HOLMES

INSTITUTE

FACULTY OF
HIGHER
EDUCATION

HA3032 Auditing
Audit regulation, Structure of the profession and auditor's liability.

Ethics, Independence and Corporate Governance

Question 1

Outline the essential attributes of a profession and explain how these attributes relate to the
auditing profession?

Solutions

The essential attributes of a profession are systematic theory, professional authority, community sanction, regulative
codes and a culture. The auditing profession satisfies these essential attributes as follows:

• Systematic theory: The underlying theory of the auditing profession consists of auditing theory and
accounting theory. Knowledge of systematic theory can be best achieved through formal education, and a
tertiary education is considered a prerequisite for people entering the auditing profession. They are then
required to complete the education program of one of the three accounting bodies (Chartered Accountants
Program, CPA Program or IPA Program) and to undertake continuing professional development throughout
their audit career.

• Professional authority: To be a registered company auditor a person must, among other things, be a member
of one of the three recognised accounting bodies, each of which controls admission to their own organisation.

• Community sanction: In Australia, only registered company auditors are permitted to render external
auditors’ opinions on the financial reports of companies.

• Regulative codes: Regulation of the auditing profession is directed at two areas: technical and ethical.
Auditing standards govern the technical work of the auditor, while the ethical rules govern the auditor’s
ethical behaviour.

• Culture: Auditors are expected to behave in a way that is in accord with the Code of Ethics for Professional
Accountants, including exhibiting integrity, independence, objectivity and confidentiality and acting in the
public interest. New members of the profession must learn what is expected of them or they will not be
accepted as colleagues by their associates.
Question 2

Describe the role of the AUASB and explain why it was set up as an independent body. Describe
the role of ASIC and explain how this role affects auditors.

Solutions
The role of the AUASB is to develop and maintain auditing and assurance standards. It was
established as an independent statutory body following CLERP 9 to establish its independence from
the auditing profession and thereby give more credibility to its standards.

ASIC is responsible for uniformity in the administration of legislation in relation to companies and
for policy based on investor protection. It also has the following responsibilities relating to oversight
of the audit function:
• registration of auditors
• enforcing auditor independence
• assessing whether auditors meet the registration requirements concerning practical
experience, education and competency standards
• post-registration supervision through an audit inspection program to ensure audit quality

• receiving auditors’ annual statements concerning the nature and complexity of audit work
undertaken and compliance with any conditions of registration
• referring matters with respect to the conduct of auditors to the Companies Auditors
Disciplinary Board
Question 3
What are Chartered Accountants ANZ, CPA Australia and the IPA, and what is their role?

Solutions
There are three major professional accounting bodies in Australia: Chartered Accountants Australia
and New Zealand (Chartered Accountants ANZ), CPA Australia and the Institute of Public
Accountants (IPA). Membership of any of these bodies by public accounting practitioners, although
voluntary, is necessary to satisfy the qualification element of the registration of auditors. To
maintain membership of these bodies, members are required to engage in continuous professional
development. Membership of these bodies provides for the setting of standards of competence in
the accounting and auditing professions, and enables partial self-regulation. These bodies represent
the interests of accountants and auditors with government and other groups, and are responsible
for the development and advancement of the accounting and auditing profession in Australia and
overseas. Members of the accounting bodies represent them on the key standard-setting bodies,
such as the AUASB, AAASB and APESB.
Question 4
Explain the role that auditing standards have with respect to the auditor exercising reasonable
care and skill.

Solutions
Reasonable care and skill is the standard of skill and care appropriate to the auditor’s professional
status, which is considered reasonable in the circumstances as they then exist. Auditing standards
provide a guide as to what is meant by reasonable care and skill. However, the courts, in cases such
as Pacific Acceptance, have indicated that compliance with professional standards will provide
persuasive rather than conclusive evidence of reasonable care and skill. The courts will assess the
reasonableness of the standards under specific circumstances, and therefore the courts will
determine what is reasonable care and skill. Further, professional standards and practice must
reflect changes in the economic and business environment if they are to be used as a guide to what
constitutes reasonable care and skill.
Question 5
Outline the matters that must be proved before a claim for negligence against an auditor may be
successful?

Solutions
The matters that must be proved to the satisfaction of a court before a claim of negligence can
succeed are that:
• a duty of care was owed to the plaintiff (that is, there was reasonable foreseeability and
proximity)

• the auditor was negligent (that is, reasonable care and skill were not exercised by the
auditor)

• the plaintiff relied on the auditor

• the plaintiff suffered a quantifiable loss as a result of the auditor’s negligence
• the loss was suffered as a result of relying on the auditor (that is, causation).
Question 6
EASY Trevor Leader is the staff training manager at a mid-size audit firm. A new graduate has
asked him why staff training is important to auditing being recognised as a profession.

Required:
Explain to the graduate why staff training is important to maintaining the professional status of
auditors.

Solutions
Staff training is important to maintaining the professional status of the auditor as it is necessary to:

• maintain and improve technical knowledge and professional skills, including keeping up with
the pace and volume of changing technology and knowledge, and

• provide reasonable assurance to the community that members have the technical
knowledge and professional skills to perform the services they provide.

Question 7
EASY You are at a social function discussing a corporate scandal when one of your friends says
‘auditors are supposed to provide assurance to shareholders, but they face little discipline from
their profession when things go wrong’.

REQUIRED
Do you agree with this criticism of the accounting bodies disciplinary procedures? Explain.

Solutions
No. The accounting bodies have disciplinary procedures supported by adequate potential sanctions,
including fines, suspension and cancellation of membership. All complaints are investigated and
where necessary referred to a Disciplinary Tribunal. Suspension or cancellation of membership
would prevent the person being a registered company auditor.
Question 8
EASY Quality control procedures are necessary to ensure that auditors fulfil their responsibilities.

REQUIRED
Discuss whether there is any one quality control procedure that is more necessary than any other.
Solutions

Quality control procedures work together to ensure the quality of the services offered by the audit
firm and as such should not be considered as a set of options from which a firm can choose. Instead,
each firm should look to the general policies and procedures set out in ASA 220 (ISA 220), APES 320
and ASQC 1 (ISQC 1) and determine how best to implement those procedures in their firm. While
some firms may decide to devote more resources to certain areas (such as training) in order to bring
them up to standard and to maintain that standard, no one policy is more important than any other.
Question 9
You are the managing partner at Greenberg & Associates, a medium-sized firm located in the
Perth CBD. Two of your managers have decided to leave the firm to establish their own audit
practice. They have already obtained some clients of their own and have made no attempt to
poach any of your current clients. They expect to be extremely busy over the next year building
up their new practice. During their exit interview, you raise with them the issue of establishing
formal policies and procedures for their practice. They inform you that they have decided to put
those on hold until their client base is more established, as they believe it is more important to
have clients before policies, otherwise there may be no one to apply the policies to.

REQUIRED
Provide the two departing managers with your opinion concerning the appropriateness of their
approach to quality control for their new audit practice.

Solutions

The auditing standards apply to all audit and audit-related services, irrespective of the size of the
firm, how many clients it has or how long it has been established. Therefore, the approach of the
two managers for their new firm is inappropriate and in breach of the standards. ASA 220 (ISA 220)
states that the audit firm should implement quality control policies and procedures at both audit
firm level and individual audit level. If it does this, the new firm will ensure that it complies with
professional standards. The underlying objective of professional standards, as stated in APES 320
and ASQC 1 (ISQC 1), is that the new firm will consider the integrity of individuals when determining
its professional relationships and will be independent to the extent required by the ethical rules,
and that the practice will assure itself that its personnel will be competent and objective and will
exercise due professional care.
APES 320 and ASQC 1 (ISQC 1) also require that the objectives of the quality control policies to be
adopted by the firm incorporate:
• leadership responsibilities for quality within the firm
• ethical requirements
• acceptance and continuance of client relationships and specific engagements

• human resources
• engagement performance
• monitoring.
Of course, the nature and extent of the new firm’s quality control will be affected by the size and
the nature of the services offered.
The quality control policies and procedures must be set out in adequately vetted documents, by
means of preparing either:
• a quality control document that provides a detailed description of the policies and
procedures, or

• a summary statement of the quality control policies and procedures with references to
supporting information contained in manuals, memoranda or other technical literature of the
practice.

These policies and procedures should be reviewed on a continuing basis.