ACT303 Principles of Auditing: Independence, Standards & Deficiencies

This assignment solution delves into key auditing principles, addressing actual and perceived independence, violations of professional standards and regulatory requirements, and evaluating internal control deficiencies. It analyzes scenarios involving auditor independence, ethical considerations, and potential conflicts of interest. The solution also outlines the necessary procedures for accepting an audit engagement and identifies weaknesses in internal controls related to cash receipts and billing processes within a hypothetical company. This document is helpful for students seeking to understand and apply auditing concepts in practical situations. Desklib provides more resources like this to aid student learning.

Running head: QUESTIONS 0
AUDITING THEORY AND PRACTICING
MAY 14, 2019
STUDENT DETAILS:

QUESTIONS 1
Answer 1:
(a) Actual and perceived independence and its importance-
The real independence is considered as the real freedom of a person who is known as auditor,
or else addressed or recognised as an independence of a brain or consideration. Even more
specifically, the sincere freedom apprehensions the viewpoints the key auditor is in, and how
an examiner or the auditor protests in or handles the specific situations. An auditor or the
assessor who is independent 'fact be told' may resolve the free selections notwithstanding of
the fact that there is the ostensible lacking of independence present, or in a case when the
auditor is set in the situation of trading of trading off through the administrative of the
company. Various difficulties invent in searching if the assessor is actually free, in the
meantime, this is critical to see and assess the mental state of mind of a person and individual
respectability.
Perceived independence refers to the independence, which is not realistic and individuals
suppose one to be in independence or autonomy even if they may not be. At the particular
stage, the person may be within the embracing situation since the fairness is not clear. This is
normally very had to assess perceived independence. However, the perceived independence
is very significant for the auditing corporation since this adds trustworthiness or reliability to
an auditing report. The independence of auditor has been the greatly significant main element
of faith of the public in an accounting system. In this way, as per the individual situations
asked in this question, there are two features to independence having interchange capacity
with each other. These features can be explained below-
Perceived independence:

QUESTIONS 2
The perceived independence states the indirect relation as well as indirect relation of an
auditor with an officer within organisation doing work and states how this influences the
auditors to create the independent decisions. Further, it is required that the opinion of the
auditors must be simple and morally justified as this is helpful for the general public to take
the best decisions related to finance. Consequently, the statement’s credibility relies on the
doubts of the possessors, in a case when the possessors have the second consideration with a
qualified report or non-qualified report made by auditor, then this will not be completely
worthy. In the addition of this, this also suggests the great threat to the long run relationships
between stakeholders of company and auditor.
Actual Independence: - The actual independence is more of consideration, with more
explanation related with the state of mind where the auditor takes the decisions in the
procedure of audit. The actual independence states that the auditors are not affected by a
manager or director having say in a corporation nor have they been influenced in a
qualification report provided by them over the financial statement of this corporation.
Importance-
In a very first given case, Bob who is an audit assistant reckoned to the methodical with
information is performing activities related to audit. This is supposed that the auditor is the
independent auditor with an absence of data existing. Here, Bob is stating the qualification to
the Club casino’ financial statements that will provide the financial statements as per a fair
and true view to enhance the reliability of the financial statements. Additionally, an auditor is
reflected to be taking more fiduciary relations with company’s stakeholders than to a
corporation. Bob may suggest corporation in various portion either in tax savings or in
statement of preparing the rules, regulations, and laws compliance.

QUESTIONS 3
Further, in the second case, this is stated that ACE limited is doing work in a marketplace
through a long period however, because of the retirement of individual who was acting as the
company secretary; the company is not able to search the replacement. However, it has
questioned windy to do the services that are not correct as per the Australian law. The ASX
Corporate Governance Council has established the Principles related to best Corporate
Governance, practices recommendations in year 2003 in Australia. Therefore, the person who
is company secretary in the eyes of law can only perform the secretarial work.
In next case study, it can see that Leo has the relationship with the company’s supervisor that
is not substantial relationship to provide Leo disqualified from being recognised as the
independent auditor neither this would not influence perceived independency nor actual
independency. It can simply say that Leo is acting as the internal auditor in the corporation in
respect of the control of a payment through cash systems. Therefore, it can say that
relationship is extensively restricted to the KMPs of the organisations. On the other hand, in a
case when relation with the worker is taken in consideration then this would influence
auditor’s independency in an audit. The auditor would not be qualified as the organisation’s
auditor.
Moreover, in fourth case, classic reproduction has not made payment of audit fee to Chan &
Associates and in consideration of this corporation is rendering fifty per cent fees amount in
kinds and remaining twenty five per cent Amount in respect of the stakes in unconnected
organisations. Although Chan & Associates has financial relations with organisation
however, this is not of audit fee amount neither this would influence the perceived indecency
nor of actual independency (Kamishima, et. al, 2018).

QUESTIONS 4
(b) Violation of professional standards and regulatory requirements and its remedies
Bob in the first case copy the financial accounting information for the work that is of severe
apprehension in the legislative expression as considering private data of a corporation. This is
termed as security offence as per the listing rules. Bob must consider only the informed data
for making this assignment.
In second case, Windy who has questioned to act the secretarial works is in against of rules,
laws, and regulation as just an individual who is company secretary, may do these functions.
In next case study, it is not possible to appoint Leo as the auditor of the organisation. The
reason is that Leo has relations with the organisation’s workers that would influence the
freedom.
As per next case, there are no breaches of law however, it is required that auditor must take
the consideration in financial terms. By accepting, the stakes of other origination create him
disqualified from being hired as the auditor within that organisation. Furthermore, a classic
reproduction has also provided furniture as the portion of the considerations that would
somehow affect influence independency levels of the company.

QUESTIONS 5
Answer 2:
Before the acceptance of auditing, the nominee auditor is required to consider the various
factors including legal and ethical factors. The nominee auditor should carry out the below
mentioned procedure-
1. Make sure professionally qualified to perform- the nominee auditor should
consider whether disqualified as per ethical grounds legal grounds.
2. Make sure that available resources are proper - the nominee auditor should
contemplate available time , personnel and procedural proficiency
3. Get reference- it is necessary for the nominee auditor to conduct personal
investigations if directors are not individually familiar
4. Establish communicate with current auditors of the company- it is required for
the nominee auditor to enquire whether there are various situations or grounds behind
the changes about that the new auditors should have knowledge, also politeness. The
current auditor and proposed auditor should establish communication with other
before the audit being acknowledged. In the addition of these, the client should be
asked to provide consent for the communications to take place. In a case, where the
client does not agree to provide consent, the proposed auditors should not agree with
the proposal.
The auditor should make sure that there are no independences or other ethical issues
likely to be the reason of conflict with the ethical code of conduct. It is also required
by the new auditors that they must make sure that they have employed in the efficient
way and legally. The auditor should consider all the legal and ethical factors before
accepting the audit, such as whether company is involving in any illegal activity. The

QUESTIONS 6
ethical factors include pressure from management, accountant as whistle-blower,
impacts of greediness, omission of financial records, penalties and disclosures.
Therefore, it clear that the decision to accept the audit is not to be considered as the
one-off case. It is recommended that the nominee auditor in public practice
occasionally analysis the decision of acceptance for recurring client’s engagement.
The modifications in the situations of either a client or the auditor can mean that the
engagement ends to be morally or legally acceptable or makes the delicate levels of
risk’s exposure. Consequently, client endurance assessment is significant and must be
completely documented. In the given situation, the audit partner should not accept the
proposal because there is a threat of client for legal proceedings. The charges can be
imposed on the company for illegal activities such as corrupt activities and it is
possible that strict actions can be taken against the company and its employees
(Knechel and Salterio, 2016).

QUESTIONS 7
Answer 3:
Evaluating the internal deficiencies is considered as the part of the internal control evaluation.
The auditors should be aware of these deficiencies in designing the internal control or
operating the effectiveness. The internal control weaknesses in Everyday Supplies Pty Ltd.’s
internal control concerning cash receipts as well as functions related to billing involve the
following:
1. The credit manager has capacity to give approval to credit without having external
credit check from the rating agency or without reference to the setting of the credit
limits.
2. Next, the AR supervisor executes a procedure of billing without the independent
physical authentication or the authentication by computer. The account receivable
supervisor has a capacity to make the changes in information of the charges form
made by the sales associate and utilise the changed information in making the
invoice. In addition, there are no regulations to make sure that the day-to-day total
of the charge’s form equivalent the day-to-day total of bills.
3. Further, it can see that the account receivable supervisor also has a capacity to
write off the accounts as not collectible because there are no independent
verifications of the account receivable subsidiary ledger. Moreover, since there are
no reconciliations of account receivable subsidiary ledger with account receivable
control account within a general ledger, which is kept by a bookkeeper. Besides,
the account receivable supervisor may merely cover the collectible accounts in a
report based on monthly basis of unsettled account to a bookkeeper. Similarly, the
accounts may stay on the books long after they are outstanding and more credit

QUESTIONS 8
may be granted in a case where an account receivable supervisor neglects them
from scheduled notifications as per month basis to the bookkeeper.
4. The cashier processes receipts from cash and credit sales through executing 3
irreconcilable obligations, such as primarily getting the cash receipts, placing
money in banks, as well as considering the receipts. Even though the bookkeeper
really makes record of the cash receipt, the cashier delivers the data (transmittal
advice) that can be changed, inadequate, or partial. In the addition of this, in the
absence of verification of the deposit slips or the checking lists, there are no self-
governing confirmations of an accurateness or comprehensiveness of receipt of
cash. As well, the cashier settles the bank statement on monthly base that is also
unsuited with managing cash receipts and placing the money in the banks.
A bookkeeper approves a write-off of the accounts that are not collectible, deprived of the
enquiry in the information and causes of all unsettled accounts. The developed principles and
standards to write of unsettled accounts (six months) is very strict. It is not so flexible. In
addition, it does not render the preclusion of yielding extra credits at before the times like
while the account first becomes due. A bookkeeper also may incidentally provide more credit
by not giving notification to a credit manager while the account of contractor has written off.
As well, a bookkeeper has the irreconcilable obligations of approving the write-off and
making records of journal entries (Huang, et. al, 2015).

QUESTIONS 9
Answer 4:
The substantial weakness is the deficiency, or the grouping of deficiencies, in internal
control above financial reporting, such that there are the relevant possibilities that the
material misstatement of annual statement and interim financial statement of company would
not be discovered timely.
1. Not independently checked with stocks against purchase requisition that can result to
overstock.
2. The company should establish specific procedures to ensure that POs have been properly
authorized before the order is officially placed with a vendor. The authorized individual
typically involves the signs or marks on the purchase requisition to state valid authorization.
In the mechanical system, exact authorization for the transaction related to purchase may be
handled through restricting access to endorsement functions. It is difficult control in that no
purchasing occurrences must begin until the initial approvals take place. In various
companies, the approval of the purchase requisition is the preliminary consent, which
activates the outstanding procedures of the purchase.
3.Most of the times, the owners business take so much involvement in the daily functions of
the businesses, which they tend to ignore acting fundamental review processes. The owners
of business must consider few time and interest in a financial record. It is very significant
feature of anticipation of the fraud.
4. The purpose of accounts payable internal controls is to ensure that valid supplier and
vendor invoices are properly recorded and promptly paid by the business. The description,
quantity, cost and terms on the company's purchase order.
5. There are various focused areas of business. So different cycles would be significant to the
businesses however for most of the businesses the following procedures would be difficult
such as Accounts Receivable, process related to banking, management of cash, accounts

QUESTIONS 10
payable and purchase, and for the business selling products, inventory control would be the
significant cycle. Documenting major controls in all stages would render clearness,
consistency, and particular part and accountabilities in all the cycles can simply be provided
to the particular people.
6. The regularity of the financial information’s reviews depends on transaction’s volume and
the business’s types; however, the financial information’s review must normally be made per
month.
7. The particular people in the organisation must be provided authoritative accountability for
the preparations of purchase requisition as well as orders, comprising consent of the
particular items to purchase, order amounts, and vendor’s assortment. Only these chosen
people must have the chance to carry out the tasks (Yang, 2017).

QUESTIONS 11
Answer 5:
(a) In effective internal control framework for inventories, contain the plans of
organization by the company and each procedure as well as action it takes to secure
the assets in against of robbery and wastage. It is very essential to make sure the
compliance with the Policies Corporation as well as central laws. It is also required to
assess the performances of all the people to encourage the effective and appropriate
functions. Additionally, the Inventory control is very much significant to keeping the
correct and proper balances of stock in the warehouses. In this way, too
much inventories may generate profit loss whether the products expire, spoiled, or
becomes the out of time of year. Therefore, the auditors should be alert. It is
significant for them to have the knowledge of inventory control by knowing the
demands of customers for the products. It can see that there are some weaknesses in
the internal controls described. Following are six weaknesses in internal controls of
MyPet Pty Limited and its implications-
1. The Approval for transactions: the purchases are not authorized by inventory
control. It is also considered as the weakness of the obligation’s segregation
because acquisitions approves and procedures the orders of purchase.
2. Accounting records of inventories: the other weakness is that the inventory
records are restructured on the basis of the purchase order. In this way, these
inventories are reframed as according to the orders of purchase in place of the
invoices.
3. Accounting records of account payable subsidiary ledger: next, it can see that
the accounts payable subsidiary ledger is reframed on the basis of invoices. No
reconciliation has been conducted there with any supporting document in this
reference.