Solutions manual
to accompany
Audit and assurance
2nd edition
by
Leung et al.
© John Wiley & Sons Australia, Ltd 2023
, Chapter 4: Ethics and Client Evaluation
Chapter 4: Ethics and Client Evaluation
Review questions
4.11 What are the main Corporations Act requirements with regard to the
appointment, removal and registration of auditors?
s.301 – A company (except for a small proprietary company) must have its financial
reports audited.
Appointment
s.327A – Directors of public and large proprietary companies are required to appoint
an auditor within one month after the company is incorporated.
s.327B – The duration of the first appointment is only until the first annual general
meeting, where the members appoint the auditor.
Removal
s.329(1A) – An auditor may be removed from office by resolution of the company at
a general meeting, for which special notice has been given at least two months before
the meeting is held.
s.329(2) – A copy of this notice must be sent to the auditor and the ASIC.
s.329(3) – The auditor has seven days to make representation in writing, with copies
to be sent to all members entitled to attend the meeting.
Registration
s.1279 – There are a number of criteria that must be satisfied before an auditor may
apply to the ASIC to be registered.
s.1280 – Requirements to be suitably qualified.
s.324CH – Prohibits or disqualifies any person who is an officer of the company, a
partner of an officer of the company, an employer or employee of an officer of the
company, or a partner or employee of an employee of an officer of the company.
4.12 Why is independence crucial for an external auditor?
Independence is crucial for an external (independent) auditor because one of the key
reasons for appointing an auditor is associated with agency theory. Agency theory
suggests that there will be a demand for monitoring by someone outside of the
entity being audited. The value of the auditor to the entity is that the auditor is from
outside of the entity and can therefore comment objectively on the behaviour of
management. Therefore, the auditor’s independence is crucial. It should also be noted
that independence is important in both fact and appearance and this is reinforced by
APES 110, Code of Ethics for Professional Accountants. Regulators also
see the value of independence and therefore have included some statutory protection
in relation to the removal of auditors in the Corporations Act.
Independence is required so that the auditor will report in an unbiased manner to the
members and on any required regulatory matters to ASIC.
© John Wiley & Sons Australia, Ltd 2023 4.2
, Solutions manual to accompany Audit and assurance 2e by Leung et al.
Independence is particularly needed in dealings with management. ASA 200 states in
paragraph 15 “The auditor shall plan and perform an audit with professional
scepticism recognising that circumstances may exist that cause the financial report to
be materially misstated.”
4.13 Why must auditors follow Australian auditing standards?
There are a couple of major reasons why auditors must follow Australian auditing
standards:
(1) As members of the accounting profession, auditors must follow the standards.
APES 410 stipulates that compliance with auditing standards is mandatory — i.e. the
standards are enforceable under the Code of Ethics, which stipulates that non-
compliance can lead to disciplinary proceedings by the professional body to which the
auditor belongs.
(2) Legal enforceability
The importance of the auditing standards in Australia has been further enhanced by
the changes to make them legally enforceable. These changes were implemented as
part of the CLERP 9 initiatives to enhance the credibility of audited financial reports
in Australia. Auditing standards with the force of law are now issued by the Auditing
and Assurance Standards Board under s.336 of the Corporations Act, as discussed in
chapter 1. The force of law is by virtue of s.307A where it states, ‘the individual
auditor or audit company must conduct the audit or review in accordance with the
auditing standards’.
4.14 What are some of the benefits of an effective audit committee?
An audit committee consisting of non-executive directors should act as an
intermediary between management and the external auditor. The audit committee
usually has oversight responsibilities of the financial reporting and auditing process.
The auditor, therefore, needs to be less concerned about being replaced in the event of
a disagreement with management.
Other benefits include:
improving the credibility and objectivity of the accountability process
(including financial reporting);
assisting the board of directors to discharge its responsibility to exercise due
care, diligence and skill;
improving the effectiveness of the internal and external audit functions and the
communication between the board of directors and the external and internal
auditors;
facilitating the maintenance of the independence of the external auditor;
strengthening the role and influence of non-executive directors.
© John Wiley & Sons Australia, Ltd 2023 4.3
to accompany
Audit and assurance
2nd edition
by
Leung et al.
© John Wiley & Sons Australia, Ltd 2023
, Chapter 4: Ethics and Client Evaluation
Chapter 4: Ethics and Client Evaluation
Review questions
4.11 What are the main Corporations Act requirements with regard to the
appointment, removal and registration of auditors?
s.301 – A company (except for a small proprietary company) must have its financial
reports audited.
Appointment
s.327A – Directors of public and large proprietary companies are required to appoint
an auditor within one month after the company is incorporated.
s.327B – The duration of the first appointment is only until the first annual general
meeting, where the members appoint the auditor.
Removal
s.329(1A) – An auditor may be removed from office by resolution of the company at
a general meeting, for which special notice has been given at least two months before
the meeting is held.
s.329(2) – A copy of this notice must be sent to the auditor and the ASIC.
s.329(3) – The auditor has seven days to make representation in writing, with copies
to be sent to all members entitled to attend the meeting.
Registration
s.1279 – There are a number of criteria that must be satisfied before an auditor may
apply to the ASIC to be registered.
s.1280 – Requirements to be suitably qualified.
s.324CH – Prohibits or disqualifies any person who is an officer of the company, a
partner of an officer of the company, an employer or employee of an officer of the
company, or a partner or employee of an employee of an officer of the company.
4.12 Why is independence crucial for an external auditor?
Independence is crucial for an external (independent) auditor because one of the key
reasons for appointing an auditor is associated with agency theory. Agency theory
suggests that there will be a demand for monitoring by someone outside of the
entity being audited. The value of the auditor to the entity is that the auditor is from
outside of the entity and can therefore comment objectively on the behaviour of
management. Therefore, the auditor’s independence is crucial. It should also be noted
that independence is important in both fact and appearance and this is reinforced by
APES 110, Code of Ethics for Professional Accountants. Regulators also
see the value of independence and therefore have included some statutory protection
in relation to the removal of auditors in the Corporations Act.
Independence is required so that the auditor will report in an unbiased manner to the
members and on any required regulatory matters to ASIC.
© John Wiley & Sons Australia, Ltd 2023 4.2
, Solutions manual to accompany Audit and assurance 2e by Leung et al.
Independence is particularly needed in dealings with management. ASA 200 states in
paragraph 15 “The auditor shall plan and perform an audit with professional
scepticism recognising that circumstances may exist that cause the financial report to
be materially misstated.”
4.13 Why must auditors follow Australian auditing standards?
There are a couple of major reasons why auditors must follow Australian auditing
standards:
(1) As members of the accounting profession, auditors must follow the standards.
APES 410 stipulates that compliance with auditing standards is mandatory — i.e. the
standards are enforceable under the Code of Ethics, which stipulates that non-
compliance can lead to disciplinary proceedings by the professional body to which the
auditor belongs.
(2) Legal enforceability
The importance of the auditing standards in Australia has been further enhanced by
the changes to make them legally enforceable. These changes were implemented as
part of the CLERP 9 initiatives to enhance the credibility of audited financial reports
in Australia. Auditing standards with the force of law are now issued by the Auditing
and Assurance Standards Board under s.336 of the Corporations Act, as discussed in
chapter 1. The force of law is by virtue of s.307A where it states, ‘the individual
auditor or audit company must conduct the audit or review in accordance with the
auditing standards’.
4.14 What are some of the benefits of an effective audit committee?
An audit committee consisting of non-executive directors should act as an
intermediary between management and the external auditor. The audit committee
usually has oversight responsibilities of the financial reporting and auditing process.
The auditor, therefore, needs to be less concerned about being replaced in the event of
a disagreement with management.
Other benefits include:
improving the credibility and objectivity of the accountability process
(including financial reporting);
assisting the board of directors to discharge its responsibility to exercise due
care, diligence and skill;
improving the effectiveness of the internal and external audit functions and the
communication between the board of directors and the external and internal
auditors;
facilitating the maintenance of the independence of the external auditor;
strengthening the role and influence of non-executive directors.
© John Wiley & Sons Australia, Ltd 2023 4.3
