AF304

Auditing
Tutorial 3 Answers
Chapter 3
3.11 How does ethics apply to auditors?

3.14 Describe what is meant by independence in mind and independence in appearance.

3.17 Why did Arthur Andersen have so many audit failures, leading to its implosion
in 2002?

3.21 Professionalism

Brenda Jones is a newly qualified accountant who is carrying out her first audit as the in-
charge auditor for a construction company client that is engaged in a range of long-term
contracts. Brenda has little experience of these types of clients and the accounting
requirements in relation to long-term contracts. John Bull is the CFO of the client, he is
a busy man and has a notorious reputation for being unfriendly to auditors. You are
Brenda’s supervisor and it has become apparent that she has not got to grips with the
accounting issues involved and has avoided asking the necessary questions of John Bull
to gain an understanding of the company’s transactions and the necessary audit work
required to obtain evidence on the long-term contract transactions.

Required
Explain to Brenda the importance of professionalism, using the Code of Ethics for Professional
Accountants and particularly referring to its guidance on competence and give advice as to how
she should proceed.

3.22 Conflict of interests

Your firm, Earnest, Devoid and Couples, has been the auditor for many years of Barley
Gordon Ltd, which operates a large chain of electrical goods retailers across Australia
and New Zealand. The electrical goods retailing business is dominated by two major
players in the market, Barley’s, as they are affectionately known by the buying public,
and Duck Guys Ltd, or Duckies as they are known.
The market is very competitive with both companies engaged in significant television
advertising, price competition and other marketing activities in order to gain market
share, largely by attracting the customers from the other company.
You have recently been approached by the CFO of Duckies to carry out its year-end
audit. Duckies was attracted to your firm because of your extensive experience in the
industry.

Required
Explain the safeguards that could be put in place in relation to the conflict of interest arising
from the above.

3.23 Ethical issues

You are Mark Ouse, an audit senior with the firm Pull, Lift, Tug & Co. You are planning
the financial report audit of Nestree Ltd, a manufacturer of confectionery. The following
issues have arisen:
1. Arthur Stick, the Finance Manager of Nestree, was ill for three months of the year
and Eloise Lift, the engagement partner, received a request from Nestree to supply a
member of staff on secondment until Arthur was well. Eloise was only too happy to
help and Daisy Flute, a member of Pull, Lift, Tug & Co’s audit staff was seconded to
Nestree for three months. Nestree was happy with this arrangement and Eloise
enjoyed the additional fees this created for the firm. As a result of Daisy’s secondment
and the knowledge she now has about Nestree, Eloise is suggesting that she will be a
valuable member of the audit team for the current financial year’s audit.
2. From the review of the draft financials that Mark has received, Nestree appears to
take an optimistic approach to its valuation of development expenditure capitalised
in intangible assets. Executive remuneration includes a profit-related bonus.
3. Staff of Nestree are entitled to visit the company shop where defective confectionery
products or ‘seconds’ that do not make it past the company’s quality control
processes are available for purchase at a significant discount to normal retail prices.
Nestree has in the past invited the audit team to enjoy this benefit while it is attending
the company during its audit visit.
4. You are aware that Nestree’s Finance Director, Barbara Polo, plays on the same
softball team as Eloise Lift and recently spent a week with the team on a tour of
Vanuatu.

Required
Explain the ethical threats above and identify how they might be avoided.
3.30 Ethical issues

Noreen Parke has been working at Tony Young & Associates for 3 years. Noreen and her
husband, Tom, are both interested in environmental issues and have participated in
community work concerning the environment. During a pharmaceutical company’s
annual audit for the financial year ended 30 June 2015, Noreen notices the company had
recently changed its contractor for waste management to Dumpound Ltd. Noreen
happens to know, through her community activities, that Dumpound is being investigated
by the local council for the level of toxic waste at one of its sites.
The waste management contract between Dumpound and the pharmaceutical company
does not specify damages and has not been signed by Dumpound. The contract is for a
substantial amount and is valid for 3 years, and Noreen is concerned about the
implications. The local council carries out strict inspections and imposes heavy fines for
toxic dumping.
Noreen raises the issue with Tony, the partner in charge of the audit. ‘This is reality,
Noreen,’ Tony says. ‘As far as I am concerned, we are responsible for the correctness of
its financial report, and nothing else. Besides, you do not have the qualifications to judge
whether a company is a good corporate citizen or not. We are not concerned with the
business management.’ Noreen is told to mind her audit without raising any fuss.

Required
(a) Explain the ethical issues involved here.
(b) Recommend a course of action for Noreen.



Chapter 4
4.11 Discuss why auditors and accountants are engaged in assurance engagements other
than financial statement audits.

4.14 What is forensic accounting?

4.16 What are the likely factors that lead to fraud?

4.22 Assertion-based or direct reporting

There are different categories and different types of assurance engagements:

1. Assertion-based engagements and direct reporting engagements.
2. Absolute, reasonable, limited and no assurance engagements.
3. Positive form assurance and negative form assurance.
4. An audit and a review of a financial report.
5. General purpose financial reports and special purpose financial reports.
6. Prospective financial information and historic financial information.
7. Compliance, performance, forensic and continuous auditing.

Required
For each of the above explain in detail the characteristics of each item and the extent to which
they differ from one another.
4.24 Fraudulent expense claims

You have been approached by your client Stan Frank who runs small plumbing
business. Stan’s plumbers work on a range of small domestic jobs as well as large jobs
on constructions sites. It is not unusual for Stan’s staff to be required to stay away from
home during the week.
Stan has become concerned that the amount he has been paying for travel and
accommodation expenses for staff staying away has increased significantly and he
recently sacked a member of staff on suspicion of providing a false claim.
Stan has asked to have a meeting with you to discuss the problems he has found. He
wants you to carry out an investigation into possible fraudulent expenses claims.

Required
Prepare notes for your meeting with Stan that will allow you to understand the nature of the
engagement.

4.30 Environmental auditing

Required
(a) Explain the meaning of environmental auditing.
(b) List some standards that have been issued in relation to environmental auditing.
(c) Describe the types of tasks that may be involved in environmental auditing.