ACT303 Principles of Auditing Assignment Solution, Semester 1 2019

This document presents a detailed solution to an auditing principles assignment, addressing key aspects of auditing. The assignment covers topics such as auditor independence, distinguishing between actual and perceived independence, and ethical considerations. It explores scenarios where auditors may breach confidentiality or compromise their objectivity, and suggests corrective actions. The solution also analyzes internal control weaknesses in various business processes, including supplier management and purchase orders, offering insights into potential risks and mitigation strategies. Furthermore, the assignment examines the steps required for accepting an audit engagement, including due diligence and communication with management. The document provides a comprehensive overview of auditing concepts and their practical application in real-world scenarios. The assignment solution covers topics such as internal control weaknesses, auditor responsibilities, and ethical considerations.

Running head: Principle of Auditing
Principle of Auditing
Name of the Student
Name of the University
Author Note

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Principle of Auditing
Table of Contents
Question No 1............................................................................................................................2
1A...........................................................................................................................................2
1B...........................................................................................................................................2
Question No 2............................................................................................................................4
Question No 3............................................................................................................................5
Question No 4............................................................................................................................7
Question No 5............................................................................................................................8
5A...........................................................................................................................................8
5B...........................................................................................................................................9
Reference..................................................................................................................................10

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Question No 1
1A
Actual Independence to the auditor means that the auditor will not do any kind audit
service of the company in which any of the family member of the auditor have any kind of
interest as not the auditor but also if the auditor family member have any interest than
independent of the auditor will not be valid in the company (De Simone, Ege & Stomberg
2014). As the audit is been done by the auditor to say whether the financial statement are
showing true and fair view or not so if the auditor have any interest in the company than it
will not able to give an independent audit report to the company. So to keep the opinion fair
the auditor should not perform any audit in similar nature of the company.
Perceived Independence in regards with the auditor should have a professional
relation with the company as it should work as a professional and should decrease the gap of
it with the management of the company so that it can able to give an independent opinion
upon the financial statement of the company (DeFond & Zhang 2014). As if the auditor does
not maintain a professional behaviour with the management than it may happen that the
company may influence the auditor to give decision in favour of them and as a result the
auditor have to give a false opinion about the financial statement and its can be a fraud in
regards with the financial user of the company. So this the reason the auditor should have a
professional gap with the management.
1B
1. The auditor have broken the confidentiality principle which been laid down in
the professional standard as the auditor have no right to use any of the
information of one client to another (Donelson, Ege & McInnis 2016). As the
company information is very secret so the auditor should not use the

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information in related to the company to different company. So the auditor
have breach the confidentiality clause which is there in its profession and also
it has used information in regards of the different company (Furnham &
Gunter 2015). It can be stop the breach of the clause as if it had asked the
company about the matter as it can have ask the company that it require some
of the detail in regards with the audit of different company and with the
permission of them it can have use the information in his upcoming audit
process this would have save him in regards of the breach and also doing of an
illegal act in regards with the professional standard.
2. An auditor should not provide any additional service to the client as it should
not provide any additional services to the client it should only provide services
related the professional that it should only do the audit of the company
(Griffiths 2016). To maintain a professional auditor should only perform its
duties and should not provide any additional service which can directly or
indirectly can affect the opinion of the auditor. As in the case the auditor
become a part time company secretary of the company so it have to deal with
the management as a result the professional gap of the auditor will not be there
so it will directly affect the opinion of the auditor in regards with financial
reporting of the company. So the auditor should strictly avoid giving the
service to the company as a company secretary but it can able to search a good
employee for the company who can provides such services but the auditor
should not provide such services to the client company.
3. An auditor cannot take any family member of the client in its auditing service
as it can directly affect the service quality and which can result in a wrong
opinion of the financial statements (Hall 2015). In the given case as the audit

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process was been carried by the owner son LEO so it will not find any
weakness in the control system of the company and as a result the auditor
cannot give a fair opinion in regards with the financial statements of the
company as the audit process have not been properly by the auditor. The
auditor can change or can stop these by sending the owner of the son to some
other audit process in another company as it will help the son to learn the
auditing process and also it help the auditor to save them the audit process and
also help them to get an proper audit process and it help them to give an
correct opinion upon the financial statement of the company.
4. The case look like that the auditor have broken the principle of the
professional as it include the case of self-Interest threat. In the case it can be
seen that the auditor have taken a gift from the client company which is the
share of the some other company so this can be consider as benefit which is
been given by the client to the auditor so that the auditor can able to change
the decision upon the financial statements of the company and can give its
opinion in regards of the company decision (He, Zeadally & Wu 2018). The
auditor could have avoided this duty it should have said no to the company in
regards of the shares and other items which were given by the company to him
and should have only ask about the amount of cash which is due with
company and if still it is unable to get the required cash than it should go for
legal help in regards of the money which is due in the company.
Question No 2
In the given case it can be seen that the company should accept the process of the
audit, but before giving the required acceptance about the audit, it should take into the
consideration of some issue like legal factors in the previous case, ethical factor and other

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factor which are very necessary for the auditor to check before taking the audit of the
company. It should check whether the company had completed all the necessary adjustment
in regards of the previous audit company (Knechel & Salterio 2016). It will see how the
company have comply in legal way with related to the company. It should check the
reputation of the company in the market and how the company is matching their customer in
regards of their products and services.
Steps needed before the appointment are:
 It should take confirmation from the audit firm and should also take necessary
documents and points which are needed in the process of the audit
 It will have to analysis the case study so that it can know the fault in it
 As all the case details are there with the statutory body so it should acquire with them
in regards of the company case and should get details from them.
 Should plan the audit procedure while keeping the industry norms in decision making
process
 Communication with the management should be done and also ask them about the
audit procedure to be followed
 Legal advice should be taken by the auditor so that it does not have any loop holes in
the audit planning
After completing the above points the auditor should accept the audit process of the company
and after accepting the process it should give them the require engagement letter as it will
contain all the details of the audit process will be carried in the company and what are the
necessary documents which is needed in the auditor in completing the audit process.
Question No 3
Internal Control Weakness in Everyday Suppliers

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1. Internal control weakness in the company is that it does not check goodwill of the
contractor as the they pass the cash order because the manager think it can able to pay
the amount back to the company (Kumar & Sharma 2015). So this is a weakness as
the manager passes the order on the assumption and no real checking is been done by
the company so as a result if the contractor does not able to pay the amount to the
company than it will be a huge loss and the company have to suffer and it can even
affect the financial position of the company so the company should always check the
financial position before giving any to the contractor so it can help them to avoid the
loss.
2. As the company have made a computer system which allow them to transfer it
automatically, but the manager of the company does not check each transaction
personally so it can be consider as internal control weakness as the manager should
have check each transaction personally about the entries which are been passed by the
supervisor (Li et al., 2016). So there can be many error and even the company may
have passed wrong entry of the transaction so it should not able to supervise each
account properly. So this will automatically be a mistake and can create material
misstatements of the company.
3. It can be seen that the company cashier have many jobs to do and it also supervise
other person so it may happen that the cashier is not able to perform its task
effectively so this can be termed as an internal control weakness as the cashier have to
do so many job so it can make many error or omission in the cash balance of the
company so it can create a material misstatement in the financial statement and can
affect the true and fair view of the company (Lin et al., 2014).
4. The company account cannot be verify by the cashier so it can create an error in the
balance sheet of the company so it can be consider as internal control weakness of the

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company as the cashier is unable to make any entry in the journal and ledger so it can
create an adverse effect in the financial account of the company (Newton et al., 2015).
5. It the company only the book-keeper record the transaction so this can be consider as
an internal control weakness as due to human judgement the transaction can be
affected by the company balance sheet and it may happen the book-keeper is unable
to do all the related entry in the balance sheet so the company should authorize more
person in regards with the transaction so this will help to minimize the required risk
and also it will help them to reduce the error and omission in the balance sheet
(Reeves, Culverwell & Wittman 2017).
Question No 4
Internal Control Weakness in Retro
1. As per the company they do not check each purchase order so it can be consider as
internal control weakness as if the company does not able to check each order so the
overstock of the stock can be there in the account as a result it will create a loss to the
company and also it will block the money of the company (Sandvig et al., 2014).
2. The system of the company automatically generate the supplier purchase order so it
can be consider as internal control weakness as it does not check the details of the
suppliers and also it does not check the price, term and other things related to the
suppliers so it should check each item before ordering the purchase order (Wang, Li
& Li 2014).
3. The company does not verify the stock so this is consider as internal control weakness
as it only check the shipment but no personal verification of the stock is done so the
company should check each amount of stock so it will able to know real value of the
stock which lies with the company (Wang, Li & Li 2015).

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4. The company does not compare the price with outsider so it can be consider as
internal control weakness as company should compare the price of the outside market
so it able to make them get less amount of the cost of goods and as a result it will able
to increase the profit of the company (Wang et al., 2015).
5. The company does not verify each party invoice so it can be consider as internal
control weakness as the company should verify each account from the third party so it
will help the company to verify each account properly (Yu et al., 2015)
6. The company system does not able to give all the suppliers details so it can be
consider as internal control weakness as it should verify each account of the suppliers
so it able to make a proper entry in regards with the company account and also help
the m to reconcile the accounts easily (Yuan & Yu 2015).
7. The assistant accountant of the company does not check the account so it can be
consider as internal control weakness as it should verify the transaction on a regular
basic so that it can able to get proper details of the transactions and also help them to
minimize the misstatements of the company.
Question No 5
5A
Internal Control Weakness of Mypet
1. The company accounting system automatically generate the purchase order so it can
be consider as internal control weakness as it should check all the part of the supplier
as it should verify the price and term of the suppliers before giving them the order
(Zhang,Yang & Appelbaum 2015)
2. The company is totally depend upon the scanning process so it can be consider as
internal control weakness as the company does not record the transaction as if it does

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not get in the scanning process so it dies not able to get a proper record of the stock
and can directly affect the company financial statements
3. The system of the company automatically generate the production order so it is
consider as internal control weakness as the company system does not able to check
the demand of the product so as a result the company may incur losses and also it
will give them over stock in the company
4. The company depend upon the bar code system in recording the details of the
finished goods so it is been consider as an internal control weakness as if the bar
code does not able to scan so it will not able to record the details of the finished
stock and it will affect the company financial statements
5. No background check of the suppliers is been done so it can be consider as internal
control weakness as the company does not check the supplier reputation so it can
affect the goodwill of the firm as if they get poor quality of the product from the
suppliers
6. The company printing have only access by one person so it can be consider as
internal control weakness as only one person have access so it can easily manipulate
the account and create a material misstatement in the financial statements
5B
Testing in regards of Inventory System
 The auditor should verify all the transaction related to the inventory
 The auditor should check the accuracy of the accounts of the company

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