you have selected case study 1 do not

let your friends suffer

please follow through the story closely

you are John a newly promoted audit

partner in a mid-sized audit firm it's

an open secret that Katherine the

managing partner has earmarked you to be

her successor when she retires hi John

mr. dan the chairman of KS Private

Limited has arrived he is now in the

meeting room

thanks Joey I will be there in a short

while moments later in the meeting room

hi before I start this meeting I would

like to thank you for making your way

down for this urgent meeting that I

called for no problem may I know what

this is about as you would recall I had

previously agreed with your assertion

that the one point five million dollars

owed by Express Limited was collectible

however due to current developments it's

impractical we had discussed this

previously and you had agreed that it

was collectible is it arising from

Express limited liquidation I am afraid

so

as it was widely reported that Express

Limited is facing financial difficulties

and had been recently put on compulsory

liquidation it is no longer likely that

the one point five million dollars owed

by Express Limited will still be

collectable and allowance for doubtful

debt will need to be made in the

worst-case scenario the entire debt will

need to be written off that will also

cause my company's account to be

adjusted downwards which will lead to us

breaching certain debt equity ratio

imposed by the bank this would cause a

liquidity issue in the worst case

scenario we may even need to shut K s

Private Limited down jobs are going to

be lost John are you sure this is an

issue in the first place I had called

the liquidator of Express Limited and he

had assured me that the debt will be

repaid in due course I can even issue

you a formal letter to confirm my

understanding Mr Tan based on my

understanding I am not sure if the full

amount would be collected and allowance

would still be required

so regardless an allowance for doubtful

debt would still have to be made John

you had been auditing us

since you joined your firm after

graduation you have become a good friend

to us I had even asked Catherine to let

you take over from her to be our auditor

now that she is retiring soon would you

like to see your friends suffer now

let's review and understand the learning

points from this case study first there

could be a self-interest threat as KS

limited was a major client of John's

audit firm and second there could also

be a familiarity threat since John had

audited KS limited for a very long time

and mr. tan had regarded John as a

friend in spite of the threats

John exercised professional skepticism

he did not accept mr. tans claims that

most of KS private limited stats from

Express Limited were collectable at face

value so what should John do next as a

follow-up John should contact the

liquidator of Express Limited to have a

better idea of how much could be

recovered he should also propose the

necessary adjustments to KS Private

Limited financial statements if the

liquidator reverts that Express Limited

is unable to repay KS Private Limited