Define actual and perceived independence
Course:- Auditing
Reference No.:- EM131287061

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Assignment Question ( 1)

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 )

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.


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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The said paper consist of discussion of audit of financial statement. In the said paper we have discussed how the audit of financial statement is conducted and how it is beneficial to the organization and the investors of the company. Here the duties, roles and responsibility of auditor is discussed. Secondly a case study is been discussed and several question is being resolved from audit point of view.

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Audit is an independent examination of the financial statement conducted by the auditor to provide opinion, whether the financial statement is free from material misstatement and show the correct financial position of the company.

Management of a concern is responsible for preparation of financial statement, auditor is only responsible for expressing its opinion on such statement. Interested people of the company relies on the opinion made by the auditor, thus it is important for the auditor to clearly understand the financial position of the company before making any comment on them. However due to inherent limitation of audit, it is not expected from auditor to detect all the error and misstatement. It is important to estimate the provision on doubtful debt for the purpose of analyzing the account receivable presented in the balance sheet and also correct recognition of provision disclosed in the income statement.
Professional negligence during an audit means the situation where auditor dose not exercise required diligence and thus overlook the material aspect affecting the financial statement of the company. If the certain misstatement cannot be identifies in spite of the due diligence exercised by the auditor, he would not be held guilty of non-performing its duty effectively.

Following are the situation in which auditor would be consider as negligent:

1. A inability to show suitable expert doubt, which is especially hazardous when shown by the senior individuals from the review group;

2. An inability to set and utilize a suitable materiality level which then undermines the entire review process;

3. A inability to take after the association's review rules and manual;

4. An inability to explore blunders emerging in the example amid review testing;

5. A disappointment by the review accomplice to explore inquiries or survey focuses raised by review colleagues;

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    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.

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