Assurance Responsibilities & Ethics Flashcards
Complete the below table for the two categories of assurance type;
Reasonable Assurance
Assurance Level:
Expression of opinion:
Limited Assurance
Assurance Level:
Expression of opinion:
Reasonable Assurance
Assurance Level: Reasonable
Expression of opinion: Positive
Limited Assurance
Assurance Level: Limited
Expression of opinion: Negative
What are three benefits of an assurance engagement?
- Enhances the credibility of the information being reported on
- Reduces risk of fraud in the information being reported on
- Draws the users attention to any deficiencies in the information
- Ensure high quality, reliable information circulates in markets
- Give investors confidence in market
- Improve the reputation of the organisations being reported on
Identify the three party relationship in an audit engagement and state who each party would be
Practitioner: Audit firm
Responsible Party: Board of directors
Users: Shareholders
What is the audit threshold for small companies?
When must an audit still be carried out on a small company?
Small companies are exempt from an audit if they can satisfy two of the three;
a) No more than 50 employees
b) Turnover less than £10.2 million
c) Net assets less than £5.1 million
2.
The articles require one
10% shareholders request
It is public and non dormant
Insurance or banking sector
What are the audit exemption requirements for subsidiaries?
When must an audit still be carried out on a sub?
a) Parent company must guarantee the liabilities of the subsidiary
Audit must still be carried out when;
b) The articles require one
c) 10% shareholders request
d) It is public and non dormant
e) Insurance or banking sector
Why are audits valued by management?
a) Business is scrutinised for weakness by another set of eyes
b) Assurance provided to third parties who rely on FS
c) A growing business will one day require an audit so gets used to process
d) Auditors may recommend improvements to systems
What are some disadvantages to the entity of being audited?
a) Cost
b) Disruption to business
c) Disruption of staff time
d) Confidentiality issues
e) Expectations gap - fraud detection, inherent limitations of an audit
Name some activities that are distinctly management’s responsibility and NOT the auditors’
a) Managing the business so as to achieve the company’s objectives
b) Assessing risks to business objectives
c) Safeguarding the company’s assets
d) Keeping proper accounting records
e) Preparing FS & sending to registrar
f) Ensuring company complies w laws and regs
Where are legal requirements for statutory audits contained
Companies Act 2006
Are auditors required to report on their assessment of entity’s system of internal controls?
Yes - must report on whether system is capable of preventing or detecting errors
Indicate when/whether the auditor should report to the following parties on the suspicion of fraud;
a) Management
b) TCWG
c) Third parties
a) Management
report on suspicion of fraud and when fraud is detected
b) TCWG
Yes, unless auditor suspects their involvement in fraud
c) Third parties
determine whether it is appropriate
Shareholders would be notified if fraud id detected as their would be a modified opinion - of the fraud causes FS to not give true and fair view
What are the following parties’ responsibilities in terms of laws and regulations;
a) Management
b) The Auditors’
a) Management are responsible for ensuring the company complies with laws and regulations
Give written representation to auditors that management has disclosed all instances of non-compliance
b) Auditors are responsible for concluding that the FSs are free from material misstatement caused by non compliance with laws and regulations
To do this, Auditors are required to have a general understanding of the legal and regulatory framework within which the company operates
What are three areas of law which affect all businesses?
Health and safety act
Employment law
Social security law
What steps would an auditor follow after suspecting non compliance with laws and regs
- Obtain an understanding of the non compliance
- Evaluate impact on FS
- Discuss with appropriate levels of management - unless involves ML
- If cannot gather sufficient evidence of the fraud can be gathered -> limitation of scope -> modify opinion (because FS do not give true and fair view)
(This is in ISAs)
Communication of reporting non compliance:
Communicate to TCWG, unless they are expected to be involved, in which case report to audit committee or seek legal advice
Only inform shareholders if material - will be communicated in modified opinion
TP if required
What is the approach to record Related Party Transactions in the FSs?
Disclose amounts and relationships so that the readers can determine for themselves whether they manipulate FSs
Look in ISAs for how auditors should deal with RPs at planning and detailed work stage
What would be some identifiers of Related Party Transactions?
Transactions with:
Unusual terms of trade
No logical business sense
Previously unidentified RPs
Unusual processing
What is the paradox that auditors face when concluding on FSs of which include material amounts from Money Laundering?
It is probable that their inclusion means the FSs do not give a true and fair view, however, if the auditors modify the opinion before the ML investigation has concluded they could be accused of tipping off
What activities do Auditors undertake with clients to reduce Money Laundering risks?
a) Know your client - verify identity and keep on file
b) Assess real nature of business sales, start up capital & loans
Available in the ISAs
Where are there paragraphs that aim to address the expectations gap?
Engagement letter & report
What standards are;
a) UK Audits governed by?
b) International Audits governed by?
a) ISAs UK & Companies act 2006
FRC Modifies ISAs from IAASB -> ISAs UK
b) ISAs
From IAASB
What is harmonisation?
Aligning international standards for auditing so that global audits are consistent
How is big data/AI changing the way we audit?
Benefits
Use of whole data sets rather than samples
Process unstructured data sets
Removes human error/bias
Reduces risk/liability for the auditor
Challenges
Standards will need to be updated to reflect integration of tech
Significant investment
Training costs
Compliance with data security - breaches
The Kingman review led to the government announcing the abolition of the FRC & replacing it with ARGA.
How will ARGA differ from the FRC?
Direct regulation of big 4
Greater sanctions for corporate failure
Require rapid explanations from companies
Publish reports about a company’s management & conduct
What are some benefits of assurance to;
a) The users of reports
b) The wider market
a)
Enhances credibility of information being reported on
Reduces risk of management bias
Reduces risk of fraud
Draws attention to any deficiencies in information
b)
Ensures high quality, reliable information circulates in market
Gives investors faith in market
Improves reputation of organisations in market in aggregate
Why & how is the level of assurance provided in a report on forecasts different to the level of assurance provided in an auditors report?
Audit provides reasonable assurance, assurance on forecasts provides limited
This is because audit is conducted after a period of time following YE so estimates such as provisions can likely be substantiated.
However, a forecast is not based on historical information. It is based on assumptions which are subject to uncertainty
List 4 key responsibilities of Directors.
What kind of penalties can failure to fulfil these requirements lead to?
- Safeguarding assets
Documents, NCA, physical controls - Preparation and delivery of FSs
Determine accounting policies, estimates, comply w laws - Lay FSs before members and deliver to companies house
- Company books and records
Failure to comply can lead to criminal penalties
What dictates the responsibilities of the assurance provider?
Legislation
Terms of engagement
Professional Standards
Quality standards
Can management delegate their responsibilities to the auditor, over areas such as detection of immaterial fraud and compliance with laws and regs?
No, management threat
rules surrounding non audit services from audit firms
Which one of the following is committed by management, and which one is committed by employees?
Fraudulent financial reporting
Misappropriation of assets
Fraudulent financial reporting - committed by management
Misappropriation of assets - committed by employees (includes directors)
How can TCWG prevent and detect fraud?
Strong top down culture of honesty and ethical behaviour
Strong system of internal controls
Communicate what is expected of employees and consequences if not followed
What factors make an entity’s financial statements more susceptible to fraud?
Weak internal controls
Earnings of management based on financial performance of company
Applying for loans/appealing to investors
Cash transactions - risk of misappropriation
Unusual changes in the lifestyle of management
Any existence of fraud allegations
Why do auditors look for non compliance with laws and regulations?
Not necessarily to report it, but to see if it’s impact has been recorded in FS - eg provision for fine
Lack of evidence regarding non-compliance may mean a limitation of scope
How does materiality differ in relation to related party transactions?
Materiality is st to include transactions which are material to the RP as well as client
Who should have audit committees?
What are their responsibilities?
Listed companies - recommended by UK corporate governance code
Responsibilities:
Monitor auditors’ independence
Monitor work of internal audit
Who does an auditor report Money Laundering suspicions to?
MLRO - their responsibility to decide whether to report to National Crime Authority
What are the 6 threats to ICAEW Code of Ethics?
How does one generally safeguard against these threats?
Self interest threat
Self review threat
Familiarity threat
Management threat
Advocacy threat
Intimidation threat
- Training
Hot & cold file reviews
Regulatory inspections
Control environment & commitment to ethical behaviour
Segregation of audit and non audit services
Independence declarations
a) What is the fee cap for a listed client?
b) What is the fee cap for a non-listed client?
At what point are fees for the above reviewed?
Are there any exeptions?
a) 10% firm’s fee income
Reviewed by ethics partner at 5-10%
Apply reasonable and informed third party test for perception of independence
b) 15% firm’s fee income
Reviewed by ethics partner at 10-15%
Apply reasonable and informed third party test for perception of independence
The above applies to regular fees, not one off assignments.
For new firms - 2 year grace period but hot and cold reviews must be conducted
Apply reasonable and informed third party test for perception of independence
What procedures must auditors carry out before accepting a new client?
(Mnemonic to remember)
MANICS
Management Integrity - obtain references
Adequate resources?
Nature of engagement - perform risk assessment
Identification - ML regs
Communicate with previous auditor
Stability of client?
What are the 5 fundamental principles in the code of ethics?
What are the 6 threats to these principles?
What quality management procedures safeguard against these threats generally?
Principles;
Integrity
Objectivity
Confidentiality
Professional competence and due care
Professional Behaviour
Threats;
Self-interest
Self-review
Management
Intimidation
Familiarity
Advocacy
Safeguards;
Planning, supervision & review procedures
Hot & cold file reviews
Regulatory inspections
Strong control environment surrounding approach to ethical issues
Rotation of staff
Consulting the ethics partner
What 3 types of entities are considered as Public Interest Entities?
UK Listed companies,
Credit institutions
Insurance companies
a) If an employee/former director of an audited entity who had a position of influence over the FS joins the audit firm, how long should they be removed from the audit for?
b) If a partner from an audit firm who was involved in the audit moves to a key management position at the client, what is the impact?
a) 2 years
b) If this is within 2 years of being involved in the audit, the firm should resign as auditors. They should not be reappointed for 2 years, confirming that the former audit partner ceases to have the ability to influence the audit
For the audit of PIEs, what is the cap on total fees charged by the firm for non audit services?
No more than 70% of audit fees paid in the last three consecutive financial years
What are the recommendations that arose from the Brydon Review
Redefinition of audit & its purpose
Change the language used in the audit opinion
Increased use of technology in audit
What are the recommendations that arose from the Kingman Review
Replace FRC wit ARGA, who will
> Directly regulate the biggest audit firms
> Impose greater sanctions on corporate failure
> Publish reports about companies; confect and management
