Detailed Solution: Auditing Theory and Practice Assignment - Finance

This document presents a comprehensive solution to an auditing theory and practice assignment. It addresses ethical considerations based on APES 110, examining various scenarios of ethical breaches, such as violations related to working papers, professional conduct, and advertising. The assignment also explores different types of audit opinions, including unqualified, qualified, disclaimer, and adverse opinions, providing detailed explanations and justifications for each. The solution analyzes cases where specific audit opinions are appropriate, considering factors like client restrictions, non-disclosure of liabilities, inadequate internal controls, and non-compliance with accounting standards. The document offers a thorough understanding of auditing principles and their practical application in real-world scenarios.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
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1AUDITING THEORY AND PRACTICEQuestion 2
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................6
Reference....................................................................................................................................9

2AUDITING THEORY AND PRACTICEQuestion 2
Question 1
APES 110 on code of ethics for the professional accountants had been released by
APESB (Accounting Professional & Ethical Standard Board and the code is effective from 1st
July 2011. As per the code, the fundamental principles under professional ethics for the
members and it offers conceptual framework for the members that is applied to –
 Identifying the threats for complying with the fundamental principles
 Estimating consequences of the threats identified
 Applying the safeguards for eliminating threats or reducing tem to the level that is
acceptable.
However, the members shall apply the professional judgement while applying the
above mentioned conceptual framework (Accounting Professional & Ethical Standards Board
2018).
Answer a
Audit working papers that is the documents that records all the audit evidences
obtained while auditing the financial statements, auditing of information systems, auditing of
internal management and investigation (Accounting Professional and Ethical Standards
Board (APESB) 2013). However, the auditing papers solely belong to the auditors and with
his own discretion he can make available part of the working papers to the outsiders. Further,
for disclosing the working papers to any third party prior permission of the client must be
obtained. Moreover, the auditor must comply with general law duty with regard to the
confidentiality of the client. As per the given circumstance, Penshurst Accountants was not
advised to carry out the peer review by Mortdale Accounting and the peer review is carried

3AUDITING THEORY AND PRACTICEQuestion 2
on its own discretion. Further, the prior permission from the client has not been taken before
providing the working papers to third party. Therefore it violated the ethics as per APES 110.
Answer b
If the employer considers a person to engage into his firm or organization before
engaging he must made some routine enquiry regarding the potential candidate. The inquiry
may include the matters like his behaviour, work experience, integrity, objectivity and
professional approach. Further, ha may contact the previous employer of the applicant to
enquire as to whether any professional or any other reasons are there that the appointment
shall not be made (Krupenye et al. 2018). Therefore, if the employer employs the person
without contacting the current employer or any other person on request of the applicant it will
violate the professional approach and breach the ethics of APES 110.
Answer c
The member from the public practices are not allowed to advertise their work through
any means like personal call, online marketing as it violate the ethical principle of APES 110.
Under given circumstances, Wendal Sailor, the chartered accountant, during audit used to call
frequently in the client office to take up services for his superannuation and insurance
business (Accounting Professional & Ethical Standards Board 2018). Further, they did so
before delivering the final opinion regarding audit. Under such circumstances, the self
interest threat is created as the auditor suggested availing their services through inconsistent
way. Therefore, it is the violation of ethics under APES 110.
Answer d
A member under public practice must determine while offering professional service
whether any threats are there with regard to the compliance of fundamental principle

4AUDITING THEORY AND PRACTICEQuestion 2
associated with objectivity (George, Jones and Harvey 2014). The issues may be created if
the member has any relationship or is interested in the client or its employees, directors or
officers. Under given circumstance, Judith Durham, the audit partner is also the member of
board of directors of the client organization. Therefore, Ms Durham is included in the audit
team for carrying out the audit of the charitable organization it will breach the ethical
principle of APES 110. The fact that the position is honorary will not alter the conclusion of
the case.
Answer e
The member must maintain the confidentiality for the information that is disclosed by
the prospective employer or client. Further, he must take the necessary steps for ensuring the
confidentiality of the client’s data or information. Moreover, the confidentiality must be
maintained even after closing the relationship with the client (Naslmosavi, Sofian and Saat
2013). However, the information can be disclosed to third party if the disclosure is granted by
law and prior authorisation has been taken from the client. As per the given situation, the
member while selling his practice released the tax working papers along with the other
working papers related to auditing and bookkeeping. However, the permission was taken
from the client only for the tax working papers. Hence, it will violate the ethics stated under
APES 110.
Answer f
If the member offers non-audit services along with the audit services it will create
self-interest threat and its significance will not be reduced though any safeguards. As per the
given situation, Mr Fred Nerk along with the audit service also provides various services like
management advisory services and tax services for same client. Providing these services in
addition to audit will be considered as non-audit services and will attract self-interest threat.

5AUDITING THEORY AND PRACTICEQuestion 2
Hence, it will breach the ethics mentioned in APES 110 (Accounting Professional & Ethical
Standards Board 2018).
Answer g
As per APES 110 the auditors are not supposed to assist in preparing the financial
statement of the client and they shall refrain themselves from providing any opinion in the
financial matters. However, the audit working papers obtained by the auditor during the audit
and any accounting records of the client company can be kept in safe place to ensure its
availability and safety. To maintain the record’s safety and protect it from being lost the
auditor maintain it in their own computer if the wish to. Therefore, if All Good Chartered
Accounting firm maintains client data in their own computer it shall not breach the ethical
principle mentioned in APES 110.
Answer h
As per Section 150 of APES 110 – professional behaviour, the members shall comply
with the applicable regulations and laws and must avoid the action that may discredit his
profession. These actions include the omission or action involving third party who may
conclude the adverse impact on the professional’s good reputation(Accounting Professional
& Ethical Standards Board 2018). Violation of professional behaviours also includes
involving in fight, assault or taking excessive drink. In the given circumstances, the public
accountant Mr James Jameson while attending Christmas party consumed excessive drugs
and alcohol. Eventually he got involved in a fight with a person and charge if assault brought
against him. Owing to this incident Mr Jameson convicted and eventually sentenced to three
months and his license also suspended for the period of 1 year. Therefore, behaviour of Mr
James Jameson in the given case breached the ethical principle of APES 110.

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Question 2
Audit opinions are expressed on the audited financial statements. The requirement of
expressing the opinion is to ensure that the generally accepted accounting principles are
followed by the company while the financial statements were prepared (Cox 2013). In
general 4 types of audit opinion are provided by the auditors after completing the audit of any
client. These are –
 Unqualified opinion – when there is no reservations regarding the financial statements
a clean or unqualified opinion may be provided. It states that the report is presented in
fair manner.
 Qualified opinion – it states that the auditors have taken the exception to certain
accounting principles related to current period or is not able to establish potential
outcome of material uncertainty
 Disclaimer of opinion – this reports does not provide any type of opinion regarding
the condition and financial position of the company
 Adverse opinion – it indicates that the financial statement of the company is
misstated, misrepresented or is not presented accurately.
Answer a
Though the auditor was able to satisfy him regarding the account balances through
other procedures, he was not able to get confirmation from 8 major clients. Hence, in this
situation a qualified opinion will be issued.
Answer b

8AUDITING THEORY AND PRACTICEQuestion 2
The equipment, plant and property of the company that comprises of 35% of entire
assets could not be verified due to restriction from the client. Therefore, in such
circumstances, a disclaimer of opinion will be issued.
Answer c
The client must disclose through notes the contingent liabilities that may have
material impact if materialises. Not disclosing the fact will raise question of true and fairness
of the report. Hence the qualified report shall be issued here.
Answer d
If the auditor cannot verify transactions including significant amount owing to
inadequate internal control system qualified opinion shall be issued. Further, no audit tests
were available fir assuring that the recorded amounts are correct. Therefore, qualified
opinion shall be issued (de Andrés Suárez et al. 2013).
Answer e
If the auditor is pleased that no material misstatement is involved in the financial
statement, he can issue the unqualified report. Further, the opening balance can be confirmed
from the previous years’ closing balance.
Answer f
After the Australian accounting standards came into force every Australian company
shall follow the standards while preparing their financial statements. Therefore, the adverse
opinion shall be issued as the company is not prepared their financial statement as per AAS
(Aasb.gov.au 2017).
Answer g

9AUDITING THEORY AND PRACTICEQuestion 2
As the LIFO system of maintaining inventory is disallowed by AAS, the company
shall not follow the system. Therefore, the auditor here will issue qualified opinion.
Answer h
As major client of the company has been liquidated and it is unlikely that other
customers will occupy their places, the going concern status of the company is in doubt. If the
company does not disclose the fact in their financial statement, disclaimer of opinion shall be
issued (Amin, Krishnan and Yang 2014).

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Reference
Aasb.gov.au. 2017. Australian Accounting Standards Board (AASB) - Home. [online]
Available at: http://www.aasb.gov.au/ [Accessed 30 Mar. 2018].
Accounting Professional & Ethical Standards Board, 2018. Code of Ethics for Professional
Accountants. [ebook] Australia: Accounting Professional & Ethical Standards Board.
Available at: http://www.apesb.org.au/uploads/standards/superseded_pronouncements/
21092016145901_APES_110.pdf [Accessed 30 Mar. 2018].
Accounting Professional and Ethical Standards Board (APESB), 2013. APES 110 Code of
Ethics for Professional Accountants.
Amin, K., Krishnan, J. and Yang, J.S., 2014. Going concern opinion and cost of
equity. Auditing: A Journal of Practice & Theory, 33(4), pp.1-39.
Cox, J.D., 2013. Strengthening financial reporting: An essay on expanding the auditor's
opinion letter. Geo. Wash. L. Rev., 81, p.1036
de Andrés Suárez, J., García, E.C., Méndez, C.F. and Gutiérrez, C.R., 2013. The
effectiveness of the audit committee in Spain: implications of its existence on the auditor’s
opinion. SERIEs, 4(3), pp.333-352.
George, G., Jones, A. and Harvey, J., 2014. Analysis of the language used within codes of
ethical conduct. Journal of Academic and Business Ethics, 8, p.1.
Krupenye, C., Kano, F., Hirata, S., Call, J. and Tomasello, M., 2018. A test of the
submentalizing hypothesis: Apes' performance in a false belief task inanimate
control. Communicative & integrative biology, (just-accepted), pp.00-00.

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Naslmosavi, S., Sofian, S. and Saat, M.B.M., 2013. The effect of audit firm size on
independent auditor’s opinion: Conceptual framework. Asian Social Science, 9(9), p.243.