Auditing and Internal Control Report: Theories and Analysis

This report provides an in-depth analysis of auditing and internal control, focusing on the comparison of PwC and BDO Melbourne as audit firms. It explores the range of services, geographic coverage, staffing, special skills, and industry specializations of each firm. The report also examines the marketing messages and research findings related to Big 4 versus non-Big 4 firms, discussing topics such as independence and audit quality. Furthermore, it delves into the theories underpinning the demand for audits, including agency theory, information hypothesis, and insurance hypothesis, and applies these theories to the Enron case, highlighting conflicts of interest and accounting irregularities. The report concludes with an argument on why a similar event to the Enron collapse is unlikely to happen again, referencing regulatory changes and improvements in auditing standards. The report provides valuable insights into the role of auditing in maintaining financial integrity and the evolution of auditing practices.

Running head: AUDITING AND INTERNAL CONTROL
Auditing and internal control
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Table of Contents
Introduction......................................................................................................................................2
Requirement 1..................................................................................................................................2
(a) Report on audit firms........................................................................................................2
(b) Selected audit firm............................................................................................................6
Requirement 2..................................................................................................................................7
(a) Theories on demand for audit...........................................................................................7
(b) Argument regarding why same event is unlikely to take place again...............................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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Introduction
Australia has their own 3 recognized professional accounting bodies those decide
accounting regulations and rules for the Australian organizations. These bodies are IPA (Institute
of public accounts), CPA Australia and ICAA (Institute of Chartered Accountants of Australia).
Audit firms are segregated in different ways and 2 common ways are – international big 4 audit
firms including PwC, EY, Deloitte and KPMG and non-big 4 or mod-tier audit firms. Most of
the audit firms have their own websites that states the services provided by them and delivers
resources to the clients as well as other interested parties (Apesb.org.au, 2019).
Requirement 1
(a) Report on audit firms
A big4 audit firm selected for this report is PwC and non-big 4 or mid-tier audit firm
selected is BDO Melbourne.
i. Range of services provided
Services provided by PwC include audit, regulatory and tax service, deals, infrastructure
development and government reforms, services related to risk assurances, accounting advisory,
consulting, private and entrepreneurial business, digital services, international business groups,
FinTech, analytics and data and technology solutions of PwC (PwC, 2019). On the other hand,
services provided by BDO Melbourne include audit, business services, business restructuring,
corporate secretarial, corporate finance, global outsourcing, family business, risk advisory,
migration services, international business, tax, transfer pricing and network for professional
practices. Further, it supports the clients with commercial, proactive and technical advices for

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number of years. The dedicated team of the firm work to assure that the client’s business are
placed well for dealing with particular industry challenge and taking advantages of the
opportunities those may arise (Bdo.com.au, 2019).
ii. Geographic coverage
Offices of PwC are located all over the world including the place like South America,
Caribbean Africa, Western Europe, Asia pacific, Middle East, CEE/CIS and Mexico &
InterAmericas (PwC, 2019). On the other hand, the offices of BDO Melbourne is located all over
Australia including the places like New South Wales, Tasmania, Victoria, Western Australia,
Queensland, South Australia and Northern Territory (Bdo.com.au, 2019).
iii. Number of staffs and special skills offered
Number of staffs working with PwC is 250,930. PwC invests in the development of the
staffs for their skills as leaders and supports collaborative workplace that assists the people to
work in smarter way with improvement in their well-being. It further enables the staffs to
enhance their well-being and enable them in working on the societal issues that matter for them.
Further it provides technology skill in cyber security along with privacy solutions, international
assignment services and forensics technologies (PwC, 2019). On the other hand, BDO
Melbourne offers customized and structured training plan that is key for development in
constantly changing environment in terms of skills and knowledge required. Special training
provided to the staffs include tax training, training related to particular provisions and legislation
required to be complied with, communication skills, audit knowledge and skills (Bdo.com.au,
2019).
iv. Industries in which they claim specialization

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Industries for which PwC claims specialization include defence and aerospace,
automotive, oil and gas, utilities and power, chemicals, consumer products, public sectors,
technology, metals and steels, media and entertainment, health, transportation, industrials and
telecommunication (PwC, 2019). On the other hand, Industries for which BDO Melbourne
claims specialization include automotive, financial, agribusiness and food, public sector and
government, healthcare, wholesale and manufacturing, natural resources, not-for-profit,
construction and real estate, retail, media, technology, entertainment and telecommunication
(Bdo.com.au, 2019).
v. Publications and various materials offered to clients
Various reports and materials offered by PwC to its client include the annual reports, tax
and regulatory related service reports, global mobility related service reports, financial service
related reports, and reports and publications including amendments in tax and accounting
standards, if any (PwC, 2019). On the other hand, BDO Melbourne apart from annual reports,
issues various reports including risk management, regulatory framework and publications
including amendments in tax and accounting standards (Bdo.com.au, 2019).
vi. Marketing message
Marketing message of PwC is – ‘Our purpose is why we exist. Our values define how we behave’
Marketing message of BDO Melbourne is – ‘Helping you make better business decisions’
vii. Topic of choice 1
As per the research carried out by American Accounting Association, impact of big 4
auditors are inconsiderably different from non-big 4 auditors. Main differences in these firms are

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reflected in client characteristics and their sizes. Further, big 4 firms are much closer to the
corporate as compared to Mid Tier. Hence, there are more established systems and processes for
Big 4 firms as compared to Mid Tier firms. In fact some of the Mid Tier firms from UK are
spending huge amount of the time to introduce consistent way for working (American
Accounting Association, 2019).
viii. Topic of choice 2
In accordance with the research carried out by international journal of financial studies,
statistically significant difference is not there among the discretionary accruals of the firms
audited by the Big 4 and non-big 4 auditors where the institutional settings are not there to offer
incentives to the auditors for delivering high quality along with constraining the opportunistic
behaviour of the manager (Abid, Shaique & Anwar ul Haq, 2018).
ix. Topic of choice 3
Big 4 audit firms have higher independence as compared to non-big 4 firms or mid tier
firms. The study further evidenced that both respondents of audit firms and the respondents of
public company perceive the same thing. Further big 4 firma have higher level of resources
owing to large clients as compared to mid tier firms. It indicates that they can resist the pressure
from client management as well as can protect their reputation in better way
(Pdfs.semanticscholar.org, 2019).
x. Topic of choice 4
No difference in quality of audit is there whether it is provided by big 4 audit form or mid
tier audit firm. However, big 4 firms are earning significantly higher amount of fees as compared

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to mid tier. However, the fees charged by both type of firms have no impact on the quality of
audit service they provide (Bcasonline.org, 2019).
(b) Selected audit firm
Though there is no difference in audit quality, our firm shall chose big 4 audit firm as
they enjoy higher level of independence. However, if the budget of the firm is limited then shall
go for non-big 4 or mod tier firm as the fees charged by big 4 firms are significantly high
whereas the quality of audit is same.

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Requirement 2
(a) Theories on demand for audit
Agency theory – under this, management has conflicting incentives while presenting the
information that is related to both their own performance as well as the performance of entity.
Here, the reports may be biased or investors may perceive merely that there is bias. Hence,
theory for requirement of auditing is that assurance report is the attempt for reducing the actual
bias or reducing perceived bias from the user’s side (Abbott et al., 2016)
Information hypothesis – users of information has the increased confidence regarding the report
if there is any assurance or audit report. Further the shareholders may be more interested in
investing or the banks feel more comfortable in providing debt to the company if the assurance
report or audit report is there (Bell, Causholli & Knechel, 2015).
Insurance hypothesis – under this theory, if any organization liquidates the entity may sue the
auditor for mitigating their losses. However, the auditors shall have the professional insurance
against such kind of losses and hence the organisations may desire to sue the auditors with
deepest pocket (Bills, Swanquist & Whited, 2016)
Considering the above mentioned theories various reasons were there why some clients
announced that they will dismiss Arthur Anderson as the auditor for their firm. These reasons are
as follows –
 Conflict of interest as the auditor Arthur Anderson was playing 2 roles one as the auditor
and another as consultant together. They were responsible to check Enron’s financial
statement along with preparing the true and fair approach of the same. However, owing to

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interest conflict they were not able to express the fair opinion on the financial statement
of the entity. Further, working as consultant as well as auditor together allowed them to
charge higher amount of fees from the client (Ball, Tyler and Wells 2015).
 Enron used the accounting approach of mark-to-market where the assets reported under
balance sheet at current value instead of book value. Further, to hide the loss from the
commodity business the company started using this approach. Audit firm Arthur
Anderson was questionable as they overlooked the same and did not mention the same in
the audit report. Moreover, employees from Enron destroyed all the mails and papers
related to the audit firm’s engagement (Apesb.org.au, 2019).
 Enron had excess amount of leverage that signified the poor financial performance. The
audit firm could have simply demonstrated the same through comparing the company’s
balance sheet with other giants in the same industry. Before the collapse the closing
balance of the company’s debt and equity shown that large component of capital structure
was composed of debt. The auditor could have questioned the company’s management
regarding the company’s volatile model of business including high level of debt
(Beardsley, Goldman & Omer, 2018).
(b) Argument regarding why same event is unlikely to take place again
In accordance with the warning provided by Greg Medcraft, the outgoing chairman of
ASIC, Australia is less likely to face the similar event like Enron as the big 4 auditing firms
enhanced the standards of auditing significantly. One week before the retirement Greg stated that
the poor auditing in context of corporate accounts can be like canary in coal mine for the next
financial crisis. It is obvious that no one will want similar event like Enron again and for that the
auditors must do their job as well as must receive the audit assurance financial information are

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free from any material misstatements (ABC News, 2017). As per the sample key audit verified
by ASIC those are carried out by Big 4 firms for 18 months period till 2016 December, in 23%
of cases reasonable assurance were not delivered stating that the financial information are free
from any material misstatements and are accurate. After the collapse of Enron, Seven West
Media and Nine Entertainment Company written down the value of their assets after ASIC raised
the apprehension regarding their asset valuation approach for the financial year 2016. Further,
after the Enron case Sarbanes created Public Company Accounting Oversight Board (PCAOB)
which is a non-governmental, independent entity that is responsible for establishing the auditing
standards and to regulate the public accounts those are engaged in auditing of entities registered
under SEC. Surbanes further imposed very specific prohibitions on the corporate officers who
interfere with the work of the independent auditors. Another development in regulatory system
was influenced after Enron and Anderson failure was issuance of new auditing standard in late of
2002 by AICPA to deal with the auditor’s responsibility for detecting fraud.
Audit planning is termed as the procedure under which strategies are designed for
conducting expected results that also defines the audit scope. Though the size, time and nature
for audit may differ it depends on the size of the firm to which the service is to be provided.
Audit plan can help the auditor to assess the client’s business easily and will help them to notice
major risks in the company (Enron Fast Facts, 2019). On the other hand, audit risk model
signifies total number of the risks associated with the audit and describes the way in which the
risks can be managed. Elements of audit risk model are control risk that is the risk generated
through failure of the existing control, detection risks that are the risks generated through failure
on the part of auditors and inherent risks that is risk generated through omission or error arising
from the factors excluding the control failures. While the inherent risk and control risk is at low

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level, it will be safer for the auditor to reduce sample size for the purpose of audit testing that
will increase the detection risk (Cahan & Sun, 2015).
Conclusion
It is concluded from above that there is not much difference in the quality of audit service
provided by big 4 audit firms and non-big 4 audit firms. However, the big 4 audit firms earn
higher amount of fees and enjoy higher level of independency. In case of Enron collapse, the
audit firm was found guilty as they did not perform their duties as per requirement and
independence threat was there on their services as they got benefitted through using various
theories like agency theory, insurance hypothesis and information hypothesis.

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References
Abbott, L.J., Daugherty, B., Parker, S. & Peters, G.F., (2016). Internal audit quality and financial
reporting quality: The joint importance of independence and competence. Journal of
Accounting Research, 54(1), pp.3-40.
ABC News. (2017). Poor auditing could be 'canary in the coal mine' for financial crisis: ASIC.
[online] Available at: https://www.abc.net.au/news/2017-11-03/asic-boss-concerned-
over-poor-auditing/9114490 [Accessed 8 Aug. 2019].
Abid, A., Shaique, M., & Anwar ul Haq, M. (2018). Do Big Four Auditors Always Provide
Higher Audit Quality? Evidence from Pakistan. International Journal Of Financial
Studies, 6(2), 58. doi: 10.3390/ijfs6020058
American Accounting Association (2019). Can Big 4 versus Non-Big 4 Differences in Audit-
Quality Proxies Be Attributed to Client Characteristics?. Retrieved 8 August 2019, from
https://aaajournals.org/doi/10.2308/accr.00000009
Apesb.org.au. (2019). [online] Available at:
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 8
Aug. 2019].
Ball, F., Tyler, J. & Wells, P., (2015). Is audit quality impacted by auditor
relationships?. Journal of Contemporary Accounting & Economics, 11(2), pp.166-181.