Case Study: Auditing Theory and Practice, MAA303, 2018

This document presents a comprehensive solution to an auditing case study, addressing various issues related to auditing theory and practice. The case involves ethical dilemmas, potential threats to auditor independence, and breaches of confidentiality. The solution analyzes scenarios involving self-interest and intimidation threats arising from fee dependency, outsourcing of audit work, and breaches of confidentiality. It provides recommendations for mitigating these risks, including reducing client dependency, ensuring confidentiality, and maintaining objectivity and professional skepticism. The analysis references relevant auditing standards and ethical codes, offering a practical understanding of audit procedures and ethical considerations within the context of a real-world case study. The solution emphasizes the importance of professional judgment, legal advice, and effective communication to maintain the integrity of the audit process and protect client interests. The document also includes a detailed list of references to support the analysis.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Authors Note
Course ID

1AUDITING THEORY AND PRACTICE
Table of Contents
Answer to question 1:.................................................................................................................2
Answer to case A:..................................................................................................................2
Answer to case B:...................................................................................................................2
Answer to case C:...................................................................................................................3
Answer to question B:................................................................................................................3
References:.................................................................................................................................5

2AUDITING THEORY AND PRACTICE
Answer to question 1:
Answer to case A:
When it is noticed that the total fees from the audit client constitute a large portion of
the total fees of the firm stating their audit opinion, the reliance on that client and concerns
relating to losing the client results in self-interest or intimidation threat. The significance
relating to such threat should be assessed and safeguarded when it becomes necessary to
eliminate the threat at the acceptable level (Hayes, Gortemaker and Wallage 2014). A self-
interest or intimidation threat is created by Simpson Co when it refused to agree with the
increase in the audit fees in spite of the increase in the size of firm. This is because the audit
fees produced from the audit client constitute a large portion of the revenue for the Zara Co.
Evidences suggest that Simpson Co ignored the materiality level and did not carried out the
review procedure. This concludes that Simpson Co did not complied with laws and
regulations and the auditor should document as well as discuss the findings with
management. Simson Co did not included the sample of non-current assets for physical
verification which results in the materiality of the financial interest (De Paula 2016). As only
part of population was sampled, it restricts the ability of the audit team towards physical
verification of the assets and ultimately limiting the scope of audit.
Answer to case B:
Outsourcing the work of Simpson Co to overseas office of Zara might require the
third party to make decision on behalf of the client or might create a perception which would
require the service provider to act in capacity of the management (Kumar and Sharma 2015).
If the Zara & Co were to assume this kind of responsibility for the auditing client, then it
would result in threat to objectivity. To avoid the risk of assuming the management
responsibility, Simpson & Co should make sure that Zara & Co has the appropriate procedure

3AUDITING THEORY AND PRACTICE
to make sure that the management takes all the judgement and decisions together. Zara & Co
should designate a person that has appropriate skill, knowledge and experience to be
accountable for the Simpson & Co decisions and to oversee the services that are provided.
Answer to case C:
Confidentiality of the information must be maintained relating to business and
professional relationships by not disclosing any information to the third party without any
sufficient information unless there is any legal or professional right of disclosing (Cohen and
Simnett 2014). The former finance director of Simpson joined Zara as the audit partner and
passed on confidential business information that took place at Simpson. Reporting the
business development to Lester resulted in breach of client confidentiality (Louwers et al.
2015). In such situations legal or regulatory responsibility would have outweigh the
requirement of confidentiality. Currently, it appears to be uncertain whether Russel Gerrard is
aware of the confidentiality practices. Given the conflict with IESBA code of ethics for Zara
Co, the company must seek lawful advice prior to minimising the risk of lawful dispute with
their customers or legal actions from the regulatory because of breach in confidential
information.
Answer to question B:
The recommended actions for each of the issues identified above is stated below;
a. Simpson & Co should reduce the dependency on the client and review the external
quality control. Simpson & Co should review the significance of the threat and
applying the safeguard principles when it becomes necessary to eliminate the threat or
reduce the same to the acceptable limit.
b. Simpson & Co must ensure that confidentiality of the information is maintained as the
outcome of professional and business relations. Simpson & Co must clearly seek the

4AUDITING THEORY AND PRACTICE
reason from Lester for disclosing the information to Zara & Co. If Lester fails to
provide any sufficient reason, then Simpson should seek legal advice or legal action
because of the breach of confidential information (Knechel and Salterio 2016). Zara
& Co should communicate the management of Simpson & Co by obtaining a written
statement from the client that they understand the outsourced audit works and accept
this.
c. In order to avoid the risk of assuming management responsibility, Simpson and Co
should exercise the objectivity and professional scepticism to override the
professional or business judgements. If Zara & Co determines that Simpson & Co has
breached the confidential information, then they must obtain a satisfactory conclusion
and in prudent circumstances Simpson & Co should politely decline further audit
engagement with the Zara & Co.

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References:
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research
agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.
De Paula, F.R.M., 2016. The principles of auditing a practical manual for students and
practitioners. Isaac Pitman & Sons, Ltd (1919).
Hayes, R.S., Gortemaker, H. and Wallage, P., 2014. Principles of auditing: an introduction
to international standards on auditing. Prentice Hall, Financial Times.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Kumar, R. and Sharma, V., 2015. Auditing: Principles and practice. PHI Learning Pvt. Ltd..
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C.,
2015. Auditing & assurance services. McGraw-Hill Education.