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Topic: Auditor’s Public Interest Responsibilities and Audit Quality

In a recent interview with ABC news, the now former Chairman of the Australian Securities and Investment Commission (ASIC) Greg Medcraft warned that:

“We don't want to have another Enron. And the key to not having another Enron is making sure auditors do their job and to get assurance that financials are free of material misstatement" 

Enron was an energy, commodities, and services company based in Texas, USA. It was founded in 1985. Prior to its bankruptcy on 3rd December, 2001, Enron employed close to 30,000 staff and was a significant electricity, natural gas and communications company, which had reported revenue of nearly US$101 billion during the year 2000.

By the end of 2001, it was revealed that Enron's reported financial position was manipulated by a systematic and preconceived accounting fraud, known since as the “Enron Scandal”. Enron has since become known as an infamous case of audacious corporate fraud and corruption.

The scandal also brought into question the accounting practices and activities of many corporations in the USA and was a factor in the creation of the Sarbanes–Oxley Act of 2002. The scandal also led to the demise of the accounting firm, Arthur Andersen, which was Enron's auditor.

In more recent times, according to ASIC, based on samples of key audits performed by Deloitte, KPMG, PWC and Ernst & Young, over an 18 month period up to December 2016, 23% had not provided reasonable assurance that accounts were accurate or free of misstatements.

As stated in the Accounting Professional and Ethics Standards Board (APESB) APES 110 Code of Ethics for Professional Accountants, under Section 100 Introduction and Fundamental Principles,

“A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest.”

When sub-standard audits are performed and reasonable assurance cannot be reliably ascertained, there are consequential risks for key stakeholders, including auditors. In light of this, perform the following key assignment tasks:

  1. Perform a key stakeholder analysis for an ASX listed company. Explain how the key stakeholders would be affected if material misstatements are not properly identified, disclosed or adjusted for in the finalised financial statements. What are the key risks posed to each key stakeholder you have identified?
  1. Consider the concepts of independence and “whistleblowing” in relation to auditors. How do these concepts relate to the public interest requirements mentioned in the APES 110 Code of Ethics for Professional Accountants document?
  1. What lessons can auditors learn from the Enron scandal and in particular from the behaviour of Arthur Andersen?
  1. With reference to the APES 110 Code of Ethics for Professional Accountants document and the ASIC website, research “audit quality” and discuss what auditors need to do to address the “warning” noted in the statement made by Greg Medcraft above.

Enron scandal and audit quality

After applying the applicable sub-standards of audit for concluding their performance on uncertainty in getting the assurance. It was analyse that the major stakeholders are open to risk. This includes the auditor as well. The base of the report is stakeholder analysis. The report provides the evaluation of the impact as the material misstatement is not identified. In the second part of the report concepts of APES 110 is discussed that focuses on the whistleblowing that is related to auditors including public interest.  In the last part of the report experiencing regarding the scandal of Enron is discussed with Arthur Andersen behaviour. The report is concluded stating the recommendations based on the G. Medcraft for the quality as well as steps that is be maintained and taken by an auditor.

The following are the stakeholders identified on the basis of scrutiny that is related to material misstatement.

· Government:

The entity had communicated both the state as well as central body of government about the numerous issues that were causing problems in their activities regarding operations. As the time is limited that to resources the company has problems to respond actively to the issues to the governing body. The inaccuracy in the tax calculation that is been presented in the fiscal reports of the company might sight that there prevails the chances of material misstatement. This signifies a threat alarm for the government.

· Suppliers

Any monetary loss and the deteriorating conditions persists in the company would affect the retail sector of the suppliers in Australia. This would create hurdle on the path of the company while writing off dues. The company aims out for results that are based on long-term basis providing advantage for suppliers through realising the debts. This would help in maintaining sustainability. This would reflect material misstatement on grouping the liabilities under long-term, valuing non-current assets as they are the matters of concern for suppliers. (Wong  & Millington, 2014).

· Shareholders

Computershare Investors Service Private limited supervises the share of the company. As every company Wesfarmers too hold annual generals in order to communicate with shareholders. The company conducts briefing sessions twice a year on every six months interval with its investors. Keen interest of the shareholder is learning about the competition prevailing among Australian sector in retailing, capital allocation method as well as separation of Coles. Detecting the material misstatement in this matter is vital as the decision of an investor is solely depend on financial report and this could fetch them low returns.

· Consumers and Employees:

Stakeholders and risks of material misstatement

The consumer of the company is supported through telephonic calls, emails, websites customer support messages, letters as well as in person meeting. Feedback to the customer is provided on working day as per their query responses are provided at beat to resolve their problems.  All the staffs get engaged in decision making. A survey is being conducted among the employees for their betterment, even though emails and whistle blow process is followed. The decision of consumers as well as employees is dependent on fiscal reports so there should not be any material misstatement.

Independence of external auditor is featured by the honour and objective approach towards the procedure of audit. The concepts indicates that auditor decision should be based on its independency and shall achieve the objective for which an audit is being conducted. The auditing profession is governed by the accounting ethics that emphasises on the concept of whistleblowing and independency of auditor. Independency would be reflected if auditor pinpoints the misstatement as soon as he identifies it. The commitment of auditor towards it profession is for its independent opinion. (Wong & Millington,2014).

The independent opinion on the whistle blow policy by the auditor would reflect on the direct as well as positive impact. The opinion of auditor shall reflect the intentions of whistleblowing.  Whistleblowing is defined as an agreement that gives the right to the workers of the company to report unethical practises prevailing in the company if the suspects or finds. Whistleblowing is a way out that helps in highlighting the unethical deed being practised in any company may it be public or private. This led the company in generating its loyalty including commitment towards loyalty.

The regulation APES 110 Code of Ethics for Professional Accountants issued by “Accounting Professional and Ethical Standards Board (APESB)”.  In accordance with Section 210.11.1 of APES 110, the present designated auditor shall seek the permission of the client to communicate with preceding auditor. If the client’s response is negative the designation of the auditor is wilted. In case the permission is grant all the required information shall be taken on writing by the preceding auditor to conclude the decision for designation. This has been introduced in order to protect the whistle blow policy related to reporting of misconduct as well as informing the same to the government. This has protected the right of speech as well as freedom of the worker along with contractors in a particular situation. Right of filing a complaint resists in the hand of whistle-blower having evidences that support breaches.

Whistleblowing and APES 110 Code of Ethics for Professional Accountants

 This has assisted in assuring the freedom of speech for the workers and contractors in specific in accordance with “Section 100.1 of APES 110” the breach could be:

  • Act, guideline or regulation
  • Gross fund excess
  • Gross mishandling
  • Exploitation of authority
  • Precise or considerable hazard to community security or well-being

Enron has been marked as globally biggest scandal among corporates. The experiences learnt by the auditor are listed as well as elaborated bellow:

The effective capital market is the reflection of correct representation of company`s accounts. Andersen the auditor of Enron addressed in its statement that the downfall that has occur is representing the whole profession. The auditor has been found to be guilty about Enron and laying the blame on the evidence of documents that has been presented in front of investigators. The reason behind the failure of audit is because of occupational association that has been manipulated due to disputes along with obligating incentives. The auditor is being appointed by the shareholder to present the true picture of the company financial. But actually the higher level of management had selected auditor and had become obliged. The secretarial entity are involved in recurrent vending of referring facilities to the audit customers and from time to time, the exterior auditors are conscripted in top administration places or interior auditors. Hence, it develops easiness for the entity to perform on the anxiety of the discrete audit companion of trailing a lucrative audit project. In dissimilarity to such a contextual, the review superiority is expected to grieve.

In this situation it is better to give the audit work to the government than providing to the private accounting body. This would involve inherent risk in respect to the auditor, also it is not sure that the government accounting body would also not be on the same line as private accounting body. By means of transitional move, it is obligatory to safeguard that the assortment of auditors make sure of not lie in the influences of the higher level of the body. In its place, the government organization would employee the auditors constructed on the grade on the condition by the organisation that would transmit on experiencing the audit remuneration. (Wong & Millington, 2014).

However, it indicates that there is a need of strict regulations for the profession regarding audit that constitutes of high disciplinary powers. There shall be banned imposed on the organisations providing consultancy services and other facilities to the clients. The auditors have successfully attain the way out from the regulation imposed on them through dominancy. The idea of rotation of auditors in every four year of gap so that auditors does not reflect their personal emotions at the time of their professional judgement.

The most practicable peer of the realm appraisal takes domicile when an organisation creates in to opinion at the records of a precursor. The Australian Securities and Investments Commission require to prohibition the repetition of the organisations employing auditors as employee along with supervisors from external audit firm. (Ellis, 2018).

From the Enron scandal auditor shall take into consideration the problems that is related to accounting standard.  The way of the firm does it audit needs attention in some of the areas including the treatment of balance sheet, accounting standards applicable in US as they are neglected highly as they are too much narrow that results in missing of wider aspects of principles. The reason of voluble awareness had suppressed the improvement of accounting standard the attempt taken by FASB. (Ellis, 2018). This gives the indication towards the requirement of regulating body to apply strict regulations that ensures principles for sound process of work. This would be more applicable if the standards are accepted globally.

The debacle of Enron pointed out the absent of efficient governance in high MN corporations. In the upcoming periods each different kind of balances along with payments have been developed in order to rely the supervisor of the firm. They play the role of managers for the stakeholders, are performing the same in reality. The powers of doing so rest in the hands of CEO for setting out the payment limit as per the stock holding capacity. (Australian Broadcasting Corporation, 2019)

The need of the system is focusing on the interest of the stockholders. There is a need of non-executive directors who can provide proper focus on the independent remuneration as well as audit committee in a science manner. So that job of every person can be well defined. So, there persist a need of better guidelines on which auditor and the entity can run smooth and comprehensive business operations. (Knechel and Salterio, 2016).

At the time of performing of audit performing of Enron Arthur Andersen was at the second position of being the oldest firm. It responsibility was to ensure to provide true and fair view about the financial statement along with the internal books of record. The public showed their interest to invest in the company on relying upon the opinion stated by Andersen that the reports were free of misstatement and represents the true view of the firm. There prevailed conflict of interest as he was the business partner of Enron. Some managers of Andersen were employed by Enron. Andersen did a mistake that he did not approach to Enron about their partnership formerly verifying of fiscal reports of the latter. As Andersen was found to be guilty for destructing the documents of Enron. This indicated the unethical practise opted by the auditor for millions. ( Bing, Huang & Zhu, 2014).

There was no definition that were given global recognition regarding the quality of audit, external audit facilities. These are taken into account that provides high level of professionalism regarding strict audit with accordance to accounting standards. The observation that can be concluded from the audit procedure are those element that includes information regarding the nature as well as degree of appreciated insights. Even the capability to coordinate facilities that fits appropriately with the matter across the globe. Australian Broadcasting Corporation. (2019)

As per to Greg Medcraft, there are probabilities so that Australia may take into consideration for meeting incidents like Enron if not the big four MNC accounting firm significantly develop their auditing standards. Even there was complain logged by the individuals that their accounts are not properly inspected by the auditor. A warning bell of financial danger.( Ellis, 2018).

As the case mentioned above if the issue is not bought under notices as soon as it prevails the rate of cases like Enron would increase more. To omit these scandals auditor need to be more potential to perform their duty so that no material misstatement shall be there in the financial statement. The auditor shall provide assurance regarding the statement that its true and view in its knowledge according to APES 110(2). It was noticed by Medcraft, that the reason behind the Enron scandal was lack of efficient audit. This indicates that auditor shall be more efficient while performing audit and shall not violate the responsibility of an auditor.

In one of the news article it was published that ASIC had reviewd the Key Audit Samples of one and half year till December 2016., framed by the big four audit firm. It concluded on reviewing that twenty three percent did not provide actual assurance that the fiscal statement that are been represented by the company are free from any material misstatement.  This signifies that the inefficacy of auditor in maintaining his professionalism or shows lack of knowledge to tackle the situations that throws challenges on professionalism of auditor. This can turn worse out in the coming time. (Fox, 2013).

The Enron 2002, scandal was due to fraud even the auditor Arthur Andersen was involved in the fraud. As soon as the matter was raised by the ASIC related to valuations of asset in the year 2016 Seven West Media and Nine Entertainment Company wrote the value of assets.

Medcraft, commented that ASIC had carried surveillances up to seven thousand, they conducted number of investigation and they banned hundreds of firms. More than eighty individuals were put behind bars as they submitted unfinished returns to the government.  The charges imposed on them was termed as criminal charges. This suggestion was identified by government as well as the fiscal enquiry body. Keeping the point highlind ethical auditing practise is recommended. ( Bing, Huang & Zhu, 2014).

From the declaration of Medcraft, it is flawless that once the firm comprise merely few persons owning the compulsory familiarity along with information to achieve the responsibilities of the inspection partner, revolving them potency not promise satisfactory precaution, as declared in in APES 110 as per prescribed section. In case, the autonomous supervisor has specified an exclusion from companion gyration in the appropriate authority, it converts conceivable for a separate to vacation as a key audit companion for overhead seven long years. Though, there requirements to be the attendance of alternative protections like self-governing exterior evaluation.

In APES 110 Section(100(1)), recommends the auditor to give his best to serve the interest of public would be secured. The duty of an audit firm member is to attain the trust regarding the interest of public for their assurance. Section 100(2c) defines safeguard as the essential to be pragmatic so that the intimidations could be eliminated or they could be minimised to a satisfactory gradation. In specific, safeguards are realistic when it is analysed that the intimidations are overhead the anticipated equal when near is no cooperation made with the foremost reviewing philosophies.

As a base on the statement of Medcraft, there is chance to avoid the crisis regarding finance. This can be only done if the Australian auditors walk on the ethical path to discharge their responsibility.  He or she shall possess the skills and knowledge to overcome such challenges. APES 110 directs the auditor to maintain cordial relationship between profession and personal. They are not allowed to leak out the confidential matters regarding the company they are conducting audit.( ASIC - Australian Securities and Investments Commission, 2019).  They should be unbiased while they frame their opinion. Their opinion shall present true and fair view about the presentation of the financial statement. It is necessary on the part of the auditor to follow the guidelines given to discharge their responsibilities so that they can present unbiased report. (Knechel & Salterio, 2016).


At end it can be stated that the chosen company Wesfarmers Limited has distinct level of stakeholders those has different requirement from the company. There could prevail negative effect to the stakeholders if there presents the material misstatements of the financial report as they are unable to take the right decision at right time. The auditor shall give high concentration in presenting its opinion regarding the statement of the company. The independency of auditor as well as whistleblowing has been proved to be the basic rule of auditing as a profession. Auditors were able to acknowledge numerous experience from the Enron scandal. Those scandal requires strict action as well as sets of rules for an auditor so that the common interest of conflict can be avoided. At last the opinion of Greg Medcraft was reviewed. Greg Medcraft, presented his thought of anxiety that in future Australia may face cases like Enron. To avoid such incident auditors shall need to implement their true and fair view along with performing unbiased audit. As the auditors have been highlighted and have gained the first place than the companies. Therefore, it is recommended that the auditor shall perform and adopt ethical means of discharging their duties and addressing unbiased as well true opinion.


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ASIC Home | ASIC - Australian Securities and Investments Commission . (2019). Retrieved 23 January 2019, from

Bing, J., Huang, C. X., Li, A., & Zhu, X. (2014). Audit quality research report. Australian National Centre for Audit and Assurance Research, Canberra.

Chou, D. C. (2015). Cloud computing risk and audit issues. Computer Standards & Interfaces, 42, 137-142.

Christensen, B. E., Glover, S. M., & Wood, D. A. (2013). Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), P36-P42.

Cohen, J. R., Hoitash, U., Krishnamoorthy, G., & Wright, A. M. (2013). The effect of audit committee industry expertise on monitoring the financial reporting process. The Accounting Review, 89(1), 243-273.

Dowling, C., Knechel, W. R., & Moroney, R. (2018). Public Oversight of Audit Firms: The Slippery Slope of Enforcing Regulation. Abacus, 54(3), 353-380.

Duncan, B., & Whittington, M. (2014, September). Compliance with standards, assurance and audit: does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.

Edgley, C., Jones, M. J., & Atkins, J. (2015). The adoption of the materiality concept in social and environmental reporting assurance: A field study approach. The British Accounting Review, 47(1), 1-18.

Ellis, R. (2018). Quality assurance for university teaching: Issues and approaches. In Handbook of Quality Assurance for University Teaching (pp. 21-36). Routledge.

Fox, M. J. (2013). Quality assurance management. Springer. Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., & Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297). Emerald Publishing Limited.

Knechel, W.R. & Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.

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