1) Legal and other professional regulations, ethics etc.

Question 1

ISRE 2400

Answer 1

Non-audit engagements to review historic financial information

Question 2

ISAE 3400

Answer 2

Non-audit engagements to exam prospective financial information

Question 3

Current issues in Audit

Answer 3

1) Harmonisation of global standards

2) Professional scepticism - Attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence
FRC briefing paper - stresses need to challenge and test management assertions

3) Big data - increased use of data analytics tools (alteryx in audits e.g. planning)

4) Future of audit: Kingman review: ARGA to replace FRC, promote audit quality to reduce scandals, CMA review - joint audits, operational split of big 4 (EY!)
Brydon review - Redefinition of audit and its purpose, Creating audit profession guided by principles
Extension of auditing beyond F.S. to other areas

Question 4

IFAC Ethical principles

Answer 4

1) Objectivity
2) Confidentiality
3) Professional competance and due care
4) Professional behaviour
5) Confidentiality

Question 5

Self interest threat

Answer 5

(eg having a financial or other interest in the client)

Question 6

Self review threat

Answer 6

e.g auditing financial statements prepared by the firm - unable to take impartial view

Question 7

Advocacy threat

Answer 7

promoting the clients position by dealining in its shares

Question 8

Familiarty threat

Answer 8

eg an audit team member having family at the client - insufficiently question client POV

Question 9

Intimidation threat

Answer 9

e..g threats of replacement due to a disagreement

Question 10

Management threat

Answer 10

e.g. doing work/making decisions which should be carried out by management

Question 11

FRC Ethical standard 3 - Long association with audit engagement

PIE

Answer 11

Engagement partner - rotate after 5yrs (can extend to 7yrs), no return within 5yrs

Key audit partner - rotate after 7yrs, no return within 2yrs

Question 12

FRC Ethical standard 3 - Long association with audit engagement

Non PIE

Answer 12

Private&raquo_space;> PIE: If company becomes listed consider existing service of partner (if ≥ 4yrs, can continue for 2yrs after listing)

Non-listed client: Engagement partner – rotate after 10yrs (can continue but need to review independence)

Question 13

FRC ethical standard 4 - fees + remuneration

Answer 13

Recurring fees:

LISTED: Not exceed 10%, monitor and disclose (5% +)

NON - LISTED: Not exceed 15%, monitor and disclose (10% +)

Question 14

WHo are audit firms liable to

Answer 14

1. Shareholders as a body - can be sued for breach of contract if negligent in performing the audit.
2. Third parties such as the companies bank – may sue for damages under the Tort of negligence. The third parties must demonstrate that a duty of care was owed by the auditor and that a loss was suffered by relying on the f/s with an unmodified auditor’s report.

Question 15

Bannerman paragraph

Answer 15

Protects auditors against liability to 3rd parties:

Paragraph is included stating the audit report is prepared for companies members ONLY.

Question 16

a) Proportional liability agreements + b) Liability caps

Answer 16

a) Where the auditor agrees to take a proportion of the blame, the rest goes to the company.

b) CA06 allows auditors to agree limits on liability
Covers 1 FY at a time
Requires approval by company shareholders

Question 17

Benefits of assurance

Answer 17

Added credibility.
Makes information more reliable.
Audit is a legal requirement for companies of a certain size in the UK.
Independent confirmation of accounts
Improve likelihood of obtaining credit
Deterrent to fraud and error.

Question 18

Limitations of assurance

Answer 18

It does not provide absolute assurance.
We use samples and judgement; we do not test the whole population. (Population bias)
There are limitations of controls used.
A human risk of collusion.