Would your answer change if EFL had written to King &amp 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?

Impulse Pty Ltd (Impulse) is an entertainment system manufacturer thatwas established in 2005. Your audit firm King & Queen have been theauditor of Impulse since its formation. The audit report for the year ended30 June 2012 was unqualified. Although Impulse had been sufferingliquidity problems with a drop in both debtors’ turnover and inventoryturnover, King & Queen did not consider that any additional audit workwas necessary in regard to the valuation of these assets. In August 2012,Impulse obtained a large loan from a finance company, Easy FinanceLimited (EFL), to provide additional working capital. However, Impulsecontinued to experience severe trading problems and was placed inliquidation in December 2012.King & Queen has been notified by EFL’s solicitors that they are takingaction against your firm based on the audit of the 30 June 2012 financialreport. EFL claim that the cause of Impulse’s failure related to theinadequate provision for doubtful debts and a fall in the value ofinventories on hand, and that these problems were evident at 30 June2012, but had not been adequately dealt with in the financial report dueto your negligence. They also claim that they would not have given theloan to Impulse if the 2012 financial report had been qualified.Requireda) Would King & Queen be liable to EFL? Provide specific casereferences to support your answer.b) Would your answer change if EFL had written to King & Queenadvising you that they intended to make a loan to Impulse andwere relying on the 2012 audited financial report to assist them inmaking their decision?
Assignment Question ( 2 ) ( 10 Marks)The following are independent situations:(i)Bob is an audit assistant currently undertaking university studies. Whileauditing the books of Club Casino, he comes across certain financialinformation that he believes will assist him in completing one of hisuniversity assignments. He copies the information and uses it in hisassignment, carefully removing all reference to Club Casino in order topreserve the client’s confidentiality.(ii)Wendy has been the engagement partner on the Ace Limited audit fora number of years. Some time ago, Ace’s long-standing companysecretary retired and Ace took six months to find a replacement. At Ace’srequest, Wendy performed company secretarial duties for this period oftime.(iii)Leo is the eldest son of the factory foreman of one of your firm’s majoraudit clients, Precision Machinery Limited. During vacation work, L isassigned to the audit of Precision Machinery. Leo’s work comprised testingthe internal controls of the cash payments system.(iv)Chan & Associates are auditors of Classic Reproductions Pty. Limited, alarge furniture wholesaler currently experiencing financial difficulties.Classic Reproductions is a significant client of Chan & Associates and havenot paid their audit fee for the past three years. The audit partner recentlythreatened 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 fullconsideration of the outstanding fees, even though the furniture was onlyworth 50% of the balance. As a thankyou present, Classic Reproductionsgave the partner a 25% shareholding in an unrelated listed company. Atpresent these shares are worth $1,000. Chan & Associates do not act asauditors of this company.Required:a) Define actual and perceived independence, and explain theimportance of each.b) For each of the above independent situations list any professionalstandards and regulatory requirements breached and discusspossible alternative courses of action the auditor should have takenin order to properly discharge their professional responsibilities.

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