7. Responsibilities Flashcards
Are mgmnt responsibilities the responsibilities of auditors?
Not at all
Who’s responsibilities: Business risk
- Assess business risk
- Strategies to mitigate them
Management
CA: Mgmnt responsibilities
Promote C success for benefit of all members
- Safeguarding assets
- Proper accounting records
- Preparing and delivering FS
- Compliance (laws & regs)
Past sustainable global initiatives
- United Nations Global Impact (2000)
- Global Reporting Initiative (2000)
- Task Force on Climate-related Financial Disclosure (or TCFD, 2015)
- Sustainable Development Goals (2016).
The international body that monitors the global financial system
Financial Stability Board (FSB)
Group who develops recommendations on the disclosures companies should make to help users properly assess risks related to climate change
Task Force on Climate-related Financial
Disclosures (TCFD)
TCFD recommendations
- Governance
- Strategy
- Risk management
- Metrics/Targets
Which Cs need to state that the disclosures are in line with TCFD’s recommendations?
Larger
UK companies
(In the annual report)
Who has responsibility for developing a set of sustainability disclosure standards (IFRS Sustainability Disclosure Standards)? (In 2021)
International Sustainability Standards
Board (ISSB)
When will the first international sustainability standards be issued for public consultation and aim to provide users with reliable and comparable sustainability-related information
2022
Current ISS drafts
IFRS S1 General requirements for disclosure of sustainability-related financial information
IFRS S2 Climate-related disclosures.
Particular user interests relating to climate
E.g.
Social aspects
C value impact
ISSB areas covered?
Environmental, social and governance (ESG) sustainability topics
With urgent focus on climate-related matters
Will the IFRS Sustainability Disclosure Standards follow the same standard setting process used by the IASB?
Yes
Where do ESG issues arise from?
Stakeholder or political concerns
ESG: Environment: Key issues
Reduce the businesses environmental footprint and counter the impact of climate change
ESG: Key issues: Social
Focus on the well being and operational impact on society/stakeholders. Create a positive working environment for staff
ESG: Key issues: Governance
Practices implemented from the top down. Provide goods/services in a sustainable way. Offers good working conditions
Which audit and assurance issues are affected by sustainability issues?
-
Risk management
Need to integrate into governance and risk management processes -
Assurance
Info disclosed needs to be credible -
Law and regulation
And best practice from the UK listing authority
Encourages transparency
What are the responsibilities of the assurance provider in all assurance engagements?
- Relevant legislation or regulation
- Terms of engagement
- Ethical and professional standards
- Quality management standards.
CA: Auditor responsibilities when conducting a statutory audit
- Form an independent opinion on the truth and fairness of the financial statements.
- Confirm that the accounts have been properly prepared
In accordance with Companies Act 2006 - State in the audit report whether the information given in the directors’ report is consistent with the annual accounts
How does an auditor achieve its objectives relating to CA?
- Plan
- Obtain sufficient evidence
- Draw valid conclusions
OBT: Two types of misstatement arising from fraud
- Fraudulent financial reporting
- Misappropriation of assets
Management responsibility to fraud
Preventing and detecting
Auditor responsibility relating to fraud
Obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error
OBT: Procedures to identify misstatement
caused by fraud
- Fraud risk assessment:
– incentives/pressures
– opportunities
– attitudes/rationalisations - Professional scepticism
-
Discuss among team (be aware that it may
occur). -
Respond appropriately to the assessed level of fraud risk e.g.
– assign appropriate personnel to the audit
– assess controls and look for instances of management override - Introduce an element of unpredictability into audit procedures.
- Consider the implications for other areas of the audit
e.g management representations.
What sort of fraud reported to: Mgmnt
All
Except if mgmnt suspected
What sort of fraud reported to: Mgmnt when mgmnt suspected
TCWG
What sort of fraud reported to: Shareholders
Only if material misstatement/uncertainty in FS
What sort of fraud reported to: 3P
If duty/right to disclose
(E.g. regulator)
What sort of fraud reported to: Important case to watch out for
Money laundering
(But avoid tipping off)
OBT: Mgmnt responsibilities: Laws and regulations
Responsible for complying with relevant laws and regulations.
OBT: Auditor’s responsibility: Laws and regulations
Obtain sufficient appropriate evidence of compliance with laws and regulations generally recognised to have a direct effect on the financial statements
Laws and regulations: Procedures to test
-
Risk assessment
a. relevant laws and regulation
b. how client ensures compliance - Obtain evidence about compliance:
a. enquiries of management
b. inspect correspondence with regulatory bodies
c. obtain written management representations to confirm all known instances of non-compliance have been disclosed
Reporting legal non-compliance to management: If suspected in involvement but no higher level of management?
Consider obtaining legal advice
Can organisations be penalized for failing to prevent bribery?
Yes
So bribery prevention policies necessary
What should bribery prevention policies focus on?
- Top level culture
In which bribery is unacceptable - Risk assessment
-
Due diligence procedures
Taking a risk-based approach -
Communication to staff
Including training - Monitoring and review
Procedures to assess client’s compliance with bribery act
Assess risk of non-compliance with the Bribery Act
Exercise professional scepticism
Assess bribery prevention policies of the client.
Who would auditor report suspicions of bribery to?
To the National Crime Agency (NCA) under the Proceeds of Crime Act 2002
Sarbanes-Oxley Act 2002 (Sarbox/SOX): Provisions relevant to: Management
CEOs and CFOs attest to the
veracity of the financial statements
Greater disclosure of the amendments made to the financial statements during the audit process.
Sarbanes-Oxley Act 2002 (Sarbox/SOX): Provisions relevant to: Auditors
Stricter enforcement of auditor independence rules
Public Company Accounting Oversight Board (PCAOB) can inspect the audit files of US listed companies, including subsidiaries based overseas.
Sarbox: Who does it apply to?
US companies
So UK subs of US groups
Related party definition
A company or person
that might have, or be expected
to have
undue influence on the company being audited
e.g.
directors and their families, key management, other companies in the same group.
What can RPTs be?
‘Arms length’
Procedures to identify misstatement caused by non-disclosure of related party transactions
- Obtain a list of all related parties from management
- Carry out detailed tests of transactions and balances as usual, looking out for related party transactions
- Review minutes of the meetings of shareholders and directors where related party transactions may have been discussed
- Review bank confirmation letters for evidence of guarantor relationships
- Review investment transactions
- Confirm that the correct disclosures have been made in the financial statements
- Obtain written management representations confirming that all related party transactions have been disclosed.
Money Laundering
Using, acquiring, retaining, controlling, concealing, disguising, converting, transferring and removing from the UK the proceeds of criminal conduct
Money laundering: Less obvious examples
- Tax evasion
- Saving costs by failing to comply with laws and regulations
-
Offences committed overseas that are criminal offences in the UK
e.g. bribes that would be covered by the Bribery Act 2010
Money laundering: What should the auditor report?
Actual knowledge
OR
Reasonable grounds for suspicion
Money laundering: Who should the auditor report to?
To the audit firm’s money laundering nominated officer (MLRO)
They will consider whether necessary to report to NCA
Money laundering offences include
- Failure to report
- Failure to provide suitable training for staff
- Tipping-off the money launderer
Money laundering: Most severe penalty
14y prison
GDPR and data protection act: Who has to make sure personal info is correctly protected?
Anyone processing personal info
GDPR and data protection act: What can individuals access?
- Their personal data
- Details of how it is processed
GDPR and data protection act: When can personal data only be held
- Lawful reason
- Chosen to allow storage
Who must people collecting personal data inform?
Information commissioner’s office (ICO)
(Effective for a year)
GDPR and data protection act: Who is the person responsible for informing ICO called?
Data controller
GDPR and data protection act: Is failure to notify ICO a criminal offence?
Yes
If climate change impacts the entity, the auditor needs to
Consider the risk of material misstatement for the amounts/disclosures that are affected by the climate-related risks
Understand how climate-related risks relate to their responsibilities.
Examples of where climate-related risks may have a material effect on the FS?
- A contingent liability for potential litigation
- Fines/penalties as a result of the breach
Climate risk audit publications
The IAASB published a practice alert called ‘The Consideration of Climate-Related Risks in an Audit of Financial Statements’ in light of current developments on this area.
The Financial Reporting Council (FRC) have made recommendations for auditing climate-related risks in the publication ‘FRC Climate Thematic Audit – How are auditors taking account of climate-related challenges?’. They advise to ‘test and challenge the financial statements’.
How do auditors close the expectations gap?
Improving the audit report to set out:
a. responsibilities of directors and auditors
b. explain how an audit is conducted
e.g. test basis, reasonable assurance, material misstatements
Further detail provided in the audit reports for listed companies
Including the responsibilities of directors and auditors in the engagement letter
Liaising with audit committees
Audit failure: Usually due to some of what factors?
- Failure to adequately assess audit risk
- Failure to adequately respond to the assessed audit risk
- Failure to recognise or respond to threats to objectivity
- Failure to recognise or respond to situations where the auditor is not competent
Can future changes in audit regulations occur due to the lessons learnt from audit failures?
Yes
What other factor might need to be considered in relation to fraud?
Public pressures and the public’s interest (rather than just a single entity’s)
