Principles of Auditing Assignment Solution: Detailed Analysis Report

This document presents a comprehensive solution to a Principles of Auditing assignment. Part A addresses ethical considerations based on APES 110, evaluating auditor responsibilities regarding client conduct and the issuance of audit opinions. Part B analyzes internal control deficiencies within a company, proposing improvements and outlining testing procedures. Part C examines the risk of material misstatements in financial accounts, particularly trade receivables and sales, and assesses going concern assumptions. It also identifies fraud risk factors. Part D delves into specific scenarios related to audit independence, identifying threats like self-review, advocacy, familiarity, and intimidation, and suggests remedies or safeguards. The assignment covers a broad range of auditing principles, including ethical conduct, internal controls, risk assessment, and audit procedures.

Running head: PRINCIPLES OF AUDITING
Principles of Auditing
Name of the Student
Name of the University
Author’s Note

1PRINCIPLES OF AUDITING
Table of Contents
Part A...............................................................................................................................................3
Answer to Part A-1......................................................................................................................3
Answer to Part A-2......................................................................................................................3
Answer to Part A-3......................................................................................................................4
Answer to Part A-4......................................................................................................................4
Situation 1................................................................................................................................4
Situation 2................................................................................................................................5
Situation 3................................................................................................................................6
Situation 4................................................................................................................................6
Part B...............................................................................................................................................7
Part C...............................................................................................................................................8
Requirement (a).......................................................................................................................8
Requirement (b).......................................................................................................................9
Requirement (c).......................................................................................................................9
Requirement (d).....................................................................................................................10
Answer to Part C-2....................................................................................................................10
Requirement (a).....................................................................................................................10
Requirement (b).....................................................................................................................10

2PRINCIPLES OF AUDITING
Requirement (c).....................................................................................................................11
Requirement (d).....................................................................................................................11
Part D.............................................................................................................................................11
References......................................................................................................................................14

3PRINCIPLES OF AUDITING
Part A
Answer to Part A-1
As per APES 110, Section 210, Professional Appointment, while accepting the audit
engagement, it is necessary for the auditors to determine whether there is any negative effect of
this engagement on the ethical and fundamental principles of the profession or not (Chapple et
al. 2014). This aspect leads the auditors to obtain sufficient understanding and knowledge about
the client and its management for ascertaining any corporate governance or ethical issue. As per
this standard, the auditor of Billing and Associates is required to take into consideration two
ethical aspects. First, the auditor is required to take into consideration the toxic chemical spill
from the manufacturing process into the river. Second, the auditor also needs to consider
Pharmaceuticals management’s involvement in covering up the unethical situation. Thus, both
the scenario clearly shows breach of ethical code of conduct that has negative impact on the
fundamental as well as ethical principles of auditing (Chapple et al. 2014).
Answer to Part A-2
The next step for the auditor of Pharmaceuticals after identifying the errors and control
weakness is to suggest the management of Pharmaceuticals on how they can strengthen the
internal control so that the repeat in the errors can be avoided. The next step is the issue of
qualified audit opinion that is not much different from the unqualified audit report. The main aim
of the issue of qualified audit opinion is to inform the key stakeholders of Pharmaceuticals about
the hedging related issues faced by Pharmaceuticals. As a part of qualified audit opinion, the
auditor will provide the explanation of issuing qualified audit opinion in the audit report
(Czerney, Schmidt and Thompson 2014).

4PRINCIPLES OF AUDITING
Answer to Part A-3
The main aim of auditing is the examination of financial statements of business entities in
order to find out any kind of material misstatements in them. In this process, it is the obligation
on the auditors to obtain sufficient audit evidence. The audit engagement letter includes all the
terms and conditions about the audit engagement and the audit clients need to read this
engagement letter (Blay et al. 2014). In the provided scenario of Reaction Pty Ltd, the auditor of
Billions & Associates has provided the engagement type in the audit engagement letter along
with other terms and conditions of audit engagement. Due to this, Billions & Associates is
responsible for the audit operation of Reaction Pty Ltd but not undertaking the review
engagement.
Based on the provided situation, the auditors of Billions & Associates are needed to
provide the Disclaimer of Audit Opinion that is the part of the modified audit opinion. The main
reason behind the issue of modified audit opinion is the restriction of the management of audit
client on the auditor not to obtain all required financial information. In the provided scenario of
Reaction Pty Ltd, lack of documentation in the organizations has put a restriction on the auditors
in obtaining the necessary information (Tsipouridou and Spathis 2014). Thus, in the presence of
all these issues, the auditors will provide disclaimer of audit opinion.
Answer to Part A-4
Situation 1
Requirement (a)
APES 110, Section 290.167 indicates towards the obligation of the companies to follow
the required accounting standards for the preparation and presentation of financial statements.

5PRINCIPLES OF AUDITING
Section 290.167 indicates the creation of Self-review Threat of audit independence while
providing the services of accounting and bookkeeping for preparing financial statements
(apesb.org.au 2018). In case of Hail Pty Ltd, the auditors create self-review threat of audit
independence by proposing number of accounting adjustments for impairment.
Requirement (b)
Removing the particular auditor from the engagement team is the main remedy of this
scenario. Apart from this, Hail Pry Ltd can seek the help of accounting bodies for accounting
issues (apesb.org.au 2018).
Situation 2
Requirement (a)
APES 110, Section 100.12 indicates towards the creation of Advocacy Threat of audit
independence while an auditor is promoting the business of audit client (apesb.org.au 2018). In
the provided scenario, after satisfying with the work of Travel Time Ltd, the auditor agrees in
recommending the services of the firm to others. This action of the auditor of Travel Time Ltd
breaks the professional objectivity and leads to the development of advocacy threat.
Requirement (b)
The introduction and implementation of effective corporate governance policies in audit
profession is the major remedy or safeguard in this situation (apesb.org.au 2018).

6PRINCIPLES OF AUDITING
Situation 3
Requirement (a)
APES 110, Section 100.12 indicates towards the creation of Familiarity Threat of audit
independence in case there is any close and longstanding relationship between the auditor and
other audit client (apesb.org.au 2018). The provide scenario indicates toward the presence of
longstanding relationship between the auditor and audit client due to the major shareholding of
one of the auditor’s wife in Civil Constriction Ltd and the whole situation can lead to biased
audit opinion. Hence, it can create the familiarity threat of audit independence.
Requirement (b)
The removal of the particular audit partner from the engagement team can is the major
safeguard in of this situation (apesb.org.au 2018).
Situation 4
Requirement (a)
APES 110, Section 100.12 indicates towards the creation of Intimidation Threat of
audit independence in case the auditors cannot perform the correct audit procedure due to any
actual or perceived influence or pressure (apesb.org.au 2018). As per the provided scenario,
Pleasure Cruises Ltd is requesting the auditors for extra time that is creating indirect pressure on
the auditor. Thus, the acceptance of the request of Pleasure Cruises Ltd by the auditor will lead
to the creation of intimidation threat of audit independence.
Requirement (b)
The implementation of efficient corporate governance policies and procedures is the
major safeguard of this situation (apesb.org.au 2018).

7PRINCIPLES OF AUDITING
Part B
Deficiency Explanation Control Test of Control
Lack of integration
between inventory
mechanism and
website
It can contribute to
the placement of
order and full
payment in the
absence of enough
inventories.
TUPL needs to
consider the
implementation of
accurate Accounting
Information System
as it will allow the
website to take order
in the presence of
sufficient inventory
by integrating the
website with the
inventory (William
Jr, Glover and Prawitt
2016).
Re-performance of
the order placement
process can be used
for test this control.
Lack of mechanism
for recording the
customer signature
as a goods delivery
proof
Some customers can
take advantage of this
lack of control by
denying the delivery
of goods.
TUPL needs to
consider the
introduction of digital
signature system in
order to obtain the
proof of delivery
(Skaife, Veenman
and Wangerin 2013).
By inspecting the
introduced process,
auditors can test this
control.
Non-forwarding the
sales order to
dispatch
department
This scenario can
lead to late delivery
of products to the
customers that can
affect the company
goodwill.
TUPL is required to
consider the
appointment of
specific department
that will have the
responsibility of
delivering the sales
In order to test this
control, the auditor is
needed to observe the
whole process
starting from the
sales to the delivery
of the sales orders to

8PRINCIPLES OF AUDITING
order to the dispatch
department at correct
time (Vovchenko et
al. 2017).
the dispatch
department.
Non-including the
area sales manager
and the sales
director in the
process of credit
checking
This scenario can
contribute towards
the ineffective and
incorrect setting of
credit limit that can
end up in company
loss.
As a remedial
mechanism, TUPL
needs to consider
assigning the area
sales management
and the sales director
in the credit setting
process that will
require the approval
of both of these
officials (Vasarhelyi
and Halper 2018).
The strategies of
observation as well as
inspection can be
used for testing this
introduced control
process.
More than required
plant and
equipment
This scenario can
contribute to the
business loss for
TUPL due to non-
usage of additional
plant and equipment.
TUPL is required to
consider the
replacement of
existing production
supervisor with an
efficient one who will
be responsible for
providing the correct
requirement of plant
and equipment as per
business operations
(Mock and Turner
2013).
In order to test this
control, the auditor
can take the help of
both inspection and
observation of the
whole process.

9PRINCIPLES OF AUDITING
Part C
Answer to Part C-1
Requirement (a)
As per the provided scenario, there are two accounts at the risk of material misstatements
in Unique. One of them is the Trade Receivable account. The scenario shows 1.24 as the current
ratio of Unique while the bank’s requirement is 1.2 as the current ratio. An efficient policy for
debtors is there in Unique and in the presence of this well-crafted debtor policy, the deficiency in
the current ratio indicates towards the presence of material misstatements (Lobo and Zhao 2013).
Another account is the Sales account. As per the given information, Unique has $350,000
as net sales for the whole year where the bank wants Unique to maintain a sales amount of
$100,000 per quarter. Thus, major deficiency is there in the sales account of Unique that
indicates towards the presence of the risk of material misstatements (Lobo and Zhao 2013).
Requirement (b)
As per the provided scenario, the profit margin of Unique has major issue related to the
prior year. Major decline in the net profit as well as gross profit can be seen that can be regarded
as a crucial issue in Unique (Lobo and Zhao 2013).
Requirement (c)
As per the going concern assumption, a business entity will continue its operation for the
unforeseeable future and no one will force the entity to put a halt in the operation and liquidate
its assets in the future. It is the obligation on the entities to follow the going concern assumption
to prepare the financial statements (AICPA 2017). In Unique, three major factors are there that
can stop Unique from operating as a going concern in near future.

10PRINCIPLES OF AUDITING
Major decline in both the gross profit and the net profit can be considered as the first
factors that can lead Unique towards liquidation or winding up business. The rise in the price of
timber as a result of increase and decrease in the values of US dollar and Australian dollars
respectively is the second factors as it can lead the company towards huge loss. The increase in
labour cost due to high wage rate is the third factor that can contribute towards huge business
loss of Unique (AICPA 2017).
Requirement (d)
It is required for the auditors to consider the above factors in audit planning. For the
accounts at material misstatements risk, to obtain sufficient information is required for the
auditors in order to ensure the presence of material misstatements. In addition, the auditors need
to consider the application of analytical audit procedures for obtaining information about the
going concern assumption (Chan and Vasarhelyi 2018). Thus, on a whole, the auditors are
needed to take into consideration all the accounts at material misstatement risk while planning
the audit actitiviteis.
Answer to Part C-2
Requirement (a)
The payment of sales bonus involves an internal control issue in Unique. As per the
provided scenario, there has been the payment of sales bonuses in spite of the non-fulfilment
desired criteria. This situation indicates towards the weakness in internal control of Unique due
to fraudulent activities (Mock and Turner 2013).

11PRINCIPLES OF AUDITING
Requirement (b)
There are two fraud risk factors in Unique. No change in the gross margin can be
considered as one of them. Decline in the gross profit leads to decline in the gross margin.
However, there is not any change in the gross margin in Unique in spite of the decline in gross
profit that indicates towards any fraudulent activity in the company (Mock and Turner 2013).
The balance of debtors can be considered as the second factors. As per the provided scenario,
Unique witnessed a large change in debtor level between the last day of the year and the next six
months that is unusual. It indicates towards the fraud risk in this account (Mock and Turner
2013).
Requirement (c)
The above discussion indicates that the balance of debtors in Unique is at risk and the
potential fraud actitiviteis in the account can be held responsible for this. The main intention to
manipulate the balance of debtors could be to earn sales bonuses (Power 2013). For this reason,
two major assertions related to the debtors in Unique can be also at risk. The initiation and
approval of the customer invoice while sales take place is the first assertion. The approval and
issue of credit note to the customers within the return of 60 days is the second assertion. It might
happen that the management of Unique has made these assertions to make manipulation in the
debtor account (Power 2013).
Requirement (d)
The introduction and implementation of test of control is one audit procedure to address
material misstatements where the auditors are responsible for implementing different test of
control for obtaining sufficient audit evidences in order to measure the internal control of Unique
(Guénin-Paracini, Malsch and Paillé 2014). The introduction of substantive audit procedures is