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Impulse Pty Ltd (Impulse) is an entertainment system manufacturer that
was established in 2005. Your audit firm King & Queen have been the
auditor of Impulse since its formation. The audit report for the year ended
30 June 2012 was unqualified. Although Impulse had been suffering
liquidity problems with a drop in both debtors’ turnover and inventory
turnover, King & Queen did not consider that any additional audit work
was necessary in regard to the valuation of these assets. In August 2012,
Impulse obtained a large loan from a finance company, Easy Finance
Limited (EFL), to provide additional working capital. However, Impulse
continued to experience severe trading problems and was placed in
liquidation in December 2012.
King & Queen has been notified by EFL’s solicitors that they are taking
action against your firm based on the audit of the 30 June 2012 financial
report. EFL claim that the cause of Impulse’s failure related to the
inadequate provision for doubtful debts and a fall in the value of
inventories on hand, and that these problems were evident at 30 June
2012, but had not been adequately dealt with in the financial report due
to your negligence. They also claim that they would not have given the
loan to Impulse if the 2012 financial report had been qualified.
a) Would King & Queen be liable to EFL? Provide specific case
references to support your answer.
b) Would your answer change if EFL had written to King & Queen
advising you that they intended to make a loan to Impulse and
were relying on the 2012 audited financial report to assist them in
making their decision?
Assignment Question ( 2 ) ( 10 Marks)
The following are independent situations:
(i)Bob is an audit assistant currently undertaking university studies. While
auditing the books of Club Casino, he comes across certain financial
information that he believes will assist him in completing one of his
university assignments. He copies the information and uses it in his
assignment, carefully removing all reference to Club Casino in order to
preserve the client’s confidentiality.
(ii)Wendy has been the engagement partner on the Ace Limited audit for
a number of years. Some time ago, Ace’s long-standing company
secretary retired and Ace took six months to find a replacement. At Ace’s
request, Wendy performed company secretarial duties for this period of
(iii)Leo is the eldest son of the factory foreman of one of your firm’s major
audit clients, Precision Machinery Limited. During vacation work, L is
assigned to the audit of Precision Machinery. Leo’s work comprised testing
the internal controls of the cash payments system.
(iv)Chan & Associates are auditors of Classic Reproductions Pty. Limited, a
large furniture wholesaler currently experiencing financial difficulties.
Classic Reproductions is a significant client of Chan & Associates and have
not paid their audit fee for the past three years. The audit partner recently
threatened to resign from the audit if the outstanding fees were not paid.
To prevent this occurring, Classic Reproductions offered to supply Chan &
Associates with new office furniture. The partner accepted this offer in full
consideration of the outstanding fees, even though the furniture was only
worth 50% of the balance. As a thankyou present, Classic Reproductions
gave the partner a 25% shareholding in an unrelated listed company. At
present these shares are worth $1,000. Chan & Associates do not act as
auditors of this company.
a) Define actual and perceived independence, and explain the
importance of each.
b) For each of the above independent situations list any professional
standards and regulatory requirements breached and discuss
possible alternative courses of action the auditor should have taken
in order to properly discharge their professional responsibilities