Name of the student: Aamir Iqbal

Student ID: VSS31013

Name of the course:
HI6036 Auditing, Assurance and Compliance S1
 Assignment Question 1

Q1: (a) would king and queen is liable to EFL? Provide

specific case references to your answer.
A)Our audit firm king and Queen LLP is facing potential liability which
could materialize if we found guilty or if we owed any duty of care to
impulse Co, solicitors auditors are fully liable to shareholders of
impulse co, because they owe duty of care and in case of any breach
or loss suffered by client (impulse co)and if impulse Co can prove this
in court then our firm king and queen would become liable and will
suffer penalties and fines or may be severe punishment for frauds like
insider trading and material losses, in case of easy finance limited EFL
our firm is only liable if they prove three facts
King and queen owes duty of care
Duty of care is breached
And losses are suffered by EFL
If these above points are proven then our firm king and queen will become
immediately liable but the issue here is that audit firms publish audit reports
solely for the use of their clients which means shareholders they appoint
them and they become liable to them in terms of reporting their report is for
use of shareholders because they provide reasonable assurance that
financial statements are free from any material misstatement they don't
know about any hidden facts and contracts between client and third parties
some issues are hidden or are not disclose and auditor work on information
which is provided by client which is the responsibility of client management,
there are two other issues which should be understood which relate to
auditor liability which is disclaimer of personal liability if audit firms provide
disclaimer that they are not responsible to third parties if any issue or loss
arise in future in this way they protect themselves from any probable future
loss.
In my opinion king and queen our firm seems not liable for losses suffered by
EFL, Audit Report for the year ended June 2012 was unmodified, and our
auditors provided unqualified opinion the only way in which EFL can sue us
and make us pay losses is if they prove our negligence and those three
points I mentioned above then the court will rule in favor of EFL Ltd
EFL claims that the reason behind the failure of Impulse Co is that the
inadequate provision for doubtful debts and the fall in the value of inventory
in hand audit firms are required to maintain the records of the work
performed specially in listed companies so if any case arises, or any

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company sue auditors and auditors are pleaded guilty then they will have
evidence to support themselves in court room in this way they can prove
that they did perform audit test diligently and with skepticism, and they
obtained substantial and reasonable audit evidence during the course of
audit to give opinion that financial statements are free to form any material
misstatements and are presented fairly and truly.
The Royal Bank of Scotland VS Bannerman Johnstone Maclay case in 2002
had a significant impact on the treatment of auditor liability in which the
court ruled out in favor of RBS because auditor knew the identity of third
parties in above case the identity of third party was not known to king and
queen.

b)
My answer would have had changed if the identity of the third party in this
case EFL is known to king and queen then certainly we would have become
liable for the negligence and the losses suffered by ELF in return. Because
court would have had provided the same verdict which was in the case of
RBS VS Bannerman which is very famous case on auditor's personal liability
and used widely in many countries to obtain guidance on case because the
main point of concern is case of personal liability is the acknowledgement of
the third party and whether the third party is known to auditor.

Q2. Actual and Perceived independence

a)Many concern stakeholders put their faith and rely on the audit work
performed by the auditors they place their opinion on audit reports and
perform audit test to gain sufficient appropriate evidence this all would
be worthless if auditors are not independent, Actual independence
refers to the fact is that auditor personality and his work is free from
any undue influence and they are free to perform their work with great
professionalism and great independence in this way they only
stakeholders can rely on the work performed by auditors because they
are appointed by shareholders to give opinion the financial statements
and many people or concerned stakeholders rely on such information.
Perceived independence means auditors are perceived as
independent because the type of work they perform requires auditors
to free from biases and influence without auditor independence such
level of work cannot be performed they always have to work with great
professionalism and skepticism.

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b) Auditor responsibility and regulatory standards and
framework for following cases.

ISA-610 defines confidentiality. Bob is audit assistant and currently

performing work at club casino. The auditors are generally do binding
contracts with clients for the confidentiality of information. The IFAC
professional code of ethics Aa talk about confidentiality and expect
from auditor to respect the information gained from client during the
course of audit and preserve confidentiality and do not disclose or use
any information of client for any personal or the gain of other people
Bob uses that information for personal which is not only ethically
correct but also breaches IFAC code of ethics.
In case of Wendy and Ace Limited there is a possible self-review threat
and some other potential ethical threats and laws are present to deal
with such situations and also possible safeguards for auditors to
execute their duties professionally and divert to other course of action
to avoid any penalty of fine and to maintain audit quality in case of
ACE PLC the Wend is not allowed to work in any executive position for
ACE and laws strictly prohibited Auditors if they were engagement
partners at client and now performing some material work at client
form example preparation of financials or in a position to exert
significant influence on the company matters In my view Wendy should
not join ACE Ltd because she was previously an engagement partner
for ACE and now she will be doing secretarial work for ACE if ACE is not
listed then there will be some leniency otherwise not.
In this case, it appears that there are a significant self-interest and
intimidation threat and a possible advocacy financial interest is present
because Leo will be doing audit of his own company as he is the son
and he will be intimidated by his father and advocacy threat lies where
audit promotes client interest up to the point where auditor objectivity
is compromised so in the case of Leo and precision company limited
the audit firm should appoint another team member in place of Leo to
carry out audit work properly and with questionable mind.
The issue of audit fee and contingent fees arises in this case classic
reproduction is the significant client of Chan and associates
international standards on auditing clearly states that audit fee can
create self-interest, intimidation and a possible advocacy threat for
audit firm specially if the audit firm depends heavily on the client. The
law prohibits audit firms specially in case of public listed companies
that audit total firm revenue from any client who is listed should not
exceed 15% of total revenue of firm from that client so Chan and

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 associate should review the breakup of their fees from classes
reproduction.
Classic furnitures also provided chairs as a compensation for fees
which not adequate and is not allowed which could be Implied as a gift
from client which again impair auditor independence and questionable
mind that furniture is worth 50% of the total outstanding fees which is
material, another issue is the shares acquired in other unrelated
company which is not a reasonable means of obtaining fees from client
because if Chan and associate are appointed as an auditor of that
company they will have to give up those shares to avoid any threat
which could arise the bottom line is the fees should be predetermined
and should not include contingent pattern although this is not a case
here.