auditing

HI6026 Audit, Assurance and Compliance

TRIMESTER 3, 2016

INDIVIDUAL ASSIGNMENT 1

Assessment Value: 20% Instructions:

 This assignment is to be submitted in accordance with

assessment policy stated in the Subject Outline and Student

Handbook.

 It is the responsibility of the student who is submitting the work, to

ensure that the work is in fact her/his own work. Incorporating

another’s work or ideas into one’s own work without appropriate

acknowledgement is an academic offence. Students should

submit all assignments for plagiarism checking on Blackboard

before final submission in the subject. For further details, please

refer to the Subject Outline and Student Handbook.

 Answer all questions.

 Maximum marks available: 20 marks.

 Due date of submission: Week 6.

Assignment Question ( 1) ( 10 Marks)

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.