Auditing and Professional Practice Assignment 1 Solution - ACC305

This document presents solutions to an auditing assignment (ACC305), addressing two key questions. Question 1 analyzes various threats to auditor independence, categorizing them as self-interest, self-review, advocacy, familiarity, or intimidation, and providing justifications for each classification. The scenarios include the CEO's pressure, gifts, share ownership, familial relationships, promoting client shares, acting as an advocate, fee reduction pressure, board membership offers, prior directorship, and the audit firm's role in implementing the inventory valuation system. Question 2 examines a case study where an audit firm, ABC, has been auditing Company Ltd. for ten years and discusses potential threats to auditor independence, highlighting self-interest threats arising from complimentary trips and offers of directorship with reduced audit fees. Question 3 focuses on different types of audit opinions, including qualified, disclaimer, and adverse opinions, based on specific situations such as limited audit samples, restrictions on verifying assets, undisclosed liabilities, lack of audit evidence, missing opening balances, non-compliance with accounting standards, and the use of disallowed inventory methods. References to relevant auditing standards and literature are also included.

Auditing and
Professional Practice
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Question 1:
1. It states to be an intimidation threat as the CEO is not allowing the auditor to do his job
rightly and pressurising him to act as per his motive.
2. It is an advocacy threat as the client is trying to influence the auditors by offering them
the gift of holiday cruise.
3. It stands to be a self-interest threat as the auditor being a shareholder might get carried
away of his audit behaviour.
4. It is a familiarity threat as there are chances that the auditor could be sympathetic to the
Company’s Director who happens to be his brother-in-law.
5. It could be categorised as self-interest threats as the auditor runs the risk of exploiting his
auditing skill for the purpose of promoting the shares of the client company.
6. It is definitely an advocacy threat as the auditors run the risk of compromising their audit
responsibilities as they are representing their clients for negotiations with third parties.
7. It stands to be the self-interest threat as the auditor’s remuneration would be affected
because the company is trying to reduce the audit hours.
8. It is the self-interest threat as by offering the position of the Board Member for the next
year, the client is trying to influence the auditor of his current responsibilities.
9. It is an instance of self-review threat as the supposed auditor would be going to evaluate
his own service as he was Director to the company.
10. It could be an intimidation threat as the auditor has been asked to reconsider the
inventory process although the audit for the company got over by that time.
Question 2:
Company Ltd has ABC as its audit firm for 10 years, John and Robert being its audit partner. It
is seen that each year after the audit gets over, Company Ltd offers a paid weekend for its staff
engaged in the audit process and the audit firm. According to IFAC Code it definitely stands for
a self-interest threat as by providing such complimentary trips, Company Ltd is at a position to
influence the audit judgement by making the process less formal (Arens, Elder, & Mark, 2012).
Again John had been offered the post of Director by Company Ltd on the terms that the audit
fees need to be reduced. It is also a scenario depicting self-interest threat in line with the IFAC
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Code as by offering a prominent position in the organisation, the management is trying to
compromise on the current audit fees (DeFond & Zhang, 2014). It is noted that by reducing the
audit fees, the organisation is trying to limit the extent of the auditor in dispensing his duties and
responsibilities.
Question 3:
a) The auditor has the ‘Qualified Opinion’ in this case as the audit samples were not
properly provided to the auditor for the purpose and the client has not been supportive to
conduct the process (Knechel, 2017).
b) It could be stated as the ‘Disclaimer of Opinion’ on the grounds that the auditor was not
allowed to verify the property, plant and equipment of the organisation constituting 35%
of the total assets. So the auditor was not able to reach at a suitable opinion owing to lack
of information.
c) It is definitely of the ‘Adverse Opinion’ as the contingent liabilities were not included in
the disclosure of the financial reports (Hayes, Gortemaker, & Wallage, 2014). It is gross
violation of the way the financial statements would be prepared in accordance to the
GAAP regulations.
d) It is of ‘Disclaimer of Opinion’ as the auditor is unable to gather any audit evidence on
the cash sales owing to a loose internal control system in the company.
e) It presents for ‘Qualified Opinion’ as the client has not provided with the opening
balances of the accounts raising a suspicion in their financial activities.
f) It is a matter of ‘Adverse Opinion’ as the client has not been following the Australian
Accounting Standards since its operations (DeFond & Zhang, 2014). So the financial
statements need to be prepared as per the prescribed standards to make it eligible for
auditing.
g) It is definitely of ‘Adverse Opinion’ as LIFO inventory system is not allowed under the
Australian Standards, so the method itself or representation of inventories would not be
admissible.
h) It is of ‘Unqualified Opinion’ as there is no concern regarding the financial misstatement
of Numark and the cause of its customer is a separate issue.
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References
Arens, A., Elder, R. & Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
DeFond, M. & Zhang, J., 2014. A review of archival auditing research. Journal of Accounting
and Economics, 58(2-3), pp. 275-326.
Hayes, R., Gortemaker, H. & Wallage, P., 2014. Principles of auditing: an introduction to
international standards on auditing. Sydney: Prentice Hall, Financial Times.
Knechel, W., 2017. Auditing: Assurance and Risk. 4th ed. New York: Routledge.
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