2 Flashcards
Standard setters and regulators have tried to introduce three
initiatives:
- Harmonisation of auditing procedures
- focus on audit quality
- adherence to a strict ethical code of conduct
in order to achieve this, practitioners have to follow regulatory guidance::
National corporate lawNational corporate law
The Companies Act 2006 in the UKThe Companies Act 2006 in the UK
The Sarbanes Oxley Act in the USThe Sarbanes Oxley Act in the US
Auditing StandardsAuditing Standards
Code of EthicsCode of Ethics
1 The need for regulation
What does national law typically include regarding audits?
Which companies are required to have an audit – Laws that determine whether a company must undergo an audit based on factors like size or public interest.
Who can and cannot carry out an audit – Rules governing the qualifications and restrictions for auditors.
Auditor appointment, resignation, and removal – Guidelines for how auditors are hired, replaced, or terminated.
The rights and duties of an auditor – Defining what an auditor is entitled to do and the responsibilities they must fulfill during the audit process.
Who is typically required by law to have an audit?
In most countries, the law mandates that companies undergo an audit, except for certain small or owner-managed companies that may be exempt. However, exemptions often do not apply to:
Regulated sectors: For example, financial services companies are generally required to have audits, regardless of size.
Publicly listed companies: Companies listed on a stock exchange are also typically required to have audits, irrespective of their size.
What are the requirements for firms conducting audit work?
Control by members of a suitably authorised supervisory body (e.g., ACCA)
or
a film directly authorised by the state
Who are the individuals eligible to conduct audit work?
Sole Practitioners
Partners in a Partnership
Members of Limited Liability
Partnerships (LLPs)
Directors of Audit Companies
who may not act as a auditor- EXCLUDED BY LAW
Those who manage
or work for the
company
Those who have
business or personal
connections
who may not act as a auditor- EXCLUDED BY CODE OF ETHICS
Independence: Individuals with conflicts of interest or close ties to the company.
Competence: Individuals lacking the necessary skills or qualifications.
Confidentiality: Individuals unable to maintain confidentiality of audit information.
How are auditors appointed for public and private companies?
Public Companies – Auditors are appointed at the Annual General Meeting (AGM), and their appointment lasts until the next AGM.
Private Companies – Auditors are appointed and serve until they are removed.
Who Appoints the Auditor?
Members (Shareholders) – In most cases, shareholders appoint the auditor.
Directors – In some cases, directors may also appoint the auditor.
Secretary of State – In rare instances, the Secretary of State may intervene and appoint an auditor.
How can an auditor be removed?
Auditors are independent from management, meaning they cannot be removed by company executives.
Shareholders vote on the removal at a general meeting.
A simple majority vote is typically required for removal.
What happens when an auditor resigns?
They must submit a written notice and a statement of circumstances
If applicable, request a general meeting to explain the reasons
Deal with clearance requests from new auditors
What are the rights of an auditor?
(During Appointment)
Access to company books and records at any time
Receive necessary information/explanations for the audit
to receive notice of and attend general meetings and be heard on any matters of concern to the auditor.
Receive written resolutions of the company
What is a written resolution?
A formal decision made by a company without holding a physical meeting, circulated in writing for approval by shareholders or directors.
Rights and Duties of Auditors (On Resignation)
To request a General Meeting of the company to explain the circumstances of
the resignation.
To require the company to circulate the notice of circumstances relating to the
resignation.
What are the duties of an auditor? (Primary Duty and additional duty)
Audit financial statements
Provide an opinion on whether financial statements present a true and fair view
Additional Duties:
confirm that the financial statements are prepared in accordance with local national laws
What is the role of the International Federation of Accountants (IFAC)?
Sets minimum requirements for accountancy qualifications
Requires Post-Qualification Experience – Mandates practical experience to strengthen professional expertise.
Provides Guidance on Accounting and Assurance
What are International Standards on Auditing (ISAs)?
ISAs provide professional guidance for auditing
Not legal requirements but widely applied
ISAs contain basic principles and requirements.
ISAs are written in the context of an audit of financial statements but can be applied to the audit of any historical information.
Developed by the International Audit and Assurance Standards Board (IAASB)
There are 37 ISAs and 1 International Standard of Quality Control
How are ISAs developed?
Issued as Exposure Drafts (EDs) for public comments
Requires approval from two-thirds of IAASB members
Undergoes a lengthy process of discussion and revision
How do international and national standards interact?
IFAC has no legal authority in individual countries – It provides guidance, but national regulators make the final decisions.
Countries can develop their own auditing and ethical standards – They may create unique rules suited to their legal and economic environments.
ISAs (International Standards on Auditing) may be adopted with modifications – Nations can adjust them to fit their specific regulatory needs.
Each country must regulate its own audit profession – This includes overseeing auditors and enforcing compliance with national standards.
If a conflict arises, local regulations will apply
What is the role of professional bodies like ACCA and ICAEW?
Provide Rigorous Qualifications – Ensure accountants and auditors acquire the necessary knowledge and skills for professional competence.
Support to members to demonstrate high professional and ethical values
Technical expertise to governments on accounting and business matters
What is the role of the UK Financial Reporting Council (FRC)?
Monitors the quality of work performed by audit firms
performs inspections of audit files
Inspection reports are available to view on the FRC website
What are the requirements to become a member of a professional body?
Successfully complete the exams provided by that
body
Be able to demonstrate appropriate practical
experience (usually a minimum of three years)
Complete an ethical assessment
What is required to maintain membership?
Continuous professional development (CPD)
Compliance with a code of ethics and conduct
What disciplinary actions can be taken for non-compliance?
Fines
Reprimands (formal warning or disciplinary action)
Suspension from membership for a limited time
Complete removal from the professional body
