Case Study Analysis: Auditing Principles and Ethical Considerations

This case study analyzes three scenarios related to auditing practices. The first case examines MaxSecurity Limited, focusing on inherent and control risks, and the application of materiality factors in financial statements. The second case, involving MSMG, explores the importance of debtor confirmation, its valuation, and potential misstatements in the balance sheet. The final case addresses ethical considerations for auditors, specifically the principles of APES 110, threats to auditor independence (self-interest, intimidation), and recommendations to ensure compliance. The study covers audit planning, risk assessment, ethical responsibilities, and the process of compiling an audit report, providing a comprehensive overview of auditing principles and practices.

Running head: Auditing
Auditing
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................4
Case 1.........................................................................................................................................4
Requirement A.......................................................................................................................4
Requirement B.......................................................................................................................5
Case 2.........................................................................................................................................6
Requirement A.......................................................................................................................6
Requirement B.......................................................................................................................7
Case 3.........................................................................................................................................8
Requirement A.......................................................................................................................8
Requirement B.....................................................................................................................10
Requirement C.....................................................................................................................10
Reference..................................................................................................................................11

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Introduction
Each company have to prepare their financial statement as per the rules and regulation
so that the individual can have proper access to company financial information. Auditing
process help the user to know that the company has made the financial report as per the
accounting standard and able to show true and fair view (Abdul Wahab, Mat Zain & Abdul
Rahman 2015). The auditing process is carried by auditor who know the detail of company
financial information, the auditor have to carry different procedure to ascertain the material
mis-statement in company financial report. The auditor have to ascertain the materiality
aspects in company so that it can acquire proper information of the company. It have check
all the details properly in the company information so that it can give its opinion on the
company financial statement, auditor is able to have proper independence so that it can give
proper opinion on the company financial statement (De Simone, Ege & Stomberg 2014).
Auditor report serves as an important information which help the user to take necessary
decision in regards of company financial position. The report deal with three situation which
is faced by company as in first section it show about the materiality aspects which is there in
company financial statement, second section show about the details of debtor confirmation in
the company and lastly it show about the issue in auditing process and some recommendation
in action of the same.
Case 1
Requirement A
Control risk and inherent risk are the one which is not be controlled by the company
activities, this are the activities which is not able to ascertain by any individual (DeFond &
Lennox 2017). The company Max Security is have some issue which indicate about the

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inherent risk that is not controlled by the business activities. The points show about the
inherent risk in company financial statement is:
1. Company is carrying its business in an industry which is having high amount of
competitions, as it have to be proactive to get all the government and other company
tender in the business (DeFond & Zhang 2014). It show that the company have to
depend upon the external factor so this can lead to increase in the inherent risk of the
company. Each tender is given to company having a proper financial position so to
get the tender company can do so kind of material mis-statement in the business that
can lead to inherent risk in the financial report of company.
2. Company deal in high tech armour plated personal care, which is in high sector
manufacturing industry (Furnham & Gunter 2015). This signify that the company
have to make proper and quality design of its product and it have to make it a proper
system so that it can save the design from its competitors. This show that the business
model is very complex so it will result in high human error so this can affect the
company financial position. The complexity can directly increase the change of
inherent risk in the business. the company have to take many assumptions in regards
of business so this can increase the inherent risk in the business.
3. Company have shifted their system by adding a new technology in the business as it
is adding off-the -shelf cost system which can assist the company to manage the
business activities easily and effectively (Griffiths 2016). The costing system is
connected to the production of unit and it also connect with the main general ledger
so if any error occur in the production of unit that will directly impact the overall
ledger of the company. This rise some kind of materiality affect which is connected
to the inherent risk of business.

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Requirement B
Materiality factor is an important factor which should be seen by the auditor while
carrying the audit process in the business. Materiality signify the error and omission which
the company can have in the financial statement, auditor have to plan the same in the starting
of the audit so that it can plan the audit process accordingly in the business. Company having
more amount of materiality can increase the risk in the business so auditor have to deal with
the same properly and effectively (Groomer & Murthy 2018). Auditor should have proper
assumption of materiality in the business as per the company Max Security is concern the
qualitative aspects is shown below:
 The company having 10% or more amount of materiality than it can be consider risky
and the auditor have to carry additional process to make out the materiality in the
financial statement (Aasb.gov.au 2019).
 Company having 5% of materiality than it could be taken as normal materiality and
the auditor does not have to make additional efforts to check the materiality in the
financial statement
Company should able to provide all the detail information about the business activities and all
this factor should be consider by the auditor in regards of the materiality in the business. This
will help the auditor to ascertain the amount of risk which is associated in the business
activities.
Conclusion - Complexity of business can lead to high level of materiality and mis-statement
of information in the business, auditor should take into consideration all the human
judgement in regards of assumption of company business activities. This will help the auditor
to give proper opinion about the financial statement.

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Case 2
Requirement A
Auditor have to ascertain all the factor in company financial statement to ensure that
there is no error or omission in company financial statement. As per the company MSMG is
concern the auditor have to ascertain the debtor confirmation also so it can know about the
details more easily and effectively (Hall 2015). Company is having many debtors so auditor
have to make proper debtor confirmation so the auditor can check the material mis-statement
in the financial report of the company. The company is having some debtor valuation and if it
does not match the debtor confirmation than it can be said that their some kind of material
mis-statement in company balance. This will help the auditor to know the risk which is
associated in the company business and how the company is able to handle those risk in
financial statement (Khlif & Samaha 2014). The confirmation should not be the only source
which the auditor has to take while making any opinion in company financial statement. The
materiality amount in company MSMG is $3974569, it carry a policy of 14 days credit in the
company financial statement. The information which is given about the company suggest that
there are debtor who are not paid their debt for more than 60 days. The Shady Oaks is having
high amount of weakness in the debtor confirmation as the company is not able to have any
proper information about the valuation of the debtor in the company (Knechel & Salterio
2016). The company is having more than 60% of materiality in regards of debtors as the
debtor who are from different medical practitioners should give proper amount of information
about the balance which is there in the company. This will assist auditor to make proper
assumption about the company financial statement and able to give proper opinion upon the
same. It can be treated as a weakness in company financial statement in regards of debtor
confirmation.

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Requirement B
Auditor have to ascertain from which balance it want to have debtor confirmation as
this help the auditor to plan the risk accordingly, as per the debtor confirmation is concern the
company, Chan and Partner should have take debtor confirmation from the medical
practitioners as this help them to get proper information about the debtor in the company
(Newton et al., 2015). Auditor should get more amount of information so that it can have
proper opinion about company debtor balance so it can have proper opinion in the financial
statement. The circumstance show that the company is not able to maintain the credit policy
of 14 days as they are not getting their back in the time limit of credit. The auditor should
have more information only the debtor confirmation cannot be a proof in the business as this
should also check about different balance in the company. The remaining 40% of company
debtor are also not having any good conditions as they are not able to avail the 14 days credit
policy in the business (Pizzini, Lin & Ziegenfuss 2014). The assumption about the provision
of doubtful debt should also be properly analysed by the auditor so it can know company has
made proper assumption in the business. The auditor responsibility is that it should carry all
the process in the company so that it can obtain many audit evidences in regards of company
financial statement.
Case 3
Requirement A
Each company should able to meet up professional ethics in the business so that it can
run the business ethically and effectively (Power & Gendron 2015). The APES is able to
provide all the detailed information of ethics in the business as APES 110 should be followed
by the company and all the fundamental principle which are listed there should be followed
by company Meg so it can run the business easily. Each principle should be followed by the
company business as it should comply with Objectivity, Confidentiality, Integrity and

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Professional Due Care (Apesb.org.au. 2019). Their some kind of threat which are there to
affect self-interest threat, familiarity threat, intimidation threat, advocacy threat and self-
review threat. The information is given show two kind of threat to the auditor independence,
the threat is shown below:
Self- Interest Threat – This are the threat which happen when the auditor is having some
kind of financial interest in the company, as it should not any personal interest in company
business but if it had, that will directly affect the company annual report (Sandvig et al.,
2014). The company is very big so it able to give more amount of income to the auditor so
this can lead the independence of the auditor which will affect the opinion of the auditor. The
auditor should not be affected by the management influence so that it can give proper amount
of report to the company.
Intimidation Threat – The company is forcing the auditor to give the decision as per their
preference so that the company can overcome all the risk of false audit report in the business.
As per the information about the management of MEG it states that the company is forcing
the auditor to give report as per their choice or otherwise it will directly discontinue their
business operation with the auditor and will give the audit to some other company (Tepalagul
& Lin 2015). This can lead a threat to the company and result to affect the auditor to change
its opinion about the management decision.
The points which will help Meg to follow all the principle of APES 110:
 It should appoint one more audit firm as this will help them to handle more easily the
management of the company
 It should involve the higher authority in regards of audit evidence in the company
 Proper utilization of method of asset valuation in the company

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 The auditor should show all the audit evidence to the shareholder of company in
company meeting
 It should go to higher regulation to get proper result of the same issue in the company
 Resigning from the post of auditor of Champion Securities
Requirement B
Types of report the auditor can give:
 Unqualified report if the matter between the auditor and firm can get some solution.
 If the company have a little mis-statement in regards of asset valuation than the
auditor can give Qualified Report
 Company is not able to provide proper information about asset than Disclaimer of
opinion
 Company have high amount of materiality in valuation of asset than Adverse Report
to company.
Requirement C
Each company have different process of carrying its business activities so auditor
should take the assistance of management which will help them to gain proper knowledge
about the company financial activities in the business. it can avail the second option as it
should give proper disclosure about the asset valuation in the company accounts (Wang, Li &
Li 2014). Auditor is not able to gain any solution than it should resign from the position of
auditor but it should exercise these options as a last option, but the auditor should not agree
upon the wrong valuation of asset in the business.
Conclusion – The discussion shows that there is some chance that the management can have
affected upon the auditor independence as it contain both self-interest and intimidation threat
in the business. This will also affect the company in regards of APES 110 in the business.

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Auditor will able to give disclaimer of opinion and should also communicate the same with
company investors and shareholders.

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Reference
Aasb.gov.au (2019). Materiality. Retrieved 22 August 2019, from
https://www.aasb.gov.au/admin/file/content102/c3/AASB1031_9-95.pdf
Apesb.org.au. (2019). APES 110 Code of Ethics for Professional Accountants. Retrieved 22
August 2019, from
https://www.apesb.org.au/uploads/standards/apesb_standards/23072019055710_APE
S_110_Code_of_Ethics_for_Professional_Accountants_December_2010_-_Final.pdf
Auasb.gov.au. (2019). Materiality and Audit Adjustments. Retrieved 22 August 2019, from
https://www.auasb.gov.au/admin/file/content102/c3/AUS_306.pdf
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Griffiths, P. (2016). Risk-based auditing. Routledge.

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