9 - FR & Audit Flashcards
Which statement must directors giver re. their annual report and accounts?
Taken as a whole, they are ‘fair, balanced and understandable, and provide the information necessary for shareholders to assess the company’s position, performance, business model and strategy’
Why is fin. reporting so important?
As it provides crucial information to stakeholders which guides their decisions
5 ways in which accounting position can be misreported?
- Adoption of certain accounting policies
- Choosing to place profits/losses in another FY (eg. if contract is long term)
- Taking debts off of balance sheets
- Disguising money from loans as operating income
- Over-valuing assets
Key challenge faced today by annual report
Many demands from traditional and new users has led to a ‘confused’ document
Which company type is required to have an audit committee?
Listed companies (and some financial institutions)
Other than UKCG Code, where else is requirement for audit committee found?
Disclosure Guidance and Transparency Rules
What does DTR 7.1 say on audit committees? (3)
- Listed companies are required to establish an audit committee
Should be comprised of:
- Majority of independent members
- At least 1 member with competencies in accounting or auditing, or both
- Members who as a whole have the competencies relevant to the sector in which the listed company is operating in
5 responsibilities of the audit committee (more listed in Code)
- Monitoring integrity of, reviewing and reporting on annual reports and other periodic reports
- Reviewing internal control and risk management systems
- Reviewing need to establish internal audit function
- Overseeing relations with the external auditor
- Reviewing and monitoring external auditors objectivity and independence
What is the eligibility to be a co’s (external) auditor
Person or firm that is a member of a recognised professional accountancy body
Briefly explain auditor’s liability
There has been uncertainty as to whether auditor’s owe a duty of care to third parties (as well as company and its shareholders).
Due to ruling in ‘Bannerman case’, auditors now include a disclaimer stating that they act for the company’s members only.
Auditor’s are now able to limit their liability through entering into agreements with companies
2 main purposes of audit report (ie. what must auditor state in audit report)
- Give an opinion on whether the FS give true and fair view of fin position and fin performance of the company
- Give an opinion on whether FS comply with relevant laws and accounting standards
Additional requirement of auditor for listed co’s
Review compliance with 2018 Code
What is meant by an unmodified auditors report
States that the FS do present a true and fair view of the fin position of the company
What does the issuance of a modified audit report imply?
- There are potentially grave concerns about the FS and fin condition of the company
- External auditor and board could not agree on application of accounting policies and the content of the FS
3 types of modified audit opinion
- Qualified audit opinion
- Adverse opinion
- Disclaimer of opinion
What is a qualified audit opinion? (modified audit)
FS would give true and fair view except for a particular matter, which auditor explains
What is an adverse opinion? (modified audit)
Material misstatements which are ‘pervasive’ - e. information in FS is seriously incorrect
What is a disclaimer of opinion? (modified audit)
Unable to obtain information needed to give an audit opinion
5 types of potential threats to auditor’s independence/objectivity
- Self-interest threat
- Self-review threat
- Advocacy threat
- Familiarity threat
- Intimidation threat
What is the self-interest threat to auditor’s independence?
Auditor may be earning such a large amount that their judgement will be affected by desire to protect income stream
What is the self-review threat to auditor’s independence?
If audit firm does non-audit work for company, they will have to review this, and may not be as critical of its own work, to avoid raising questions over its professional competence
What is the familiarity threat to auditor’s independence?
Familiarity with company or a director can lead to unconscious trust in company, and unwillingness to believe that company could make serious error or commit fraud
2 types - personal association & over time
What is the advocacy threat to auditor’s independence?
Non-audit work requiring the company to ‘advocate’ (give formal support) for the company by providing public statements or supporting it in a legal case should not be taken on, as it means the auditor is being asked to take sides
What is the intimidation threat to auditor’s independence?
Real and imagined threats to auditor through ‘bullying’ can lead auditor to accepting what the bully is telling them
6 measures which should be in place to protect independence of external auditor
- Appointment (and remuneration decided upon) by shareholders
- Restricting or prohibiting non-audit services (self-review check)
- Assessment of independence by audit committee
- Rotation of audit partner or firm
- Monitoring by audit com of which public statements auditor makes on behalf of Co (advocacy check)
- Audit committee meet with auditors and management once per year (intimidation check)
2 steps audit committee should take in order to assess the independence of the auditor
- Seek reassurance that auditors have no relationship with company or execs/management that could affect independence
- Seek info from auditors on their policies for maintaining independence
UK Law on non-audit work by audit firms (2)
- Non-audit work fees can be no more than 70% of average fees over previous 3 years
- Certain non-audit work is outright banned - tax, decision-making, bookkeeping
Look at FRC Guidance on Audit Committees - audit committee should apply judgment concerning provision of non-audit services not prohibited by law, including assessing: (5)
- Threats to independence and objectivity
- Nature of non-audit services
- Whether audit firm is most suitable supplier of the non-audit service
- The fees incurred, individually and relative to audit fee
- Criteria governing compensation of those performing the audit
formal policy should be applied by audit committee in respect of the above
UKCG Code requires an explanation in annual report of what, if the external auditor provides non-audit services?
How auditor independence and objectivity are safeguarded
FRC’s recommendation of normal rotation period for audit engagement partner
5 years
Can be extended up to 7 years but this should be disclosed with explanation to shareholders
What is meant by rotation of audit partner?
Changing the lead partner/lead member of the team from the external audit firm that has been appointed as the company’s auditor
Rules on PIEs max length for audit firm
- Should change every 10 years (and must tender)
- Mandatory rotation every 20 years, as long as rule of tender once a decade is complied with
5 arguments against audit rotation
- Decreased audit quality due to lack of knowledge
- Increased costs to auditor due to learning curve of new firm
- Increased costs to client due to above
- Lack of choice in choosing new audit firm with relevant experience and expertise in industry
- Difficulty for audit committee in choosing firms for non-audit purposes
Role of CoSec in relation to Audit Commitee (6)
- Developing terms of reference
- Advising on composition
- Conducing induction for new members
- Developing annual calendar of activities
- Ensuring committee has sufficient resources to carry out its role
- Assisting members in understanding current and emerging issues
Role of CoSec in relation to external auditors (4)
- Appointment and remuneration process
- Assessment of independence
- Ensuring external auditor attends AGM
- Advising board on any rotation requirements
4 main factors to consider when selecting auditor
- Quality and effectiveness of audit
- Auditor’s experience
- Price
- Independence
Quality and effectiveness of audit as factor in choosing auditor (2)
Company must be satisfied with the quality and effectiveness of audit work provided.
If the auditor is raising many queries and concerns, this is a good sign that the audit is thorough
Price as a factor in choosing auditor
Price is relevant but should not be the sole reason an auditor is chosen
Auditor experience as a factor in choosing auditor
Board should take into account auditor’s experience of work with companies of similar size and business sector.
Independence of auditor as factor in choosing auditor
Not really a factor but a basic requirement that the auditor is independent. Independence of auditors is fundamental for integrity in, and trust in, the external audit process.
What should companies seek out from prospective auditors during tender re. independence (2)
Confirmation that auditors and staff have no family, financial, employment, investment or business relationship with company and it directors and employees.
Information about policies for maintaining independence and compliance with relevant requirements
The requirement to ensure the accounts show a ‘true and fair’ view falls on who?
The directors of the company (auditors then say whether they agree or not in audit report)
Look at Code - which provision relates to audit committee composition?
24
Which two of the five threats to auditors independence are particularly relevant if talking about provision of non-audit services?
Self-interest
Self-review
What would be key aspect of audit committee’s role in relation to provision of non-audit service by auditor? (2)
Ensuring a policy is in place, approved by audit committee, in relation to provision of non-audit services by external auditor.
Aim is to ensure provision does not impair independence or objectivity
If external audit firm is providing other services, who must not carry them out?
Members of the firm working on the audit (or in the same team as)
Check Code - what must be explained in audit committee report re. non-audit services?
How auditor’s independence and objectivity are safeguarded if non-audit services are provided
What does FRC Guidance on Audit Coms say should be explained in audit committee report re. non-audit services?
What the non-audit services provided were and why it was appropriate to buy them from the auditors
6 steps to be taken by the audit committee if concerns are raised about XYZ?
- Request further information or evidence if necessary to properly understand issue
- Ensure that specific issue is dealt with by relevant persons (eg. FD, finance team, internal audit team)
- Review of financial controls and internal audit functions more generally
- Raise the issue with the external auditors
- Report to the Board on the issue
- Make relevant disclosures in audit committee report
Look at Code - which provision is related to audit committee disclosing significant issues?
Provision 26
If an issue is raised re. financial controls, why should audit committee raise it with external auditors?
As part of the disclosures and discussions it is required to have with auditors
Auditor will need to be satisfied that XYZ shown in accounts is correct
If an issue is raised re. financial controls, why should audit committee report it to the Board?
Because the Board has overall responsibility as per Code - in turn can advise on how issue is being resolved etc.
