Auditing and Assurance Services: Ethical Issues and Recommendations

This report provides a detailed analysis of auditing and assurance services, focusing on ethical considerations and practical situations. It examines the role of auditors in ensuring the accuracy and reliability of financial statements, emphasizing adherence to ethical codes like APES 110. The report explores various scenarios related to auditor independence, objectivity, and the potential threats to these principles. It delves into situations involving tax refunds, treasurer positions in non-profit organizations, and the influence of clients on audit opinions. The report also analyzes the implications of receiving audit papers from other firms and the impact of entertainment offers from clients. Furthermore, it discusses different types of audit opinions, including unqualified, qualified, and disclaimer opinions, based on the presence or absence of material misstatements and the availability of sufficient audit evidence. The report concludes with recommendations to uphold ethical standards and maintain auditor independence.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
Question 1........................................................................................................................................2
Situation [a].................................................................................................................................2
Situation [b].................................................................................................................................3
situation [c]..................................................................................................................................3
Situation [d].................................................................................................................................4
Question 2........................................................................................................................................5
Situation [a].................................................................................................................................5
Situation [b].................................................................................................................................5
Situation [c].................................................................................................................................6
Question 3........................................................................................................................................6
Situation [a].................................................................................................................................6
Situation [b].................................................................................................................................7
Situation [c].................................................................................................................................7
Conclusion and Recommendations..................................................................................................8
References......................................................................................................................................10

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Introduction
Auditing refers to the process of inspecting the financial accounts of the business
organizations in order to ensure the fact that they are free from material misstatements (Louwers
et al. 2015). In this process, auditors have the responsibility to ascertain the level of materiality
that will be harmful for the companies. At the time of conducting the audit operations of the
business organizations, it is the responsibility of the auditors to comply with the code of ethics of
Accounting Professional and Ethical standards 110 (APES 110) issued by Accounting
Professional & Ethical Standards Board Limited (APESB) (apesb.org.au 2018). According to
this standard, the auditors are required to maintain the integrity of auditing principles and they
need to be honest in this process. In addition, it is the responsibility of the auditors to be
independent from the any kind of interest in the property of audit client (Arens, Elder and Mark
2012). It also states that the auditors are required to provide appropriate audit opinions after
carefully analyze various audit matters. This report takes an honest attempt to analyze various
situations related with auditing ethics, auditing independence and auditing opinions. Lastly, some
recommendations are provided based on the whole analysis.
Question 1
Situation [a]
In the provided situation, the assurance of getting tax refund to the audit clients can be
seen from Berowra Accountants through a special advertisement. The difference between tax
payment and tax owned is regarded as tax refund. Companies can avail tax benefits in case tax
payment is more than tax liability (Mendenhall et al. 2012). In companies, income, profit and
taxation are responsible for tax refund and the auditors have not role to play in tax refund. The

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duties of the auditors do not include the guarantee of tax refund as the auditors are responsible
for determining whether there is any material misstatements in the financial statements or not.
The assurance of tax refund would breach the code of ethics of auditing. Thus, according to
APES 110 Code of Ethics for Professional Accountants, Section 130, this particular action of
Berowra Accountants has violated the principle of Professional Competence and Due Care in
which the auditors has crossed the limit of audit profession (Han Fan, Woodbine and Cheng
2013).
Situation [b]
According to the case study, Jamie Harvey conducts the audit operations of large public
firms and has been asked to hold the position of treasurer of the local club. Athletic clubs fall
under the category of not-for-profit societies. APES 110 Professional Appointment, Section 210
states that the auditors should determine that whether their new client appointment can harm
auditing fundamental principles of ethics (Ottaway 2014). In regards to this particular case study,
it is required to be mentioned that that Jamie Harvey will not violate any of the auditing
fundamental principle of ethics by accepting the offer for the treasurer of local athletic club. The
main reason is that Jamie Harvey’s holding of treasurer position has no relation with his audit
works of large public companies. In addition, the appointment in any not-for-profit societies does
not affect the fundamental ethical principles of auditing. For all these reasons, no ethical
principle of auditing will be violated in this case.
situation [c]
As per the provided situation, Monlec Ltd indicates to Pymble Accountants that their
payment will be dependent on the delivery of appropriate audit report. This situation indicates
towards the Monlec Ltd’s demand of favorable audit report from Pymble Accountants. The

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auditors are responsible for providing unbiased audit opinion as they represent the investors and
creditors. APES 110 Principle of Objectivity, Section 120 states that there should not be any
compromise of professional judgment from the side of the auditors due to any biasness, conflict
of interest or influence. It indicates that fare audit judgment should not be compromised in any
situation. In the given situation, there can be two situations. In the first situation, there will be a
violation of auditing Principle of Objectivity if Pymble Accountants provide favorable audit
report to their client, Monlec Ltd (Kuan 2014). In the second situation, there will not be any
violation of ethical principle if Pymble Accountants does not provide favorable audit report to
Monlec Ltd.
Situation [d]
The provided situation shows that Chadwick Chartered Accountants has received all the
audit papers and reports of Motoring Services from Winton Accountants. The responsibility of
Chadwick Chartered Accountants is to review the audit quality of Winton Accountants. As a part
of this responsibility, various analytical audit tests need to be conducted. However, the received
audit papers from Winton Accountants makes the work easy for Chadwick Chartered
Accountants as they have already got the results and thus, the will not have to perform any audit
tests. According to APES 110 Principles of Confidentiality, Section 140, it is the professional
obligation of the auditors to maintain the confidentiality of the information of the audit clients
(Wilson-Rogers, Morgan and Pinto 2014). However, Winton Accountants have not maintain the
confidentiality of the information of Motoring Services by delivering them to Chadwick
Chartered Accountants. Hence, in this process, Winton Limited has violated the ethical principle
of Confidentiality with their specific action.

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Question 2
Situation [a]
The provided situation states that Jane Davis from Thornleigh Accountants takes the
place of Leona Ng for the completion of the audit operation of Jenkins Ltd as Leona Ng has
fallen ill. After that, the intention of Thornleigh Accountants is to use Jane Davis for the audit
operations of Jenkins Ltd in mid July. APES 110, Self-review Threat, Section 100.12 indicate
towards the prohibition of using the results of any previous audit operation that was made by the
audit member of the same audit team (Clout, Chapple and Gandhi 2013). It implies that any audit
member does not have the right to use the audit opinion of any previous audit program. By
applying all these principles in case of Thornleigh Accountants, it can be said that the company
will violate the independence of the auditors by including Jane Davis in the audit team for
Jenkins Ltd. Thus, this action of Thornleigh Accountants will pose the Self-Review Threat of
auditors’ independence (Sarkar and Sarkar 2012).
Situation [b]
The above situation indicates towards the responsibility of John Darrow for conducting
the audit of Winmalee Ltd. It can be seen that John Darrow has received all the copies of
accounting papers that includes accounting standards and computer files from Winmalee Ltd
regarding to the intangible asset valuation. As per auditing standards, the auditors are not
supposed to take the papers of the clients into consideration as it is their responsibility to get
sufficient audit evidence after the examination of client’s financial accounts. In the given
situation, pressure can be build upon the auditors in order to become agree with the judgment of
the audit client. Apart from this, by providing the accounting papers to the auditors, Winmalee
Ltd can create unnecessary pressure on John Darrow to provide favorable audit opinion.

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According to APES 110, Section 200.8, all these actions of Winmalee Ltd have the ability to
violated the independence of auditors and can pose the Intimidation Threat of audit
independence (Ojo 2013).
Situation [c]
The provided situation states that the auditors have received invitation from the chocolate
company for visiting their second chocolate shop and for visiting the social club of the chocolate
company. The audit guidelines prevent auditor from involving any kind of entertainment related
activities with the audit clients. APES 110, Self-interest Threat, Section 100.12 states about the
rise of threat to auditors’ independence in case the audit opinion has the influence of any
financial or non-financial interest in the audit clients (Deumes et al. 2012). In the given situation,
the chocolate company may put influence on the auditors by indulging in entertainment activities
so that they can obtain favorable audit opinion. Thus, there can be two situations. In the first
situation, there will be Self-interest Threat of auditors’ independence in case the auditors accept
the entertainment offers from the chocolate company (Kouakou, Boiral and Gendron 2013). In
the second case, the auditors’ independence will not be affected in case the auditors do not
accept the entertainment offers from the company.
Question 3
Situation [a]
It is the main responsibility of the auditors to inspect the financial account of the
companies so that they can be ensured that there are not any material misstatements. In addition,
doing the compliance check is another responsibility of the auditors. Moreover, auditors do not
pose any responsibility to make comment on the financial situation of the organizations. The

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case of Connor Company indicates the heavy dependency of the company on bank overdrafts for
repaying the loans as they do not have any financing options left. In addition, the bank wants
immediate repayment of their loans from the company. All these aspects do not pose any threat
of material misstatements and the auditors have not found any material misstatements in the
financial statements of Connor Company. For this reason, the auditors will provide Connor
Company with Unqualified Audit Opinion due to the absence of material misstatements (Habib
2013).
Situation [b]
Companies have the obligation for the preparation of their financial statements by
complying with the standards of Generally Accepted Accounting Principles (GAAP). Moreover,
they are also responsible to make compliance with the operating country’s accounting principles.
The given situation shows the adoption of LIFO method by the company as its parent company
uses this method; but the company is required tom follow FIFO method for inventory valuation.
Thus, material misstatement can be seen in the company due to the difference in LIFO and FIFO
method for inventory valuation. In addition, the auditors have not found material misstatement in
areas of the company except inventory. All these reasons lead to the issue of Qualified Audit
Opinion by the auditors. Major similarities are there between qualified and unqualified audit
opinion. However, in qualified audit opinion, the auditors are required to add another paragraph
in the audit report by highlighting the reasons for the audit opinion to become qualified
(Rahimian, Tavakolnia and Karamlou 2014).
Situation [c]
As a part of accounting obligations, companies are required to carry out the valuation of
plant, machinery, land, building and other fixed assets on a regular basis due to the fluctuation in

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the market prices of them. The provided situation indicates that Victorian Manufacturing
Company has not done the valuation of their Melbourne factory for last five years due to the
thinking of their directors that the market value of the plant has not changed over the years. This
particular assumption of the directors of Victorian Manufacturing Company regarding the
valuation of Melbourne factory can poses the threat of material misstatements in their financial
statements. The auditors require the fair market value of land and buildings as the absence of fair
market value can hamper the audit process that can be a hindrance in issuing correct audit
opinion. In this situation, it is clear that the lack of information is creating hindrance in the audit
process. For this reason, the auditors will provide Disclaimer Audit Opinion due to the
incompletion of audit process in the absence of correct and sufficient information (Kachelmeier,
Schmidt and Valentine 2016).
Conclusion and Recommendations
From the above discussion, it can be observed that it is the utmost responsibility of the
auditors to comply with the APES 110 codes of ethics at the time of conducting the audit
operations of the organizations as the absence of ethics can cause ethical issues. At the same
time, non-compliance with the standards and principles of auditors’ independence can pose
various threats to auditors’ independence like self-interest threat, self-review threat, intimidation
threat and others. The above discussion also shows that the absence of sufficient information can
cause obstacle in the audit process.
Based on the whole discussion, some recommendations are provided below:
 It is the responsibility of the auditors to maintain honesty and integrity of audit profession
by complying with all the necessary fundamental principles of ethics in audit process.

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 It is recommended that the auditors should maintain the principles and standards of audit
so that the threats of auditors’ independence do not develop.
 It is recommended to the auditors that they should consider all the relevant information
before providing the audit opinion.

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References
Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. [online] Available
at: http://www.apesb.org.au/uploads/standards/apesb_standards/standardc1.pdf [Accessed 18
Jan. 2018].
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Deumes, R., Schelleman, C., Vander Bauwhede, H. and Vanstraelen, A., 2012. Audit firm
governance: Do transparency reports reveal audit quality?. Auditing: A Journal of Practice &
Theory, 31(4), pp.193-214.
Habib, A., 2013. A meta-analysis of the determinants of modified audit opinion
decisions. Managerial Auditing Journal, 28(3), pp.184-216.
Han Fan, Y., Woodbine, G. and Cheng, W., 2013. A study of Australian and Chinese
accountants’ attitudes towards independence issues and the impact on ethical judgements. Asian
Review of Accounting, 21(3), pp.205-222.
J. Clout, V., Chapple, L. and Gandhi, N., 2013. The impact of auditor independence regulations
on established and emerging firms. Accounting Research Journal, 26(2), pp.88-108.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.
Kouakou, D., Boiral, O. and Gendron, Y., 2013. ISO auditing and the construction of trust in
auditor independence. Accounting, Auditing & Accountability Journal, 26(8), pp.1279-1305.

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Kuan, K.T.C., 2014. Auditor independence: an analysis of the adequacy of selected provisions in
CLERP 9 (Doctoral dissertation, Queensland University of Technology).
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing
& assurance services. McGraw-Hill Education.
Mendenhall, R., Edin, K., Crowley, S., Sykes, J., Tach, L., Kriz, K. and Kling, J.R., 2012. The
role of earned income tax credit in the budgets of low-income households. Social service
review, 86(3), pp.367-400.
Ojo, M., 2013. Audits, audit quality and signalling mechanisms: concentrated ownership
structures.
Ottaway, J., 2014. IMPROVING AUDITOR INDEPENDENCE IN AUSTRALIA: IS
‘MANDATORY AUDIT FIRM ROTATION’THE BEST OPTION?.
RAHIMIAN, N., TAVAKOLNIA, E. and KARAMLOU, M., 2014. Qualified Audit Opinion and
Debt Maturity Structure.
Sarkar, J. and Sarkar, S., 2012. Auditor and audit committee independence in India.
Wilson-Rogers, N., Morgan, A. and Pinto, D., 2014. The primacy of client privilege: designing a
statutory tax advice privilege for accredited non-lawyer tax advisors.