Chapter 2 - The rules and who sets them
A)
Describe the regulatory environment within which statutory audits take place In the UK an audit is required for companies that are not cl assed as a "small company"
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A company who meets meets 2 or 3 of the below criteria's is classed as a SMALL COMPANY. Turn Turnov over er is less less than than 6.5m 6.5m poun pounds ds Gros Grosss asse assets ts les lesss than than 3.2 3.25m 5m pou pound ndss Les Less th than 50 empl emplo oyees yees However - banks, insurance companies and quoted companies require an audit irrespective of the above.
B)
Discus Dis cusss the reas reasons ons and and mecha mechanis nism m for regu regulat lation ion of audi auditor torss
1/ 2/
The reason why auditors are regulated: In order to ensure ensure that that there are are no high profile profile corporate corporate collapse collapsess such as Enron Enron due to auditor's auditor's inabili inability ty to detect material material errors errors and; and; To mainta maintain in confid confidenc ence e of stakeh stakehold olders ers in the the work work of audit auditors ors..
1/ 2/ 3/
Mechanism for regulation are: In order to practice practice an auditor auditor must be qualified qualified through through recognised recognised superviso supervisory ry bodies and and must hold a certail certail qualification qualification (ACCA,IC (ACCA,ICAEW AEW etc) Auditors Auditors must follow follow the auditing auditing standa standards, rds, ethical ethical standard standardss and other other laws & regulaiton regulaitonss of the country country in which they they practice practice Auditors Auditors must must only only work for for a firm author authorised ised by by the governme government nt to provide provide auditi auditing ng services. services.
C)
Explain the statutory regulations governing the appointment, removal and resignation resignation of auditors Appointment Auditors are appointed by voting members (shareholders who have voting rights) at the AGM.
1/ 2/
However directors can appoint auditors in 2 situations: At the commencem commencement ent of the busine business ss - as AGM AGM might not not take place place until 9 months months or or so after after incorporati incorporation on To fill a casual casual vacancy vacancy when when auditors auditors leave leave in between between the the year and and a replacement replacement is is required required before before the AGM NOTE:
In both the above instances when the next AGM takes place the auditors must retire or retire and offer themselves for re-election.
Before accepting the appointment the proposed auditor should request in writing to client, permission to conatact the outgoing auditors. Then write to outgoing auditor asking if there is any reason why they should not accept the appointment. If permission denied by the client - could mean that there is something fishy.
Removal Auditors can be removed at the AGM by the voting members of the company and only a simpl e majority (>50%) is required Special notice of 28 days is to be circulated to all parties attending the AGM so that they are aware of this action. The auditor has right to put together a "Statement of Circumstances" explaining their situation - so as to the reason why they are being removed (it could be because they haven't let the directors, report using incorrect accounting policies) Resignation
1/ 2/
Reasons for resignation Failure to get access to all books and records of the client Failure to obtain all information and explanations required They must notify the company registered office in writing of their resignation and inclue a "Statement of Circumstances". The auditors also have the right to call an Extraordinary General Meeting to explain why they are resigning and to speak without interference from the Directors.
D)
Explain the development and status of International Standards on Auditing INTERNATIONALLY IFAC
IAASB
International Federation of Accountants
International Auditing and Assurance Board
IFAC is a grouping of accountancy bodies and therefore has no legal standing in individual countries.
IAASB issues international standards.
UK FRC
APB
Financial Reporting Council
Auditing Practices Board
These two are similar to above bodies, perform the same role but on a local level.
E)
Explain the relationship between International Standards on Auditing and National Standards IFAC and IAASB have no legal standing in individual countries and therefore the national standards can enfore the audit standards, audit quality and inspect audit files. EU have adopted International Auditing Standards UK is a part of EU and therefore given a choice to either modify UK standards in line with International standards, or adpot international standards and modify them to suit country specific requirements.
Chapter 3 - Corporate Governance
A) Discuss the objective, relevance and importance of corporate governance Corporate governance is about ensuring companies are run properly and honestly and in the interests of both the shareholders and the wider community. It is particularly important for publicly traded companies because large amounts of money are invested in them, either by 'small' shareholders or from other financial institutions. It concerns matters such as:
1/
The responsibilities of directors
2/
The appropriate composition of the board of directors
3/
The necessity for an audit committee and good internal control
4/
Relationship with external auditors
B) Discuss the provisions of international codes of corporate governance that are most relevant to auditors International codes of corporate governance have been prepared with the assistance of OECD (Organization of Economic Co-operation Development)
The six principles of the OECD framework are: 1/ 2/ 3/ 4/ 5/ 6/
Effective corporate governance framework Shareholders rights of ownership Fair treatment for shareholders Stakeholders role and rights Disclosure and transparency Responsibilities of the board
OECD principles and audit An annual audit should be conducted by an independent, competent and qualified auditor in order to provide an external & objective assurance to the board. External auditors should be accountable to the shareholders and owe a duty to the Company to exercise due professional care during an audit.
C) Main principles of UK Corporate Governance Leadership
Every company should be headed by an effective board which is responsible for the long term success of the company. There should be a clear division of responsibilities between the Chairman and the CEO No one individual should have unrestricted powers of decision. NED's should challenge and develop proposals on strategy. Effectiveness
The board should have appropriate balance of skills, experience, independence and knowledge There should be a formal and transparent procedure for appointment of new directors and an annual evaluation of performance The board should be supplied with quality and timely information to enable it to perform its duties All directors should be submitted for re-election at regular intervals.
D) Structure/Roles/Benefits and Limitations of an AUDIT COMMITTEE Structure Audit Committee comprises of minimum of 3 non-executive directors, and at least one of them should have recent and relevant financial expertise.
Roles 1/ 2/ 3/ 4/ 5/
Monitoring the integrity of FS Reviewing the company's internal financial controls Making recommendations regarding appointment and removal of external auditors Reviewing and monitoring the effectiveness of the audit process Reviewing arrangements for confidential reporting by employees and investigating any
Benefits 1/ 2/ 3/ 4/ 5/
Improved credibility of FS as an impartial review is carried out and signif icant issues are discussed with the auditors Increased public confidence in the audit opinion, as the audit process is monitored by the committee Stronger control environment It may be easier and cheaper to raise finance as presence of an audit committee gives a perception of good corporate governance The internal audit function will report to the audit committee increasing their independence and adding weight to their recommendations
Limitations 1/ 2/ 3/ 4/
E)
It could be difficult to recruit the right NED's who have relevant skills, experience and sufficient time to be a committee member NED's are normally remunerated and their fees can be quite expensive Creates another level of decision making thereby pro-longing the process Staff fear that audit committee's are purely looking out for errors and as a result they fear loss of job
Risk Management and importance of Internal Controls The main aim of risk management is to protect the business f rom unforeseen circumstances that could negatively impact the profitability of the company and stop it f rom achieving its goals.
Type of risks 1/ 2/ 3/ 4/ 5/
Products may become technologically obsolete Risk of losing key staff Risk of a major failure of the IT systems Risk of changes in government policy Risk of fire or natural disaster
Therefore it is very important for a company to identify potential risks and then decide of appropriate ways these risks can be minimized or mitigated.
How to manage risks Companies need mechanisms in place to identify and then assess risks. In doing so a company can rank risks in terms of their relative importance by plotting them on a risk map.
Chapter 4 - Ethics and Acceptance
A) Define and apply the fundamental principles of professional ethics Fundamental principles are behavioral traits that should be followed by all accountants to ensure co principles are as follows (Remember as P-I-C-O-P) :
Professional competence and due care Members should maintain relevant knowledge and skills to ensure employer/client receives compe Members should also ensure that they act diligently.
Integrity Members should be honest and straightforward in all professional & business relationships.
Confidentiality Members should maintain confidentiality at all times and should not disclose confidential informati authority or unless it is required by law or the profession.
Objectivity Members should not allow bias, conflict of interests or undue influence of others to affect their pro
Professional behavior Members should comply with the relevant laws and regulations and should avoid any acts that disc
B) Define and apply the possible conceptual framework including the threats to the fund
D) Describe the auditors responsibility with regards to auditor independence, conflict of i
E) Discuss the preconditions and other requirements in relation to the acceptance of new As per ISA 210 the preconditions are as follows: 1/ 2/
The auditor should determine whether the financial reporting framework to be applies in the p The auditor should obtain the agreement of management that it acknowledges and understan
mpliance with the ethical code. These
tent professional services.
on to third parties without prior
fessional or business judgments.
redit the profession.
amental principles
nterests and confidentiality
audit engagements
reparation of FS is appropriate s its responsibilities
Chapter 5 - Risks
A)
Identify the objectives of the audit The objective on an audit is to provide an independent expert opinion that: Financial statements are "true and fair" Financial statements are prepared in accordance with law & regs Financial statements are not materially misstated
B)
Describe the need to plan and perform audits with professional scepticism, and to exercise professional judgement Professional scepticism is an attitude that includes being alert to conditions which may indicate possible material misstatements and carrying out a critical assessment of audit evidence. Risk based auditing uses professional judgement as a key factor therefore requires skills, knowledge, experience and an open mind.
C)
Explain the need to conduct audits in accordance with ISA's Complying with standards gives auditors guidance on how to plan, perform and complete an audit to a professional level and reduce the audit risk.
D)
Explain the components of audit risk Audit risk is the risk that the auditor gives an inappropriate audit opinion (for eg: Give an unmodified audit report when the FS contain a material misstatement.) 1/ Inherent Risk This is the risk of a material misstatement in the FS because of the nature of the industry, entity or the nature of the item itself.
Risk of material misstatement 2/ Control Risk
This is the risk that a material misstatement will not be prevented, dected or corrected on a timely basis by the entity's internal controls.
AUDIT RISK
Detect on R s
This is the risk that the procedures performed by the auditor will not be able to detect an existing misstatement, that could be material in nature.
Furthermore Detection Risk comprises of: a) b)
Sampling risk - The risk that the auditor's conclusion based on a sample is different from the conclusion that would be reached if the whole population were tested. Non-sampling risk - T he risk that the auditor's conclusion is inappropriate for any other reason.
E)
Explain how the auditors obtain an understanding of the entity and its environment Why do we need to know the client In order to identify the risks and ensure correct audit strategy is applied. We need to know ---> who the client is, what do they do, whether there are any special laws or regs they need to follow. How to understand the client??
1/
Through the client Discussions with the client, reviewing their websites/brochures,/internal audit reports/minutes of meetings and through observation & testing.
2/
Others Industry surveys, Internet,credit reference agencies, companies house and through the info available on the internet
3/
Me and my firm Obtaining information from Partner, Manager, last year's audit file & team memebers, and industry experts
F)
Describe the risk assessment procedures
1/ 2/ 3/
ISA 315 requires auditors to use the following procedures. Enquires with management, of appropriate individuals within the internal audit and others Observations and inspection Analytical procedures
ANALYTICAL PROCEDURES
a) b) c) d)
WHY?? To obtain an understanding of the entity and its environment Assisst in assessing the risks of material misstatement Help in identifying the existance of unusual transactions or events, and amounts, ratios and trends. Assisst the auditor in identifying risks of material misstatement due to fraud.
Key techniques we use in analytical review: Variance analysis - comparable information for prior periods Trend analysis - for eg: sales on a monthly basis Ratio analysis - net profits, debtor days, return on investment.
