit risk is
increased, as the
technique to identify
the financial risks of
the bank is slowed
down. In addition, it
results in an
impediment for
suitable result by
formulating over
timely collaboration
(Kend, Houghton &
Jubb, 2014).
In order to resolve this
issue, all the pertinent
aspects need to be
taken into account
before making
decisions.
This method would be
highly beneficial to
minimise errors when
the final decision
would be undertaken.
The next significant
issue could be
observed in operating
risk of the
management
framework, as
When such inefficient
risk management is
inherent, the
probability of audit
risk is increased along
with certain financial
In order to overcome
this situation, the
primary
recommendation
would be to improve
the authority and the
When the risk
management
framework is not
effective, the bank
management would be
able to minimise the

7AUDITING THEORY AND PRACTICE
practical working
procedures are not
maintained. In this
technique, there is
presence of under-
resourced and
immature compliance
function.
risks. Moreover, such
aspect results in
hurdle for the auditors
to conduct the
auditing processes in
an effective fashion.
ability of management
framework related to
operational risk in the
bank. This would help
in ensuring accuracy
in compliance
function. These are
the most crucial
recommendations for
addressing the
situation.
audit risk from its
business activities
coupled with other
risks.
Finally, the other
issues could be
observed in relation to
remuneration
framework. It denotes
that the framework
designed for
remuneration for the
top management of
CAB is highly
ineffective.
When the
remuneration
framework is not
effective, it has
negative impact on
the audit risk, as it
might lead to wrong
identification of audit
risk associated with
financial operations.
Under such situation,
the primary
recommendation is
the enforcement of a
suitable remuneration
framework by
adhering to the
necessary norms and
standards. Along with
this, CAB is required
to incorporate a
cultural change in the
The senior
management of the
bank would become
efficient and thus, this
strategy would help in
minimising the overall
audit risk.

8AUDITING THEORY AND PRACTICE
organisation in order
to identify risks
effectively and the
remedial procedures.
Answer to Question 2:
American Accounting Association Model Decision making process
1. Determine the facts In accordance with the provided information, David Little has
obtained information that John has been out for spending time
with his girlfriend at a new restaurant in the town. However,
he did not turn up to the office by saying about his poor health
condition. These are the facts that have been gathered from
this case study.
2. Determine the ethical issues In this situation, an ethical issue is deemed to be inherent.
Primarily, John has not attended the office by not providing a
genuine reason while the other fellow colleagues of his team
have been working hard for achieving the set goals. This has
violated the ethical principle of the business, since John has
not paid attention to his professional responsibilities
(Christensen, Glover & Wolfe, 2014).
3. Identify the major principles, rules and values This specific scenario takes into account certain ethical

9AUDITING THEORY AND PRACTICE
values, principles and rules. It is noteworthy to mention that
the auditors need to be responsible for maintaining the
integrity associated with the profession by maintaining
honesty and straightforwardness (Earley et al., 2016). Along
with this, the professionals would not compromise their
responsibilities and duties in any type of circumstances.
Moreover, they need to adhere to the pertinent regulations and
laws so that any type of unprofessional acts could be avoided
(Apesb.org.au, 2018).
4. Specify the alternatives In this scenario, two courses of action are deemed to be
inherent. In accordance with the initial course of action, David
Little needs to coordinate with his other members regarding
the illegitimate action of John for assuring that the other
members receive more appreciation than John. The second
course of action states that David would not disclose any
actions of John and thus, he would allow John to receive the
same credit for the job despite of restricted efforts.
5. Compare values and alternatives It could be found that the initial course of action fully ensures
adherence to all the values, principles and norms related to
auditing profession. David is required to share such action
with his other team members, since John has not acted in
professional, honest and integrated manner in his auditing
profession (Collier, 2015).

10AUDITING THEORY AND PRACTICE
6. Assess the consequences In the initial course of action, it is necessary for David to
inform his team members regarding the illegitimate action of
John in order to assure that John receives the same
appreciation. From such aspect, John would obtain a lesson
associated with integrity, professionalism and honesty
required in audit profession, which would debar him from
undertaking such kind of action in future.
From the second course of action, David would abstain from
informing his team members regarding the actions of John
and thus, he would restrict John from obtaining the same
credit like his fellow colleagues. This might lead to the fact
that John would repeat the same action in future (Williams &
Ravenscroft, 2015).
7. Make your decision Based on the above evaluation, the initial course of action is
recommended, as David should inform his other team
members about the actions of John.
Answer to Question 3:
A significant role of the inclusion of auditors as well as statutory cap could be observed
on the restriction of the auditors’ liability. In this statutory cap, the availability of few alternative
liability arrangements could be seen (Hu, 2015). In accordance with the first agreement, at the

11AUDITING THEORY AND PRACTICE
time an injured party is involved in filing a claim, they have the accountability for obtaining the
damages caused. Along with this, the injured parties possess the accountability of claiming all
damages from the auditors, if the misinterpretation aspect could be observed in the financial
statements. The presence of this alternative could be witnessed to the injured part, if the
tortfeasors are accountable for the damages (Paolini, 2015).
For this option, it is the duty of the auditors to assure entire compensation or a bigger
portion of the compensation for the fault conducted. In case of the second agreement, the liability
percentage for every tortfeasor to the injured party is considered as a part of fault. Due to this
reason, the injured parties do not enjoy the right of raising the overall share of compensation
(Gimbar, Hansen & Ozlanski, 2016). According to the rule, the auditors are responsible for
paying compensation exceeding the proportionate fault level, if the tortfeasors could not bear the
total payment. Due to this reason, the higher risk proportion remains with the injured party,
instead of the auditors and tortfeasors. This implies minimisation in the overall liability of the
auditors.
The formulation of a compensation cap could be observed in third type of arrangement.
In this arrangement, a maximum cap amount has been set for compensation to be imposed on
defendants. Therefore, when the auditors’ share is more than or equal to the set cap,
compensation could not be charged above the cap to the auditors (Abugu, 2014). The regulation
is similar for tortfeasors as well not able to pay their compensation portions. Hence, this system
plays a crucial role in minimising the liability of the auditors.

12AUDITING THEORY AND PRACTICE
Conclusion:
Based on the above discussion, it is inherent ASA 315 is an auditing standard, in which
the auditors analyse whether their clients have the needed processes in place for measuring their
financial reporting risks. Certain issues are deemed to be observed in case of the first situation,
which include lack of oversight, ineffective executive committee and others. Accordingly,
recommendations have been provided to address the various issues identified. Moreover, the
American Accounting Association Model used in the second situation state that John has
undertaken an unprofessional action for which David Little needs to provide proper information
to the appropriate authority. Finally, it has been analysed that the inclusion of auditors and
statutory cap would help in minimising the liability of the auditors.

13AUDITING THEORY AND PRACTICE
References:
Abugu, J. E. (2014). Re-examining the basis of auditors’ liability in Nigeria and the United
Kingdom. International Journal of Disclosure and Governance, 11(3), 231-254.
Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. Retrieved from
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf
Apra.gov.au. (2018). APRA releases CBA Prudential Inquiry Final Report and accepts
Enforceable Undertaking from CBA | APRA. Retrieved 2 August 2018, from
https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-
inquiry-final-report-accepts-eu
Auasb.gov.au. (2018). Auditing Standard ASA 315 Identifying and Assessing the Risks of
Material Misstatement through Understanding the Entity and Its Environment. Retrieved
from http://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
Bagshaw, K., & Selwood, J. (2014). Core auditing standards for practitioners. John Wiley &
Sons.
Christensen, B. E., Glover, S. M., & Wolfe, C. J. (2014). Do critical audit matter paragraphs in
the audit report change nonprofessional investors' decision to invest?. Auditing: A
Journal of Practice & Theory, 33(4), 71-93.
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness
and audit risk. Accounting & Finance, 54(2), 393-418.
Earley, C. E., Hooks, K. L., Joe, J. R., Polinski, P. W., Rezaee, Z., Roush, P. B., ... & Wu, Y. J.
(2016). The Auditing Standards Committee of the Auditing Section of the American

14AUDITING THEORY AND PRACTICE
Accounting Association's Response to the International Auditing and Assurance
Standard's Board's Invitation to Comment: Enhancing Audit Quality in the Public
Interest. Current Issues in Auditing, 11(1), C1-C25.
Gimbar, C., Hansen, B., & Ozlanski, M. E. (2016). The effects of critical audit matter paragraphs
and accounting standard precision on auditor liability. The Accounting Review, 91(6),
1629-1646.
Hu, R. (2015). Role and Liability of the Auditors in the Eu and in China: From Supervision
Perspective. Review of European Studies, 7(12), 170.
Kend, M., Houghton, K. A., & Jubb, C. (2014). Competition issues in the market for audit and
assurance services: are the concerns justified?. Australian Accounting Review, 24(4),
313-320.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C.
(2015). Auditing & assurance services. McGraw-Hill Education.
Paolini, A. (2015). Auditors' Liability and Corporate Fraud in the UK: Does Corporate Size and
Structure Matter. J. Bus. & Tech. L., 10, 245.
Wang, I. Z., & Fargher, N. (2017). The effects of tone at the top and coordination with external
auditors on internal auditors’ fraud risk assessments. Accounting & Finance, 57(4), 1177-
1202.
Williams, P. F., & Ravenscroft, S. P. (2015). Rethinking decision usefulness. Contemporary
Accounting Research, 32(2), 763-788.