PACC6002 Auditing and Assurance Services: Ethical Issues Case Study

This case study assignment analyzes a scenario involving Eric and Alan, focusing on ethical and legal issues within auditing and assurance services. The analysis centers on potential violations of auditor independence, as Alan's long-standing friendship with Eric, now a financial controller at a client company, raises concerns under ASA 220 and APES 110. The assignment highlights Alan's failure to address Eric's misuse of funds and his breach of confidentiality by sharing audit working papers without authorization. The discussion explores the ramifications of these actions on Alan's professional career, the integrity of financial reporting for Cement Manufacturing Pty Ltd, and the ethical obligations of all parties involved, including Alan's audit manager friend. The assignment underscores the importance of adherence to auditing standards and ethical principles in maintaining the quality and integrity of financial audits.

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
Part 1................................................................................................................................................2
Part 2................................................................................................................................................3
References........................................................................................................................................6

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Part 1
The analysis of the provided case of Eric and Alan indicates towards the presence of
some major ethical, legal and other issues; and they are discussed below:
It is the requirement of the auditors to take into consideration the rules and regulations of
Auditing Standard ASA 220 Quality Control for an Audit of a Financial Report and Other
Historical Financial Information at the time to conduct the audit operations. According to ASA
220, Paragraph 11, Independence, it is needed for the auditors to maintain the aspect of the
independence of the auditors. For this reason, the auditors are needed to obtain relevant
information related to the breach of auditor’s independence, to involve in the evaluation of this
information for the identification of breaches and to take the required action for the elimination
of such threat (Ball, Tyler & Wells, 2015).
It can be seen from the provided case study that Alan and Eric has a long-standing
relationship as they have been friends for the years; and this aspect can lead to the violation of
auditor’s independence. According to APES 110, Paragraph 100.12 (d), there can be the
development of the threat of audit independence in the presence of any long or close relationship
of the auditor with the audit client due to the fact that the auditors can become too sympathetic to
their interests or to accept the work. Thus, in the sheds of this regulation of APES 110, it can be
said that there is the potential for the development of the issue of the threat of audit
independence by Alan due to his relationship with Eric (Sanderson, 2014).
It can also be observed from the provide scenario that Alan becomes aware about the fact
that Eric has used the amount of $12,345 of tax payment for paying the office bill his wife from
the notes of Jackie Yong and the audit trail; and this aspect caused the delay in the payment for

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the taxation. However, he agreed with the explanation provide by Eric and did not take any
action. It can be seen from the earlier discussion that ASA 220 puts the obligation on the auditors
to take the required actions in case there is any indication of the violation in auditor’s
independence. Instead of complying with the regulation, Alan decides not to take any actions.
For this reason, this action leads to the issue of the violation of the auditor’s independence
principles of ASA 220 (George, Jones & Harvey, 2014).
In addition, APES 110, Section 140, Confidentiality, puts the obligation on the auditors
not to disclose any confidential business information of the audit client to any third party without
any right to disclose. The provide scenario states that Alan shows the audit working papers to his
chartered accountant as well as audit manager friend for discussing the issue. However, Alan
does not obtain the authority from Eric to show the papers to friend. For this reason, the delivery
of audit working papers without the authority of Eric can lead to the issue related to the breach of
APES 110 Confidentiality standard (Carey, Monroe & Shailer, 2014).
Part 2
The above discussion indicates towards the presence of certain issues related to the
provided situation; and it needs to be mentioned that these issue have impact on Alan, Eric and
the friend of Alan. They are discussed below:
It can be seen from the above discussion that there are some major issues like the
violation of auditor’s independence, familiarity threat of audit independence and the issue for the
violation of confidentiality principles of auditing. Thus, in the presence of all these issues, it will
not be possible for Alan to maintain the quality as well as integrity of financial reporting of
Cement Manufacturing Pty Ltd. At the same time, the threat to auditor’s independence can create

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negative impact on the professional career of Alan (Knechel & Salterio, 2016). It can be
happened in the presence of familiarity threat of audit independence that Alan can be removed
from the audit assurance team to carry on the audit operations of Cement Manufacturing Pty Ltd.
Apart from this, Alan will be responsible for illegally providing the confidential financial
information of Cement Manufacturing Pty Ltd to his audit manager friend and this aspect will
create negative impact on the career of Alan. Hence, it can be seen based on the above discussion
that these issues will have major impact on the professional career of Alan as it will not be
possible for him to maintain the integrity of financial reporting and audit profession (Louwers et
al., 2015).
It needs to be mentioned that these issues will have some major impact on Eric also. In
the presence of all of these issues, it will not be possible for Eric to maintain the integrity of
accounting profession for his post in Cement Manufacturing Pty Ltd. As it will not be possible
for Alan to maintain the independence of auditors, the financial statements of Cement
Manufacturing Pty Ltd will fail in reflecting the financial frauds and manipulation with the
account balances by Eric. Most importantly, in the presence of all of these issues, it will not be
possible for Eric to maintain the ethical principles and standards of accounting profession; such
as honesty, integrity, professionalism, objectivity and others. On the overall basis, these issues
will contribute towards ineffective financial accounting for the financial activities of Cement
Manufacturing Pty Ltd (Duncan & Whittington, 2014).
Lastly, it also needs to be mentioned that these issue can have major negative impact on
the audit manager fiend of Alan. In this context, it needs to be mentioned that the auditing
standards do not permit an auditor to involve in the audit program of other company while he is
already providing the auditing services and this is against the audit ethical principles. Hence, it

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can be said that the audit manager friend will not be able in maintaining the ethical principles of
audit profession while provide opinion on the audit of other company. Hence, he will be
involved in the violation of the principles of APES 110 (Chambers & Odar, 2015).

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References
Ball, F., Tyler, J., & Wells, P. (2015). Is audit quality impacted by auditor relationships?. Journal
of Contemporary Accounting & Economics, 11(2), 166-181.
Carey, P. J., Monroe, G. S., & Shailer, G. (2014). Review of Post‐CLERP 9 Australian Auditor
Independence Research. Australian Accounting Review, 24(4), 370-380.
Chambers, A. D., & Odar, M. (2015). A new vision for internal audit. Managerial Auditing
Journal, 30(1), 34-55.
Duncan, B., & Whittington, M. (2014, September). Compliance with standards, assurance and
audit: does this equal security?. In Proceedings of the 7th International Conference on
Security of Information and Networks (p. 77). ACM.
George, G., Jones, A., & Harvey, J. (2014). Analysis of the language used within codes of ethical
conduct. Journal of Academic and Business Ethics, 8, 1.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C.
(2015). Auditing & assurance services. McGraw-Hill Education.
Sanderson, J. (2014). Audit issues. SMSF Guide: Current Issues and Strategies for the Self-
Managed Superannuation Funds Adviser, 377.