HI6026 Audit, Assurance and Compliance

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.  
Required 
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 
time.  
(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.  
Required:  
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



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