ACT303 Principles of Auditing: Ethical Dilemmas in Case Studies

This assignment provides solutions to auditing case studies focusing on ethical and legal factors within the framework of ACT303 Principles of Auditing. It defines actual and perceived independence, highlighting their importance, and analyzes breaches of professional standards and regulatory requirements across various scenarios. Alternative courses of action for auditors are discussed to properly discharge their professional responsibilities. The assignment also addresses the ethical, legal, and other factors to be considered before accepting an audit appointment, including potential threats to compliance with ethical principles, pressures from management, and the risk of fraudulent financial reporting. The document concludes by outlining procedures involved prior to making an audit appointment, emphasizing compliance with ISA 210 and the importance of assessing management's financial reporting framework.

Auditing Assignment 1
Principles of Auditing
By (Name)
Course Name
Professor Name
Name of School (University)
City, State
Date

Auditing Assignment 2
Question 1:
a. Define actual and perceived independence, and explain the importance of each.
Actual independence refers to the real autonomy of a party known as the auditor; also entails
the liberation of the mind or brain. Generally, unpretentious freedom basically talks about the
circumstance the chief auditor is involved, and how the auditor handles or offers
administrations to a certain situation. For a self-reliant auditor, he/she can be in a position of
coming to decision despite the fact that there will be a virtual absence of autonomy, or rather
when an auditor is assigned in a trading off position by the company’s executive members.
There are challenges faced when investigating the level of free time allotted to an evaluator,
as it tends to be daunting watching and measuring one’s mental condition and uprightness.
Perceived independence is purposed not to be based on facts, and thus most individual
perceive one is self-reliant or independent however they may not be. Based on the subject,
one can be in a demanding situation as his/her objectives have not been clearly expounded.
Often it is difficult in evaluating one's level of freedom. Although, perceived independence is
essential for any auditing company as it complements credibility when writing auditing
reports for the organization.
b. For each of the above independent situations list, any professional standards and
regulatory requirements breached and discuss possible alternative courses of
action the auditor should have taken in order to properly discharge their
professional responsibilities.
Case one:
Veracity – actually, it is noticed that Bob being an auditor assistant is not honest. It is not
recommended d compromising an organization financial data as an auditor. Since Bob is a

Auditing Assignment 3
trainee in the company, he should be ready and willing to design and create his unique and
personal financial data which he will use for his assignments (Sin, Moroney and Strydom,
2015). Hence he will be prepared in the future, and thus will not compromise other
company's financial data.
Thus another alternative is that Bob should clinch on confidentiality. He should uphold the
security and safety of the company's data and thus should not expose the data to any person
outside without permission, or order from the relevant authority, lest there are professional
privileges or duties to unveil, nor using information of one’s point of preference of a
professional bookkeeper or other external sources.
Case two:
Professional conduct – Ace Company does not abide by the employment terms and policies
since it makes its workers accomplish specific tasks which have not been aligned in the
employee contract. This shows the level of unprofessionalism and unethical behavior they
exhibit. Thus it is recommended that Ace Limited Company should stop assigning Wendy
task that was not aligned during the contract signing. Thus, the company should hire and train
another employee who will best suit the role (Gaydarov, 2014). On the other hand, if Wendy
is actually competent in the task allotted, then the company should sign in a contract and
increase her pay based on the amount of work being assigned to her.
Case three:
Since Leo the son of the foreman, is negatively affecting the tests of internal control units it is
preferable that as an auditor I should notify the foreman immediately. This will be helpful as
it will enable the foreman to be in a position of adjusting the son's role which will be of
significant help through the auditing process. It is essential as an auditing firm that important

Auditing Assignment 4
points within Leo job roles which initiate problems during testing of the internal control
systems should be reported to the foreman immediately (Macve and Chen, 2010).
Consequently, the foreman should seek advice immediately so that he can manage effectively
the firm.
Case four:
Actually, various rules have been tempered with including annual fee payment by classic
reproduction Pty. In many occasion, it is unprofessional for a company to fail to pay for its
services. Since it's a breach of the contract and trust by the customers thus should be taken
seriously. Thus immediate action should be taken for the organization to pay to the
incremental fee to their auditing firm.
Additional, Classic reproduction also broke the level of professional behavior through
accepting auditing services but on the other hand failing to pay for them. As such it is
unacceptable and very backward.
Moreover, it is essential knowledge that the auditing company, Chan and his associates must
take other precaution in acquiring funds rather than blackmailing classic reproduction
company in allotting shares and additional irrelevant strategies stated. For the trailing
measures, then precautionary follow up should be done under the law with the aid of law
professionals.
Consequently, the auditing firm must audit so that they can generate a report portraying that
they can pay Classic Company's bills in the nearby future. Also, it should state the reason
behind the company not paying their yearly arrears and the actions that should be
implemented in assuring that the event will not happen again in the coming financial years.

Auditing Assignment 5
Question 2: The audit partner is unsure whether he should accept the appointment and
has asked you to outline any ethical, legal and other factors to be considered in his
decision about whether to accept the appointment for the current year and to indicate
the steps that need to be taken prior to the appointment.
During the auditing process, acceptance decision is crucial; since such schedules can create a
great challenge to objectivity, or rather create a risk exposure for the auditing firm that should
be critically assessed. Currently, there is a discussion on whether there should be an outright
prohibition of non- audit services for audit customers. Global standards based on auditing
necessities have compelled organizations in finding out whether prerequisites for the auditing
process is available when they encounter a potential new audit engagement activity.
Therefore, all these factors imply that acceptance judgments should be carefully handled.
According to the IFAC code of ethics for experts in accounting, its states that prior accepting
a new customer relationship, there should be the assessment of possible threats to compliance
incorporating essential principles, which is assessed by a professional accountant in public
practice. Prospective threats to the integrity or expert conduct may be created from.
Therefore, these threats can be in terms of dubious issues linked to the customer, that is, the
owner, the administration or events (Bijkerk, Karamychev and Swank, 2013). It implies that
when chosen to take on a customer, the company should first analyze the client, his/her
business activity, its owners so that they can assess if there are any queries over the integrity
of the prospective customer which in turn generates an acceptable risk. Such analytical
decisions are always done with due diligence and accurate steps, which is always done in
compliance with the money laundering rules and regulations
Ethical, legal and other factors to be considered prior to accept an audit appointment

Auditing Assignment 6
As an auditor, you should be impartial and loyal by abiding ethical rules when accessing a
company's or individual financial records required for the reporting process. Most
accountants come across ethical problems despite the firm and should be vigilant so that they
can minimize probable external forces that may influence a firm's financial data, hence
resulting in criminal and ethical defilement.
Ethical factors include:
Constant pressure from the administration – accountants incur stresses as there in pressure
imposed by the company's managerial team on succeeding to high levels, since the creation
of financial statements and balance sheets can be challenging. Thus the ethical issue for the
accountants will involve reporting directly about the firm's liabilities, assets, and profits
gained despite the pressure imposed on them by the management team. On the other hand, an
unethical accountant can easily alter the company's financial records and adjust false numbers
so that the company can be viewed as successful (Hay, 2014). Thus it leads to limited
success, although altered records will eventually show the downfall of a firm upon discovery
by the security and exchange commission board.
Accountants being whistleblowers – sometimes it can be challenging for accountants to
report violations to the financial accounting standard board. Since it is ethical for reporting
such, problems arise as results of reporting. Thus the government will assess the company’s
financial data and if the company was reported negatively then the company might be forced
to decline which will lead to many employees being laid off. On the other hand, other
important officials will face prosecution which will lead to fines and imprisonment.
Influence of greed – greed actually results in breaking of ethical standards and stepping
around secures in the name of making huge money. Accountants should not let their own
desires of acquiring improved lifestyle and gather more wealth in the process of ascertaining

Auditing Assignment 7
that they abide by ethical rules during financial reporting. Thus an accountant who greatly
focuses on his/her assets rather than the company's financial data poses a great risk to the
company and thus can lead to actual account violations, leading in sanctions from SEC.
Exclusion of financial records – An accountant can be asked by an executive officer to
omit of not include specific financial records in a balance sheet which would provide a bad
insight of the company’s progress and that chasing away investors. Exclusion may seem not
to be a huge breach of accounting ethical values as it does not involve direct adjustment of
numbers of figures (Rosam, I., & Peddle, R., 2009). That is why accountants should remain
ethical and evade getting into such deception.
Legal factors include:
Fraudulent financial reporting – Many scandals for the past few years have majored on
financial fraudulent reporting. Actually, fraudulent financial reporting is a misstatement of
the company’s financial data by the company’s administration. Usually, such an event is
carried out with an objective of misleading investors and up keeping the company’s market
share. On the other hand, the results of being deceptive on the company's financial reporting
can enhance the company stock for a limited period of time; there is always a negative effect
in the end. Myopic management can best describe the situation.
Disclosure – disclosure is basically mistakes of ethical exclusion of financial records as is
part of financial fraudulence. Purposefully recording business transactions in a way that is not
accepted then accounting principles will be considered to be fraudulent during financial
reporting. In an event when data is not disclosed fully investors may change their decision of
investing in the firm as is will be regarded as a fraud as well. Therefore, it is upon the
company's office to work by fine lines, also essential for the management team to secure

Auditing Assignment 8
company data. Nevertheless, if the data is related to important events, it won't be ethical in
sustaining the data away from the investors.
Penalties – consequences for defiling accounting ethics of law have expounded since the
passage of the Oxley Act in 2002. This legislation permits punitive penalties used for the
manipulation of financial data, doing away with data, meddling with investigations and
provision of legal protection for whistleblowers. Moreover, executives can be held
responsible for inaccurately reporting the company's records. Hence, is accounting ethics was
not prioritized before, then greater stakes issued by the Oxley act could absolutely up to the
ante.
Procedures involved prior to making an appointment
After you have decided to launch your audit appointment, then you should abide by the stated
requirement as in ISA 210. According to the section it states the conditions of the audit which
states that, “The use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management and, where
appropriate, those charged with governance to the premise on which an audit is conducted
(Roubtsova, E., & Wiersma, N., 2018).” Therefore, before taking an appointment the auditor
should do the following:
1. There should be an evaluation of the acceptability of the financial reporting
framework by the auditor as the financial statements are being awaited.
2. Assessment of whether policies and laws advocate the financial reporting systems,
bearing the aim of the financial statements and the type of reporting entity. Most
occasions it will involve confirming with the customer about financial statements that
will be conducted under global financial standards or national reporting framework.

Auditing Assignment 9
3. There should be an achievement of the management agreement which recognizes and
comprehends its role during the preparation of financial statements based on the
suitable financial reporting system and also for internal management. This enables the
creation of financial records that are accurate.
Assessment of new engagement processes is an important part of a successful managerial
practice. Present discussion based on the suitability of auditors who provide non-auditing
services for their customers shows that ethical issues always will progress playing a vital role
in acceptance verdicts.
Question 3:
Describe five internal control weaknesses in Everyday Supplies’ internal control for the
cash receipts and billing functions. Explain why each is a weakness.
Currently, many organizations are adjusting to internal controls and steps which will aid them
to attain their aims and ascertaining that effective business conduct inclusive of adherence to
the company's policies, securing assets, preventing errors and fraud, completion of
accounting records, accuracy, and the preparation of effective financial records. Below are
the internal weaknesses, they include:
1. Isolation of roles among persons making invoices, verifying and posting to ledger
accounts is not allowed since it is likely too unreliable records due to mistakes.
2. There should be different persons who will make the remittance and the mail and
similarly the same person who will make the deposits as it will render the firm to
fraud.
3. Also, pre-listed cheques must be attached to the certified deposit slips from the bank
throughout the bank settlement process with the aid of an independent clerk, not the
cashier.

Auditing Assignment 10
4. Thus the payment data issued electronically by the bookkeeper must be supported
with documents, which include pre-listed cheques, and deposit slips (The Revenue
Process: Auditing How a Business Makes Money., 2011).
5. There is no rigid credit card control system that involves carrying a detailed check on
the credibility of a customer prior sale is launched that exposes the firm in
augmenting the uncollectible accounts incidents.
Question 4: Identify seven (7) internal control weaknesses in Retro’s internal control
concerning the purchases and payments functions. Explain why each is a weakness.
Internal weakness encountered may include:
1. Purchases demands should be done by the department that is in need of the raw
materials. Also, stores must not willingly provide purchase claims until he knew that
there is requisition of the raw material or not.
2. Carelessness is characterized as any behavior that is imprudent or inadvertent in
nature and causes a break of any contractual obligation or obligation of consideration
in tort owed to someone else or persons.
3. It is very important to note that auditors alone should not be subjected to the
organization's loss. All parties involved in the contract were submissive and a bit
careless at their end will lead to the loss incurred. All the parties involved in the mix
up of the three organizations should be held reliable in measure of the roles they
played.
4. The auditors are farther held responsible for the breach of contract part for the
negligence claims put across. The auditors did not provide the manufacturing
company with a more competent report so that they don't take a loan if they couldn't
repay it.

Auditing Assignment 11
5. The inspector or auditor has obligation to acquire a comprehension of the organization
and additionally its occasions and conditions identified with business dangers, which
may give occasion to feel qualms about significant the organization's ability when
performing review method all through the review.
6. According to the Roles of an auditor, general obligation of an inspector or auditor in
leading a review is to consider the suitability of administration's utilization of the
advance supposition in the arrangement of the finance-related report, regardless of the
fact that the structure of monetary report does not make note of an express necessity
for fund organization to take exact evaluation of the organization's capacity to get and
proceed with its obligation (Lebedevych and Hovda, 2017).
7. As per the standards set for auditing, it is required that the auditing company must
practice the sensible consideration and aptitude which anticipated that would an
expert. It is undoubtedly that when an auditing company, claiming as they do to have
the essential aptitudes, goes into an agreement to perform certain errands as auditors;
they guarantee to perform such undertakings utilizing that level of ability and
consideration as is sensible in the circumstances as they then exist.
Question 5:
Identify six (6) weaknesses in the internal controls described. Discuss the implications of
each of the weaknesses you have identified.
1. Inadequate management and constant counter checking of systems. Actually, the
management is confident with their system as such their neglect on supervision and
periodical evaluation of their systems. In the long run, it leads to great risk of
financial misstatement which is often very difficult detecting.
2. Another internal weakness is outsourcing the entire manufacturing and most events.
Actually, internal management cannot be executed on the outside. Additionally, the

Auditing Assignment 12
company comprises of a vast number of suppliers and contractors which is very hard
to regulate. Though at times much debt can be accumulated more than the prospected
rate.
3. Maintaining of discrete systems, employees, and warehouses form a situation where
there is no effective allocation and coordination of activities between departments and
systems. Hence there will be inadequate centralized inventory management system in
place. The main defect in one system can entirely influence others (Woodrow, M.,
2018).
4. At times automated machines can fail to operate successfully as planned. In an event
when the systems fail and such an event is not noticed earlier then implications will
be seen on the inventory lists.
5. Another important concept is that during the scanning process, the activity should not
be aborted as it will influence the results. This is because the generation of copies
involves three stages, thus it may alter one process. As a result, it may lead to
misstatement in the inventory which on the other hand have an effect on the balance
sheet inventories.
6. There are no safe accounting systems or rather a unique authorization process. Within
the firm, there are individuals who have access to the password. Therefore, it can lead
to theft and fraud within the staff.
Assume your IT audit division is to perform testing of controls for the inventory
systems described. Identify two tests that you would recommend they perform.
1. Walking testing – in this type of testing, IT staffs are required to execute a tracing test
that will trace transactions from the beginning to the end of the financial statements.