9. Financial reporting to shareholders and external audit Flashcards
The Companies Act 2006 requires every company to keep adequate accounting records which are sufficient to:
- Show and explain the company’s transactions
- Disclose with reasonable accuracy, at any time, the financial position of the company at that time; and
- Enable the directors to ensure that any accounts required to be prepared comply with the requirements of the CA2006 and International Accounting Standards (IAS)
Under the Companies Act 2006, who is required to prepare accounts for a company?
The directors
What is the role of the board in financial reporting?
- compliance with financial reporting standards
- effective arrangements for the oversight over the auditors
- independence and objectivity of auditor
- significant audit matters
- auditor’s report to the shareholders and respond to any issues or queries raised in relation to their report
What is the role of the co-sec in financial reporting
- Ensuring the board complies with the legal, regulatory, standards and codes
- Reading notes in the financial statements to ensure that they clearly and transparently explain the figures in the FS
- Advising the board on the implications and potential reputational risk of the financial performance and disclosures
- Providing advice and oversight, on behalf of the board, for the preparation of financial reporting documentation, including the annual report and half-yearly report
- Overseeing the distribution/circulation of documentation/disclosure
What are the requirements of an audit committee as per provision 24?
- minimum of three independent NEDs
- at least one has financial experience
- relevant sector experience (as a whole)
What are the responsibilities of the audit committee as per Provision 25?
- monitoring the integrity of FS and formal announcements
- reviewing the company’s IC and RMS
- monitoring the effectiveness of IA function
- overseeing relationship with EA
- reviewing their independence and monitoring policy on the engagement of EA’s non-audit service
How often should the audit committee meet as per FRC Guidance?
FRC Guidance recommends that there should be at least three meetings a year. It further recommends that guests should be kept at a minimum and only invited for their items
What should be included in the Audit Committee Report?
- a summary of the role and work of the AC
- how the AC composition requirements have been met
- the number of AC meetings
- how performance valuation has been conducted
- approach taken to the appointment/reappointment of EA
- the length of tenure of the current audit firm
- current audit partner name
What are the purposes of an audit report? (2 fo unlisted companies and 3 for listed)
- give an expert and independent opinion on whether the FS give a true and fair view of the FP of the company; and
- give an expert and independent opinion on whether the FS comply with the relevant laws
- For listed companies: review the company’s compliance with the 2018 Code
A modified audit report is a serious issue and usually implies grave concerns about the FS. What are the three types?
- Qualified audit opinion – true and fair value except for a particular matter
- Adverse opinion - material mis-statements and these are pervasive i.e. info in FS is incorrect
- Disclaimer of opinion – unable to obtain the info to give an audit opinion
Name some potential threats to auditor independence - SAISF
- Self-interest threat (money)
- Advocacy threat (taking sides in legal case)
- Intimidation threat
- Self-review threat (non-audit work)
- Familiarity threat
How else can auditor independence be impaired?
- Reliance on single company for a large proportion of its income
- Mutual business interests
- Close personal relationship
- Partner holds a sig shareholding
- Auditor makes any management decisions
Name some measures to protect auditor indpendence ARAR
- Appointment by shareholders
- Restricting or prohibiting non-audit services
- Assessment of independence via UK Code
- Rotation of audit partner or firm
ICAEW states ‘A blanket prohibition on the provision of non-audit services to audit clients can be inefficient for the client and is neither necessary to ensure independence, nor helpful in contributing to the knowledge necessary to ensure the quality of the audit.’
How has the EU Audit Directive dealt with restricting non-audit services?
Restrict the amount of non-audit work to no more than 70% of the average fees from audit work over the previous three financial years and impose a ban on certain types of non-audit work i.e. tax, services involving decision making for the client, etc.
How often should an audit partner be rotated?
FRC Guidance says 5 years – AC can decide that it is necessary to safeguard the quality of the audit to extend the period – but not longer than 7 years
