Auditing Theory and Practice: Material Misstatement Analysis

This report delves into the intricacies of auditing theory and practice, addressing critical aspects such as material misstatements due to fraud, risk assessment, and the roles of auditors and governance. The first part of the report responds to a query regarding material misstatements, emphasizing the significance of ASA 240 and the inherent limitations in detecting fraud. It highlights the responsibilities of auditors and management, including the importance of professional skepticism and discussion within the engagement team. The report provides examples of material misstatements, including the Enron and Bernie Madoff scandals. The second part of the report focuses on an audit planning memorandum, analyzing the annual report of Woodside Petroleum Limited 2016. It identifies and assesses various business risks faced by the company, such as economic, operational, taxation, and reputational risks, and discusses their potential impact on the company's financial performance. The report underscores the importance of risk management and the company's strategies to mitigate these risks.

Running head: AUDITING THEORY AND PRACTISE
Auditing theory and practise
Name of the student
Name of the university
Authors note

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Table of Contents
Part 1..............................................................................................................................2
Answer to question 1..................................................................................................2
Part 2..............................................................................................................................8
Answer to question 2..................................................................................................8
References....................................................................................................................15
Appendices...................................................................................................................18

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Part 1
Answer to question 1
To Miss Williams
Subject: risks of material misstatements due to fraud
Respected madam
In the response to your query over material misstatement over the fraud of the audit
report based on the auditor and the government role, I personally believe that the as per the
auditing standards of ASA 240 the risk assessment of the potential investors are very much
significant to the case and the fraud detection is higher than the risk statement is not detected
from the error. Hence failure to the transaction could well be making certain auditor
misrepresentation. The auditor concealment may be difficult to detect when accompanied by
the solution. Hence in order to explain the management responsibility towards the
government and the auditor the differences can be recorded as follows-
Auditor
The management assignment related to the risk of material misstatement may be
misled due to fraud which includes the nature, expert and the frequency of such assessment
(Martinez, and Lessa, 2014).
The overall management process is related to the risks identification responding to the
frauds in the entity which includes the specific management have identified or have been
brought to the attention for which the risk stature is likely to exist.
The management communication if charged to the government for identifying the risk
of the fraud of the entity (Cullen et al., 2017).

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The overall management communication is related to the management exposure
towards the business practices and ethical behaviour.
The auditor of the company on the other hand will be making enquiries to the
management to see whether the knowledge base is actual, suspicious or alleged fraud which
could affect the management.
On the other hand in the case of the internal audit function the auditor he shall make
enquiries the management to determine whether the knowledge of any individual, suspected
or fraud is effecting the country or not.
Governance
As per the governance is concerned they are involved in engaging with the entity.
Hence it is important for the auditor to oversight the effective management risk process while
identifying and responding to the fraud of the risk entity and look to mitigate the same.
Unless all the charges are imposed to the management entity, the management must
look to determine the fraudulence which could affect the entity. Hence the basic difference
lies between the fraudulence identification and the possible risk factor which could affect the
scenario.
Misconception in the auditor role
The auditor misconception to the auditor roles and responsibilities happens to be a big
issue. Hence an auditor if conducting an audit as per the audit standard for obtaining some
reasonable assurance in the financial report is considered as the material misstatement
whether being caused by the error or fraud. Thus due to the audit limitation any risk related to
the material misstatement on the financial report to be detected though it is properly planned
and managed by the auditing standards of Australia .

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The inherent limitation are significant to the misstatement resulting the fraud. The
overall risks for not detecting the fraud is higher than the risk inherence. Hence the fraud may
be sophisticated and properly organised to conceal it. The collation may occur to the auditor
in pursuance of the evidence. Thus the detection of the fraud depends upon the skilfulness of
the auditor, the overall frequency and the manipulation to the process could fill with the
possible opportunities over seniority of the Individuals. Thus the auditor finds it difficult to
match the auditor perspectives as a whole. Therefore it becomes tough for the auditor to chalk
out the errors (Chan et al.,2016). As per the ASA 200 potential reporting source the overall
audit limitation is maintained properly. Hence the auditor misconception is been properly
realised with the amounts placed and utilised.
Furthermore if the audit is not properly maintained by the auditor then for that case
there is a overall misconception is made over the audit report. Thus the management is
frequently in a position to directly or indirectly manipulate those data and to present the same
to override the information and to control the procedure which have been designed to control
the similar frauds conducted by the employers (Huang et al.,2014).
On the other hand it can be said that by obtaining the assured risk matrices the auditor
is only responsible to generate and maintain the audit scientism throughout the whole process
of audit. Thus by considering the overall potential for the management effectiveness at the
time of detection of the fraudulence will not be properly effective. Thus the audit
requirements will be helpful to the auditor to identify and manage the best possible risks
status over the material misstatement and the designing procedures to mitigate those risks.
Risk factor related to the material misstatement of the entity
The material misstatement is an important factor as per ASA 240 standards. Hence it
is important for the company auditor to assess the best possible risk factors over the material

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misstatement. Thus there is a need of the proper audit evidence to manage the possible risk
exposure as well as to identify the suspected audit fraudulence factors. Hence there are many
reasons for the investor to recognise the basic risks related factors over revenue recognition
factors. These reasons are been described as below-
Professional scepticism
As per the ASA 200 standard the auditor needs to maintain the professional
scepticism throughout the overall audit report which would be important to recognise the
possibility that the material misstatement could be emerging. Now with the auditors past
experience toward the honesty and integrity of the entry management charged in the
governmental process.
Unless there is a chance of contradiction the auditor may look to accept the audit
report as genuine. Hence if the conditions are not valid and the auditor is suspicious over the
audit report, he could look to investigate bit more. Hence in the case of Woodside petroleum
limited the company audit standard are very much useful as per ASA 240 audit fraudulence.
Hence for this company the company auditor could go for further investigation if the said
report is not proper to him.
Discussion among engagement team
As per ASA 315 article there is a discussion needed from the management and
responsibility team which matters to be a part of the communication and discussion forum.
Hence this area shall place particular emphasis over the financial report of the concern.
Hence the major area to focus is on the material misstatement is stated on the fraudulence.
Hence the discussion might occur by setting the beliefs on the engagement with the team
members. Hence for the Woodside petroleum company the discussion team plays an

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important role from the end of the management and responsibility team. Hence the risk
factors relating to the material misstatements can be managed (Heck et al., 2013).
Risks assessment process and relative activities
At the time of performing the material misstatement procedures it is important to
understand the value and environment of the entity towards the internal audit control as per
ASA 315. Hence the material misstatement is detected due to the fraudulence. In the same
way for Woodside Petroleum Company also the risk assessment procedure and fraud related
activities are to be determined.
Examples related to material misstatements
The material misstatement is an active topic and throughout the decade there have
been a lot of cases where the material misstatements have occurred and the same have been
reported in the media (Vovchenko et al. 2018).
The Enron scandal (2001)
The Enron Company was the pioneer in the house of energy, commodities and the
service based on Houston. It had been discovered in the year 2001 that the company had been
using the accounting loopholes to hide the bad debts while whiles simultaneously it had
affected the earnings of the company earnings. Hence the scandal had initially reported of a
loss of $74 billion as the Enron share price had drastically collapsed from $90 to $1 within a
year. It had been revealed that the company CEO had kept billions of dollars and closed the
debt of the balance sheet. In addition to this the company had pressured the auditing firm mr
arther Andersen regarding the issues. On the other hand the convictions had been shocking to
the company as the prosecutor Andrew Weismann had indicated that they are not just any
individual. Thus the company CEO had effectively lost the business and had effectively put
the company out of the business. However over 20000 employees had lost their job.

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Bernie Madoff scandal (2002)
Bernie Madoff is a former American stockbroker who conceptualized the biggest
Ponzi scheme in the history. Hence Madoff ran the Madoff investment securities LLC. After
the 2008 financial crisis it had been discovered that an amount of $64.8 billion had been
tricked by Madoff from the investors. Hence after the conviction the prisoner had been
charged to pay $170 billion and had been sentenced to prison for 150 years.
Thank you.

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Part 2
Answer to question 2
Audit planning memorandum
Project number……………..
Project name…………………
Prepared by……….. Date………..
Received by……… time………….
From the annual report of Woodside petroleum limited 2016 the company have
basically focused on the reduction of threat and had looked to focus over the adverse impact
on the results or outcome to enhance the value chain opportunities. Thus the process does set
out some differential criteria to evaluate the material risk statements across the company.
Hence the process replicates the systematic assessment to the risk exposure in order to assess
the overall consequence for the risky areas like environment, finance, reputation and brand
recognition. Hence this is been considered as an overall risks status or risk management.
Hence the company had identified like there are four type of business risk like
economic risk, operational risk, taxation risk and reputational risk. Hence the economic risk
is an aspect which could be inculcated by knowing that the company had initially not
properly meet all the initial requirements. Hence due to the economic risks and the market
research had shown reduction on the oil price by 20 percent than the previous year. Hence
this reduction had a huge impact on the profitability of the company as well as to the annual
report. In order to explain the company reputational risk the capital structure, exploration and
the capital acquisitions expenditure had also increased marginally. Apart from this to review

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the taxation risk in the petroleum industry. Hence the Australian government had initially
used to face the taxation risk due to the imposement of risk value which have hampered the
acquisition of finance from the company. Moreover the successful exploration and the
renewal of the upstream resources could also help to improve the strategy as a whole. Apart
from this the company had successfully failed to commercialise a hydrocarbon by selecting a
suboptimal development option and falling to execute a project which could look to activate
the overall cost structure, quality and the schedule expectations and look to reduce the value
which could help to secure from the future development and bring on negativity that could
look to make an impact over the organisation. The sustained, unplanned interruption to the
production may impact our licence to operate and financial performance. Hence the facilities
include operating hazards, inclement weather and the disruption to the supply chain. Which
had been resulted to loss of hydrocarbon containment, diminished choice, production cost as
well as the environmental damage or unintentional disruption. Hence the commodity value is
very much and the same impacted by global economic factors beyond Woodside’s control.
Hence the demands for and pricing of our products remain beyond the woodside petroleum
limited control. Thus the change in the economic and the political factors could well be
including the natural disasters and the overall Introduction to the basic changes with the
buyers preferences for differentiating the value addition of the products and the price range
(Chambers and Odar 2015.). Lastly the commercial transaction undertaken with the
objectives of the growth of the impact the ability to the deliver anticipated value. These
process optimal commercial adaption of certain unfavourable conditions as a whole,
obligations and liabilities by not getting to meet the overall expectations.
Apart from the actual provided the calculated data have provided a horizontal analysis
to the financial statement of the company. Hence the calculation shows that there have been
an overall growth of 4 percent to the total value of the asset as well as to the company

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position. Apart from this it is also been seen that the current liabilities value have also been
decreased by 26 percent. the changes to the debt and value degradation could look to bring
down the overall liabilities value of the company. On the other hand the total net assets have
been increased by the overall company revenue where there is an increase to equity have
been increased to 4 percent. Hence the changed value have been well determined by the
horizontal analysis. However the revenue valuation is also decreased by the analysis. The net
profit of the company have been also increased by a good number at that point of time.
Moreover there have been use of various ratio values which have been generated during the
process. Hence at the time of calculating the ratios three types of ratio have been calculated in
this case. It is seen that the current ratio value for the company is 0.9345 approx. the general
rate of the current assets and the current liabilities have been considered at 1:1. Here the
company’s current ratio is less than 1. Hence the liquidity position of the assets and liabilities
have been not good from the company perspective. This calls for certain change in the asset
allocation strategy is to be revised. On the other hand the liquidity or acid test ratio have been
also created in this case. It can be said that the quick ratio discuses about the liquidity
position of the assets and liabilities as a whole. It is seen from the collected data that there
have been reduction to the possible assets and the liability value overall. The calculations
show reduction in the ratio where it has reduced to 0.6970. The changes are subjected to be
less than 1 which the standard norm. Thus there is a requirement for revaluation and
recodification to the assets. Lastly the inventory turnover ratio is also calculated in the
process. Since there are no such standards to this value, therefore the overall inventory ratio
is less than 1. It says that the company had not properly managed the inventory in the
financial year that have affected the financial report to the company (Alzeban, and Sawan,
2015).

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The overall risks assessment is helpful for the company auditor to perform the overall
risk management procedure and the same have been able to identify and assess the overall
risk in case of the material misstatement procedure which could possibly occur due to the
implication of error or fraud. Hence these four inherent risks which could well be very much
assessable are taxation risk, operational risk, strategic risk and the exchange risk. The
strategic risk can be assessed towards the management opportunities and the company here
will be able to use certain technologies to mitigate the risk. Here the company could well be
useful to imply certain risks in the process towards the risk development structure. It is seen
from the process that the change in the cash flow and the overall currency fluctuation also
depict the overall performance stage of the company. Hence it is seen from the overall
disruption in the general operations of the company. Hence these disruption is very much
essential to dispose the tax discount rate of the operation. Thus the discount value could be
initiated over the value. Hence in the beginning of the year the company had also lead to
decrease the financial statements of the company in the first quarter. Hence in the respect of
this process the company had not been able to compromise over the changed management
issue with the rather decreases in the overall rate of the production structure. Thus it is
expected that the demand for the petroleum is more likely to be increasing in comprising the
overall market and hence the price could likely to increase in that point of time.
The overall risks assessment is helpful for the company auditor to perform the overall
risk management procedure and the same have been able to identify and assess the overall
risk in case of the material misstatement procedure which could possibly occur due to the
implication of error or fraud. Hence these four inherent risks which could well be very much
assessable are taxation risk, operational risk, strategic risk and the exchange risk. The
strategic risk can be assessed towards the management opportunities and the company here
will be able to use certain technologies to mitigate the risk. Here the company could well be