Case Study Analysis: Auditing Theory and Practice, ACCT6006

This case study analyzes key aspects of auditing theory and practice, focusing on three distinct case studies. The first case study examines inherent risks and materiality considerations in the audit of MaxSecurities, a company specializing in high-tech armor-plated personal carriers, highlighting the complexities of specialized operations and the importance of accurate cost accounting. The second case study investigates the strengths and weaknesses of debtor confirmation procedures at MSMG, assessing the reliability of external confirmations and the need for additional audit procedures. The third case study explores ethical dilemmas faced by Meg, an auditor, addressing threats to independence as defined by APES 110, and providing recommendations for appropriate audit opinions and actions to resolve the ethical issues. The analysis covers audit risks, materiality, ethical standards, debtor confirmation, and audit opinions, providing a comprehensive overview of auditing principles and practices. The case study is well-structured and provides insights into the practical application of auditing concepts.

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

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AUDITING THEORY AND PRACTICE
Introduction......................................................................................................................................2
Requirement of Case A....................................................................................................................3
Part a............................................................................................................................................3
Part b............................................................................................................................................3
Requirement of Case 2.....................................................................................................................4
Part a............................................................................................................................................4
Part b............................................................................................................................................5
Requirement of Case 3.....................................................................................................................5
Part a............................................................................................................................................6
Part b............................................................................................................................................6
Part c............................................................................................................................................7
Conclusion.......................................................................................................................................7
Reference.........................................................................................................................................8

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Introduction
The process of Audit is followed by a business in order to ensure that financial statements
are showing true and fair view of the financial position of the business. The process involves
independent examination of the financial statements in order to ensure that proper regulations are
maintained and appropriate accounting standards are followed while preparing the annual reports
of the business. The auditing process is mainly concerned with the accuracy of the financial
statements and appropriate presentation of the same. The report would be dealing with different
aspects which are related to auditing such as compliance with ethical standards, audit risks and
process of confirmation from the debtors of the business. The assessment consists of three case
studies which is related to different issue and the same would be discussed in the assessment.
The firs case study is related to determination of audit risks and materiality considerations in
relation to the audit of MaxSecurities. The second case study deals with the strength and
weaknesses which is associated with debtor confirmation regarding the balances which is shown
in the records. The third case is related to ethical issues which is faced by Meg and also the audit
opinion and recommendation which is provided to the business.
Requirement of Case A
Part a
The discussion which is carried out in this section would mainly be relating to the major
inherent risks which is faced in the audit of MaxSecurities and the same would be including the
industry risks and entity risks. The business of MaxSecurities is engaged in the business of
manufacturing of high-tech armour-plated personal carriers and the operations of the business are
considered to be highly specialised. As the operations of the business is specialised, therefore, it
is important that the management of the company maintains confidentiality relating to the
designs and intellectual property which is used by the business (Auasb.gov.au., 2019). This
further indicates that the accounting process of the business would also be a bit complex and
therefore it is imperative for the business to ensure that the information which is provided are
showing true and fair view. It is also important that appropriate accounting policies and practices
are followed in the business. The major risks which is faced by the business is related to presence
of material misstatement in the financial statements.

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The case further shows that there has been an installation of an off-the-shelf costing
system in MaxSecurity for appropriately recording the costs of the designs which are produced
by the business and also keep a track of the costs of the business which are highly sensitive. The
business therefore has high reliance in the costs system and the same are also included in the
costs of units which are produced (Bentley, Omer & Sharp, 2013). The integration of the new
systems can also be seen to have been included in the general entries systems. Therefore, any
incorrect recording of costs can lead to wrong computation of costs and prices of the products
and the same would occur if the entries in the general ledger are misrepresented. This can cause a
material misstatement in the financial statements of the business and affect the accuracy of the
financial statements.
Part b
The process of audit planning is undertaken by the auditor in order to effectively identify
the risks and effectively identify the risks between materiality and risks level. The audit planning
process is undertaken in order to make a preliminary assessment of the materiality and
appropriate level of materiality is estimated for ascertaining the risks of the business. The
materiality estimates provide the auditor a basis to determine the items which are susceptible to
risks in the financial statements of the business (Aasb.gov.au 2019). The estimation of
materiality of the business would be determined following the below given parameters
The amount which is considered for determining the materiality needs to be a larger
amount. A predetermined percentage would be applied to such amount to get an estimate of
materiality of the business. If the element which is subjected to risks is higher than the amount
determined would be considered to be material for the business. The auditor of MaxSecurity
needs to considers three particular aspects which needs to be taken into consideration for
ascertaining the materiality of the business (Appelbaum, Kogan and Vasarhelyi, 2017). The three
aspects which needs to be considered are qualitative factors, reliability of management
information and any activity which is different from normal business activities of the business.
The auditor of the business also needs to consider the nature of the business and estimate the
presence of material misstatement before ascertaining the materiality estimate for the business.
Requirement of Case 2

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Part a
One of the important process which is involved in external confirmation in association
with audit is debtor’s confirmation and the auditor of MSMG also needs to undertake the same
so that confirmation relating to the balances can be obtained. The debtor confirmation is
considered to be important because the auditor can receive confirmation to the assertion of
existence for account receivable and the amount which is shown in the financial statement of the
business (Eilifsen and Messier Jr, 2014). The confirmation which is available to the auditor
forms part of an important evidence which is available for ascertaining the risks which are
present in the financial statements of the business. The Auditor of MSMG needs to ascertain the
value of the debtors of the business and for such a purpose external confirmation can be regarded
as the best option which is available. Debtor confirmation does not provide reliable evidence on
the assertions of valuation and allocation.
The case shows that the balance of trade receivables which is presented in the financial
statements of the business is $3,974,569 which is material. The analysis of the books of account
further reveals that payment for debtors are due for more than 60 days but the credit term of the
business is of 14 days. This shows that the credit policy of the business is not appropriately
followed by the management of the company and the same can be considered as a major
weakness in debtor collection process. In addition to this, the auditor of the business is also not
able to get a proper detail regarding the assertions of allocation and valuation from debtor
confirmation of Shady Oaks. The Shady Oaks business itself has five medical practitioner who
have at least 60% of the debt holding in the business of MSMG. Therefore, it can be stated that
proper and reliable evidence is required in order to reach a conclusion regarding the validity of
the debtor’s balances which is shown in the financial statements of the business. This can be
regarded as one of the key weaknesses of debtor confirmation as in some instances reliable data
may not be available.
Part b
The business of Chan and Partners has the option of sending debtors confirmation to
large debtors for the purpose of obtaining external confirmation from the business and also gain
evidence regarding their existence. However, the auditor also needs to perform other audit
procedures so that reliable information can be gathered regarding key assertions of the large
account balances (Legoria, Melendrez and Reynolds, 2013). The time for collection of such

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debts are also not mentioned and the probability of there being any doubt relating to the recovery
of debt is also less. The auditor therefore needs to collect appropriate audit evidences which can
be useful for useful for assessing this kind of large accounts balance. Therefore, the above
discussion effectively shows that it is not enough to just consider the debtors confirmation as a
means to obtain audit evidences and the auditor needs to search for corroborative audit
evidences.
The case shows that 40% of total debtors amounts to $1,589,828 which are mainly small
debtors. However, it is to be noted that such accounts are more subjected to risks as such debtors
have failed to make payments within the time frame of 14 days. The process of debtor
confirmation can clarify the situation and also satisfy the assertion of existence but additional
audit procedures also needs to be followed by the auditor for satisfying the assertion of valuation.
The auditor of the business needs to apply for appropriate credit control so that the debtors which
are shown by the business are not doubtful debts and therefore the auditor of the business needs
to apply appropriate audit procedures for ensuring the same (Griffin, 2014). Moreover, the
auditors must undertake reviewing the trade receivable receipts while analysing debtors ‘nature
and terms of payments so that appropriate audit evidences can be collected and assertions can be
satisfied.
Requirement of Case 3
Part a
The provisions which are stated in APES 110 puts an obligation on Meg to comply with
the principles of auditing. The major principles which are covered are Integrity, Objectivity,
Professional competence and due care, Confidentiality and Professional behaviour. The
provisions of section 100 of APES 110, states that in certain cases the independence of the
auditor might be affected and the same would be caused by five types of threats which affects the
independence of the auditor of the business (Apesb.org.au. 2019). These threats are self-interest
threat, familiarity threat, self-review threat, intimidation threat and advocacy threat. In the case
of Meg two types of threats have been identified which affects the process and quality of audit.
These threats are intimidation threat and self interest threat (William Jr, Glover and Prawitt,
2016). The threat of self interest is clear when Meg does not want to let down the client and

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when the audit firm does lose to Champion Securities audit. It can be seen that the audit firm
considers the client to be important and wants to meet the expectation of the client at all costs.
Intimidation threat in case Meg took place when Meg is threatened by the CEO regarding the
valuation process of the business. The statement which is given by the CEO can be regarded as a
threat and this affects the quality of audit as Meg tends to comply with the request of the CEO of
the business.
In this case, Meg has the option to strict to the principles of APES 110 and take actions.
Firstly, Meg can request for a new team for the review of the audit so that the influence of the
CEO might not be much on the audit process. Secondly, Meg can request for independent
valuation of the asset for the client (Mio, 2013). Thirdly, Meg can take the matter to the audit
committee or the board of directors of the company. Fourthly, Meg can contact the officials at
ASIC for resolving the issue. Fifthly, Meg can report the matter at the AGM and ask for
permission regarding the matter. Sixthly, Meg also has the option to resign from her post and
also highlight the reason for her resignation.
Part b
The audit opinion which are available to Meg are of four types considering the
regulations which are subjected to audit. The opinion which can be given by Meg and the
circumstances in which the same can be given are listed below in details:
 In case, there is an agreement between the CEO and her regarding the valuation process
of the assets than Meg can issue an unqualified audit opinion.
 In case there is a high uncertainty regarding the going concern opinion of the business,
the auditor would be providing an unqualified opinion with an emphasis of matter
paragraph highlighting the risk of going concern.
 In case, the valuation process is not discussed with Meg and the same has affected the
financial statement of the business materially than Meg can issue a qualified audit report.
 In case the valuation affects the financial statement significantly and the opinion of the
users might get swayed due to this then the Meg needs to issue adverse audit report.
Part c
The recommended course of action of action which can be suggested to Meg would be to
take assistance from the board of director and the audit committee so that the overall audit

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process is not affected. The auditor needs to ensure that the management of the company has
provided proper disclosure relating to the valuation of assets of the business. The auditor needs
to check the going concern principle in the business and accordingly issue appropriate audit
report to the business. In case the relationship between Meg and the CEO worsens, then Meg
would be recommended to resigning as the auditor. The request of the CEO is unethical and
therefore the same should not be complied by Meg.
Conclusion
The above discussion shows the complex process which is followed by the business
which leaves scope for material misstatement in the financial statement of the business. It also
shows that both the quantitative thresholds and qualitative matters are considered for the
determination of preliminary audit materiality. The above discussion also shows the importance
and weaknesses of external confirmation in the audit process. In addition to this, the different
audit opinions and the threats which affects the auditor independence are discussed in details in
the above discussion. The principles of auditing are also followed appropriately in the discussion
shown above.
Reference
Aasb.gov.au (2019). Materiality. Retrieved 21 August 2019, from
https://www.aasb.gov.au/admin/file/content102/c3/AASB1031_9-95.pdf
Apesb.org.au. (2019). APES 110 Code of Ethics for Professional Accountants. Retrieved 21
August 2019, from
https://www.apesb.org.au/uploads/standards/apesb_standards/23072019055710_APES_1
10_Code_of_Ethics_for_Professional_Accountants_December_2010_-_Final.pdf

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Appelbaum, D., Kogan, A. & Vasarhelyi, M.A., (2017). Big Data and analytics in the modern
audit engagement: Research needs. Auditing: A Journal of Practice & Theory, 36(4),
pp.1-27.
Auasb.gov.au. (2019). Materiality and Audit Adjustments. Retrieved 21 August 2019, from
https://www.auasb.gov.au/admin/file/content102/c3/AUS_306.pdf
Bentley, K. A., Omer, T. C., & Sharp, N. Y. (2013). Business strategy, financial reporting
irregularities, and audit effort. Contemporary Accounting Research, 30(2), 780-817.
Eilifsen, A. & Messier Jr, W.F., (2014). Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Griffin, J.B., 2014. The effects of uncertainty and disclosure on auditors' fair value materiality
decisions. Journal of Accounting Research, 52(5), pp.1165-1193.
Knechel, W.R. & Salterio, S.E., (2016). Auditing: Assurance and risk. Routledge.
Legoria, J., Melendrez, K.D. & Reynolds, J.K., (2013). Qualitative audit materiality and earnings
management. Review of Accounting Studies, 18(2), pp.414-442.
Mio, C., (2013). Materiality and assurance: building the link. In Integrated Report
William Jr, M., Glover, S. & Prawitt, D., (2016). Auditing and assurance services: A systematic
approach. McGraw-Hill Education.