ACT303 AUDITING

WRITTEN ASSESSMENT

9 May 2021

Question no 1:
Answer:
The key ethical matters regarding chem, need to be considered before making the decision to
accept the engagement like competence, illegal acts and liability and confidentiality of the
client business.
In the business many difficulties may arise regarding the unethical matter. The issue of such
unethical matter should be raised in the management, which may have audit implications. In
this given case, there is certain options and requirement for the auditor to analyse the
confidentiality of the client business information. It has not provided enough proof for illegal
acts and liability. If it is sure that senior employees are involved in covering the illegal spill
of toxic chemical into the nearby river, then such issue need to raise with the management.

Question no 1 b:
Answer:
In this case, the issue has been arising due to the fluctuation in the currency rate which create
small error in hedging transaction. In this situation, first auditor must find out what is the
main the reason of error which he/she found in the transactions. After that auditor need to
analyse the problems and may use audit test of control in case if it is available. In this case, it
is clearly mentioned that the problems had arisen due to the inexperience and the poor control
system. In such situation numbers of testing samples need to be increased or substantive
testing need to be use in the transaction of Chem Safe Ltd. Substantive testing is the
procedure which help an auditor to find out the error and the misstatement in the financial
statement. Substantive testing includes confirming account balance, forward rate agreement,
recalculating the calculation made by the clients. If all these errors are found in the same
transaction auditor need to provide error information to the management of the company to
adjust the error shown in transaction. And, if the company disallowed to show further action
in adjusting the error and the amount is higher than the tolerable error level then the auditor
must note that error and mentioned in the audit report.
Question no 1 c:
Answer:
In this given case, Summit and Associates CAs has agreed to take new clients ‘Reaction Pty
Ltd’ to conduct audit of small garage door manufacturing company where auditing has not
been conducted previously. During auditing process new client management are unable to
provide enough information or evidence to the audit team due to insufficient documentation.
As we know without sufficient documentation auditing cannot be commence. Same as in this
case the client management are unable to provide sufficient document to the audit team. It is
duty and responsibility of every company to provide enough information and the evidence to
the required form. Moreover, company should maintain the specific accounting standards
while doing accounting records. According to Certified Practicing Accountant Australia,
auditor is allowed to modified auditing report only if the client is unable to provide proper
document and the evidence while conducting report. In this case, client management can get
modified auditing report only from the audit report. If the client management does not accept
the modified audit report, then the audit team has authority to terminate the engagement with
the required compensation claim, which had been made in engagement letter.

Question 1 d:
Answer:
Number Situation Types of Explanation Safeguards to
potential threat reduce
to independence independence
threat
1. Hail Pty Ltd Self-review After the audit In this case,
threat or not firm has auditing firm
finalised the has already
financial finalised the
statements, the financial
clients have statement for
asked the the company
auditor to but due to
identifying and having little
calculating knowledge in
impairment loss calculating
because client impairment
has little client has asked
knowledge in auditor to adjust
accounting and it. It can create
client is not sure self-review
whether the threat if any
 accountant judgement or
changed the previous
prepared assurance need
financial to be re-
statement or not. evaluated by the
accountant
otherwise, there
will not be any
threat.
2. Travel time Ltd Self-interest This case talks The auditor
threat more about the must not
marketing and involve in
promotion thing marketing thing
which do not because it is not
concerned to the duty of
auditor. The auditor, auditor
only duty that always need to
auditor carries is consider the
to prepare code of ethics
financial and need to
transaction of aware of
the client does disciplinary
not involve in mechanism, the
promoting safeguard to
marketing for remove such
the benefits of threat are
parties. Agreed leadership,
to provide the timely
recommendatio communication
n to other audit about rules and
firm may create policies to all
self-interest the staff and
threat and partners.
increase the
 expectation in
returns from the
clients.
3. Civil Familiarity In this scenario, The safeguard
construction Ltd threat it is clearly to remove such
mentioned that threat is review
substantial in professional
shareholder who manner by the
is the wife of professional
one audit firm. accountant or
It produces involve in
familiarity another part of
threat because the firm to
when one perform the part
family member of engagement.
of the audit
team engaged in
other firm as
employee or
shareholder it
may have
influence over
the subject
matter of the
engagement
team.
4. Pleasure cruises Self-interest In this case, Safeguard to
Ltd threat Pleasure Cruises remove this
Ltd has not been threat can be
paid any fee to quality control
the auditor in and review
time fame and policies for the
the auditor client’s
report is due to engagement.
 be issued and
request to pay
after sometimes.
Here, self-
interest threat
has been
occurred
because audit
team has
accepted the
illegal dealing
with the clients
and also actual
audit report has
not been
reflected in the
financial
statement of the
business.

Question Two
Material misstatement is information in financial statements which is incorrect which can
impact on the economic decision of someone who relies on those statement.

The two assets accounts which are at risk of material misstatements are Inventory and sale or
return debtors.
Inventory: As the company has 30 days sales or return policy which allows consumers to
return the stock. It makes difficult to keep track of precise stock and creates an inherent risk
of inventories being understated in the record.
Sales or return debtor: The complete records of sales or return debtor has to be maintained by
the company, sales and return debtors have to be obtained from debtors which creates an
inherent risk of material misstatement since balances due to be received and paid may not
match with the records. Moreover, due to the lack of internal control system increases control
risk making sales or return debtor susceptible toward material misstatement.
B) while comparing the current year financial statement with previous years, the significant
increase in bank overdraft can be found. Bank overdraft is increased by 1016.54% compared
to 2019. As a result of it there is increased in current liabilities whereas current ratio is
declined compared to previous year. Similarly, due to increase in price of material, labour,
overheads which is higher than previous year, which resulted to net loss in the year 2020.

C) The going concern arises when the company is no more able to continue further its
operations in an economical manner. As per ASA 570.10, the auditors have to assess the risk
associated with going concern problem in the planning phase. Two factors thar may bring
into questions the going concern of the ability of the Best.
Loss: Due to increase in the cost of material and labour cost, the best company has lower
operating profit compared to previous year. The best’s profit has been in decreasing trend and
eventually incurred loss in 2020. If this continues to happen, the Best company cannot be
able to continues with its operation. The company must find out alternatives to be safe from
liquidation.
Decrease in sales and increase in sales return can be found in company’s financial report
which has resulted loss in 2020. The company must change the policy or introduce attractive
offers. Similarly, there is drastic increase in bank overdraft in 2002 which shows that the
company is running and dependent on debt.

Question Three:

Part of auditor’s responsibility:

2: The auditor is responsible for maintaining professional scepticism throughout the audit,
considering the potential for management override of controls and recognising the fact that
audit procedures that are effective for detecting error may not be effective in detecting fraud.
3: Respond appropriately to fraud or suspected fraud identified during the audit.
5. Make enquiries of management, and others within the entity as appropriate, to determine
whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.
7. Test the appropriateness of journal entries recorded in the general ledger and other
adjustments made in the preparation of the financial statements.
8. Determine whether management has sufficient skills to prevent and detect fraud (e.g.,
through proof of attendance at appropriate industry seminars and workshops, or past
experience with fraud).
9. Obtain a copy of the client’s code of ethics document, and ensure employees have access
to it.
10. Evaluate whether the accounting policies selected by the entity may be indicative of
fraud.
Not Part of auditor’s responsibility:
1.Ensure all material fraud instances are detected.
Explanation: According to ASA240, owing to the inherent limitations of an auditor, there is
an unavoidable risk that some material misstatements of the financial report may not be
detected.
4. A discussion among all of the audit firm’s staff on how and where the entity’s financial
statements may be susceptible to material misstatements due to fraud, including how fraud
might occur.
Explanation: ASA 315 requires a discussion among the engagement team members and a
determination by the engagement partner of which matters are to be communicated to those
team members not involved in the discussion,
6. Obtain sufficient appropriate audit evidence to confirm all potential fraud instances have
been uncovered and their impacts considered.
Explanation: Auditor cannot confirm all potential fraud instances have been uncovered.
According to ASA240, owing to the inherent limitations of an auditor, there is an
unavoidable risk that some material misstatements of the financial report may not be
detected.
Explanation of auditor’s responsibility:
--An auditor conducting an audit in accordance with Australian Auditing Standards is
responsible for obtaining reasonable assurance that the financial report taken as a whole is
free from material misstatement, whether caused by fraud or error. Owing to the inherent
limitations of an audit, there is an unavoidable risk that some material misstatements of the
financial report may not be detected, even though the audit is properly planned and
performed in accordance with Australian Auditing Standards. (ASA 240)
--When obtaining reasonable assurance, the auditor is responsible for maintaining
professional scepticism throughout the audit, considering the potential for management
override of controls and recognising the fact that audit procedures that are effective for
detecting error may not be effective in detecting fraud. (ASA 240)
-- Professional scepticism means that the auditor recognizes the overall possibility that a
material misstatement due to fraud could occur, regardless of the auditor's prior experience
of the client's integrity and honesty.

-- ASA 315 requires a discussion among the engagement team members and a
determination by the engagement partner of which matters are to be communicated to
those team members not involved in the discussion.

-- Another important responsibility of the auditor also stems from ISA 315, which is about
Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and Its Environment. This requires the auditor to evaluate the overall susceptibility
of their clients to fraud. The engagement team should also obtain information for use in
identifying the risk of fraud when performing risk assessment procedures.

Question Four (part A):

Answer:
As per Accounting standards and auditing standards materiality is simply a matter of
judgement. Information deemed to be material if its misstatement including omission, either
individually or aggregate influence the economic decision of investors because these
decisions are analyse based upon financial report. It has a pervasive effect in financial
statement of audit. In sum, any information which is important to the investor in making
decision makes it materiality. Materiality is particularly important for auditor in two stages
first planning stage and final evaluating stage. Materiality depends upon both quantitative
size and qualitative nature of the misstatements (Howard B. Levy & Julian Jacoby, 2021).

Answer B.
Materiality judgments involve an assessment of both quantitative size and qualitative nature
of the misstatements. AASAB 1031 provides some quantitative threshold guidance to help to
determine materiality. Quantitative information includes basically in monetary value.
Materiality level in quantitative information is generally governed by applying percentage to
the benchmark. Auditor selects the appropriate benchmark to the entity for evaluating
materiality at financial report. In this context, following benchmark can be used to evaluate
materiality as per AASAB:
 An amount that is equal or higher than 10% of the appropriate base amount is
presumed as a material.
 An amount that is equal to or less than the 5% of the appropriate base amount is
presumed not to be a material.

Qualitative approach is pivotal to evaluate overall nature of the enterprises. Auditor generally
concerned only with the misstatement that are quantitative material. Quantitative approach
does not provide the overall results in the financial report. But qualitative approach provides
all the misstatement in financial statement of the enterprises which quantitative cannot
provide. Qualitative factors also applicable in materiality level for particular transaction,
account balance or disclosure. The auditor must consider qualitative factors which impact on
the materiality of misstatement such as:
 The significance of the misstatement to the particular entity
 The pervasiveness of the misstatement and
 The effects of misstatement on the financial report.

Answer c:
Materiality concept extends to an auditor’s responsibility to provide reliable financial
statement to users including the qualitative and quantitative elements. With the use of
Materiality judgement in the financial statement, Auditors will become more aware of the
company not disclosing materiality in the financial statements to the stakeholders,
shareholders and users (Cooper et al., 2015). It is believed that Auditors are supposed to be
more responsible to investors because it is investor’s right to know the level
of materiality applicable and any anomalies in the financial statements which are considered
seriously and grabbed to management's attention.  It is said that Auditors should have a
professional scepticism attitude which can used to make conclusions when reporting, in
order to find out whether the management has knowingly misrepresented and deemed
the fraudulent financial reporting practice to be a result of reported profits or not
(AASB,2013). The accountant considers that the industry practice represented by the client is
cautious if it contravenes the accounting standards and that misrepresentation of contingency
policy implies a weakness in the entity's internal control system.

Question Four (Part B)

Due to the globalisation of business activity, it has created pressure to the harmonisation of
the accounting and auditing standards. All the investors from different part of world have
creating their unique auding and accounting standards. Post withdrawn AASB1031, all
Australian auditors are using the international standards which gives the same result in audit
assessment of materiality misstatement. According to Wyatt (1989) harmonisation is not only
philosophical notion to discuss but it is also an important ingredient for international
business.
There is some criticism regarding the accounting standards. Auditors believe that withdrawn
AASB 1031 has made significant impact on materiality guidance for dealing with financial
statement in Australia. However, if the auditor uses only one international accounting
standards it will be benefit to the auditor because there will be not any confusion prior to the
financial statements, and it helps to maintain great uniformity of audit opinion among the
auditors. Hence, post withdrawn of AASB1031, it will bring equity among the auditor instead
disparity/ heterogeneity to auditors’ assessment of misstatement of materiality standards
across all over the countries (Montoya del Corte et al., 2010).

Answer B
The removal of qualitative and quantitative guidelines may have created a gray area for many
auditors who want clear instructions to determine what is material. The lack of this makes it
difficult for auditors to determine numerical criteria, as qualitative factors may be
obscure, and it is necessary to use well-established knowledge that can vary considerably
from auditor to auditor (Popa et al., 2010). In particular, for auditors, their prestige and
potential inquiries underscore the need to be complete and accurate in their judgments. In the
situation, you have the flexibility and freedom to use whatever method you feel is right.
C
Experienced auditors and corporate auditors adhere to the conservative approach of applying
financial reporting standards, which has potential implications for financial reporting. In
doing so, the auditor's decision may compromise the content of the company's financial
reports and lead to results verified by inquiries and questions as to whether it meets the
utility's purpose. Furthermore, Implication of materiality would help financial report to be
error free and would show true picture of business position to management and stakeholders.
 Reference:
Cooper, B., Coram, P., Leung, P., & Richardson, P. (2015). Modern auditing et assurance
services. Wiley.

Howard B. Levy, C., & Julian Jacoby, C. (2021). The Materiality Mystery - The CPA Journal.
The CPA Journal. Retrieved 9 May 2021, from https://www.cpajournal.com/2016/07/06/the-
materiality-mystery-2

Montoya del Corte, J., Martínez García, F., & Fernández Laviada, A. (2010). Effective use of
qualitative materiality factors: evidence from Spain. Managerial Auditing Journal, 25(5), 458-
483. https://doi.org/10.1108/02686901011041849

Popa, E., Şpan, A., & Fulop, T. (2010). Qualitative Factors Of Materiality - A Review Of
Empirical Research. Annales Universitatis Apulensis Series Oeconomica, 1(12), 274-280.
https://doi.org/10.29302/oeconomica.2010.12.1.27

Wyatt, A. 1989. Commentary on International Accounting Standards: A New Perspective,

Accounting Horizons, 3, 3: 105-108.