Semester 3 2013-14


This assignment is to be completed in groups of three and comprises twenty per-cent of the

marks for this course. There are 4 parts to discuss.

Assessment Criteria:

Student work will generally be assessed in terms of the following criteria:

1. Effectiveness of communication – ie readability, legibility, grammar, spelling, neatness,

completeness and presentation will be a minimum threshold requirement for all written

work submitted for assessment.Work that is illegible or incomprehensible and does not

meet the minimum requirement will be awarded a fail grade.

2. Demonstrated understanding – This will be evidenced by the student’s ability to be

dialectical in the discussion of contentious issues.

3. Evidence of research – This will be evidenced by the references made to the statutes,

auditing standards, books, journal articles and inclusion of a bibliography.


1. All written work must conform with the University of Ballarat General Guide for the

Presentation of Academic Work.

2. For all written work students must ensure that they submit their own original work. Any

act of plagiarism will be severely penalised.

Plagiarism is presenting someone else work as your own and is a serious offence with serious

consequences. As set out in the University Regulation 6.1.1, students who are caught

plagiarising will, for a first offence, be given a zero mark for that task. A second offence will

result in a failing grade for the course(s) involved and any subsequent offence will be referred

to the Student Discipline Committee. Student must be aware of the University Regulation 6.1.1

Student Plagiarism, available at The

link to the library website for more information is:

Students must:

? fully reference the source(s) of all material, even if you have re-expressed the ideas,

facts or descriptions;

? acknowledge all direct quotations; and

? not submit work that has been researched and written by another person.

The Business School

BUACC3701: Auditing

Note – You will need to resource beyond the identified documents

PART A. (5 marks)

Auditor conservatism following audit failures

Stephan A. Fafatas

Williams School of Commerce, Economics and Politics,

Washington and Lee University, Lexington, Virginia, USA


Findings – Empirical results indicate that auditor response to audit failure has

changed over time. Auditors implicated in audit failure events occurring in the post-

Enron and Sarbanes-Oxley period enforce more conservative accounting choices in

the year following the event. Specifically, clients of the implicated firm’s office

report a significant decline in discretionary accounting accruals relative to clients of

other auditors in the same city location. However, a significant change in client

discretionary accounting accruals is not found following audit failures that occurred

prior to 2001, the year of the Enron bankruptcy.

Under GAAP a company’s reported net income includes both an operating cash

flow component and a component related to accounting accrual adjustments. The

amount and timing of these accrual adjustments are subject to management’s

discretion over accounting policies

Auditor Conservatism after Enron

Dorothy A. Feldmann , William J. Read


Corporate scandals and the resulting passage of the Sarbanes-Oxley Act

(SOX) in 2002 significantly affected the auditing profession. The quality of

financial statement audits was called into questioned and the media and

regulators held audit firms responsible. Several studies found evidence of an

increase in the issuance of going-concern opinions after the passage of SOX

relative to earlier time periods (Geiger et al. 2005; Nogler 2008; Myers et al.

2008). Auditors, it appears, behave more conservatively when the profession

is in the headlines.

Discuss how the auditing profession behaved after the Enron collapse and the

introduction of the Sarbanes-Oxley legislation.

PART B. . (5 marks)

Financial crisis and the silence of the auditors

Prem Sikka

Accounting, Organisations and Society (2009)


Against the backdrop of the current financial crisis, this paper seeks to stimulate debates about

contemporary auditing practices. It notes that many financial enterprises have sought state

support within a short period of receiving unqualified audit opinion. Auditors collected large

amounts in audit and non-audit fees. The events raise questions about the value of company

audits, auditor independence and quality of audit work, economic incentives for good audits

and the knowledge base of auditors.


Accountants, as auditors, have cemented their status and privileges on the

basis of claims that their expertise enables them to mediate uncertainty and

construct independent, objective, true, and fair accounts of corporate affairs.

This expertise, it is claimed, enables markets, investors, employees, citizens,

and the state to limit and manage risks. Such claims, however, are precarious

as measures of revenues, costs, assets, liabilities, and profits are contested

technically as well as politically and also because capitalist economies are

inherently prone to crises (O’Connor, 1987). The claims of expertise are

frequently punctured by unexpected corporate collapses, frauds, and failures.

Such events fuel the suspicions that auditors lack the requisite independence,

expertise and incentives to construct the promised ‘true’ and ‘fair’ account of

corporate affairs.

Accounting firms have been accused of delivering ‘dodgy auditing’ Discuss

PART C. (3.5 marks)

None of the Big Four accounting firms is a single firm; rather, they are accounting networks.

What is an accounting network and what benefits are there for the big accounting firms?

Discuss and explain

PART D. (6.5 marks)

Extracted from Australian Government – The Treasury

Auditors are currently exposed to unlimited liability for professional default.

Auditors, and other professional groups have traditionally dealt with their unlimited liability

exposure for professional default through professional indemnity insurance. Professional

indemnity insurance insures against loss arising from professional services offered by the

insured professional.

Australia is currently experiencing a ‘hard insurance market’, that is, a market characterised

by tougher risk selection by insurers. The recent submissions by the two professional

accounting bodies to the ACCC indicate that the position in relation to the availability and

cost of professional indemnity insurance has deteriorated in the current ‘hard insurance


The backdrop to the CLERP 9 consideration of the issues relating to the professional liability

of auditors is the important role that the independent audit function performs in relation to

Australia’s corporate governance framework and the efficiency of the capital market.

The following policy options have been raised by the accounting profession for the purpose

of establishing an appropriate framework to address the profession’s concerns in relation to

the present system of auditor liability:

? The incorporation of auditors.

? The law of joint and several liability in relation to actions for negligence causing property

damage or purely economic loss and its replacement by proportionate liability.

? The capping of professional liability within the framework of State and Territory

Professional Standards legislation.

Discuss each of the aforementioned three points (i.e. could or should these changes be