Audit framework

Question 1

Meaning of an audit

Answer 1

The evaluation of an organisation, system or process. Performed to ascertain validity and reliability of information.

True and fair view of the company’s position.

Question 2

Assurance engagements

5 elements of an engagements

Answer 2

Simple assignments where a practitioner express a conclusion designed to give confidence about a subject.
3 party relationship - practitioner (auditor), responsibility (drafter of document) and intended user (shareholders)
Subject matter - Financial statements in an audit
Suitable criteria - audit standards
Evidence - to be obtained to give level of assurance
Written report - given to intended user and responsibly party

Question 3

Levels of assurance

Answer 3

Limited level of assurance - (negative) “nothing has come to the auditors attention” that would state the accounts are not free from material misstatement.
Reasonable level - (positive) “True and fair view”
Absolute level - (100% correct) absolutely nothing wrong, impossible to give.

Question 4

Appointment of auditors - how to appoint, what need to be done before

Answer 4

Appointment - appointed via shareholder resolution at GM. Before appoitment need to: be independent,
have necessary resources, after assessing risk of nature and integrity of key staff, no conflicts of interest.
After that the auditor should: ask client for permission to contact prior auditor, if client denies the auditor must reject the audit, ask prior auditor for any “relevant matters” and if they paid, acted w/ integrity, the prior auditor will need to request client approval to respond, if denied outgoing auditor will inform new auditor and the audit must be denied

Question 5

Rights, removal and resignation of auditors

Answer 5

Rights:
Acces company books
All information and detailed explainations
All written resolutions
Notices of general meetings
To attend and be heard at general meetings

Removal:
Removed by shareholders
When directors right to shareholders to request approval they must inform the auditor and the auditor has the right to attend the GM
Auditor must produce a ‘statement of circumstances’ = to explain there side of the story

Resignation:
Resignation in writing
Can request the company call an EGM and attend and speak at the EGM
Must produce a ‘statement of circumstances’ even if it states no circumstances require reporting

Question 6

Limitations of external audits

Answer 6

Reliant on the integrity of client management
Nature of financial reporting - judgement andsubjective decisions which can not be absolute
Limited amount of time for the audit
Auditors plan work to detect material errors and fraud

Question 7

International standards on Auditing - overview

Answer 7

International federation of accountants (IFAC) worldwide organisation - includes IAASB - International Audit and Assurance Standards Board
They issue ISAs - international standards on auditing
Auditors can defer from ISAs but they must justify it

Question 8

ISAs vs National standards

Answer 8

ISAs do not hold legal status and are designed to be worldwide, there can be conflicts with local audit legal requirements. Country legislation should be followed over ISAs - must countries heavily adopt ISAs

Question 9

Corporate governance

Executive and Non-executive directors

Answer 9

The way in which companies are organised and controlled
Executive Directors - involved in day-to-day running of the Company, considered full time employees and receive a salary
NEDs - independent, part-time directors to scrutinise the company’s affairs, generally only attend board meetings. Paid a service fee.

Question 10

UK Corporate governance code:

Board leadership and responsibilities

Answer 10

UK Corporate governance code is used by UK listed entities - you wither comply or explain

Board leadership
Company should be led by an ‘effective and entrepreneurial board’ for long term success, for shareholder value

The board should
establish the company’s purpose, values and strategy act with integrity
ensure necessary resources are in place to meet objectives
establish a risk framework and relevant controls to manage it

Question 11

UK Corporate governance code:

Division of responsibility
Composition, succession and evaluation

Answer 11

Division of responsibility:

Board led by chairman
An appropriate combination of executive and non-executive directors (recommended over half = INEDs)
No one individual should have control
NEDs should provide constructive feedback, strategic guidance.
Board should be supported by a CoSec

Composition, succession and evaluation:

Promote diversity of gender, social and ethnic backgrounds while maintain cognitive and personal strength
A nomination committee should exist to be in charge of appointments
Annual evaluation of the board should consider composition, effectiveness and diversity

Question 12

UK Corporate governance code:

Independence criteria

Answer 12

Independence criteria

Not been an employee of the company or wider group within past 5 years
Has/had a material business relationship (past 3 years) with the company either directly or as a partner, shareholder, director or senior employee of a company that has
has/or does received additional remuneration besides director fee - such as being in the companys pension scheme, performance related share scheme
Has directorships or significant links with other directors
Is a significant shareholder
Has served on the board for more than 9 years

Question 13

Audit committee responsibilities
and
Advantages and disadvantages

Answer 13

Audit committee = at least 3 iNEDs (Chairman of the board ideally not in the committee)
Monitor integrity of accounts
Provide information to shareholders to access the company’s performance
Review internal controls and risk management
Monitor internal audit function (or consider annually if one is needed, if it does not exist)
Conduct tender process and recommend to the board on appointment/remuneration of external auditors
Review and monitor independence of auditor
Report to the board

Advantages 
Increases public confidence 
Should have financial expertise 
Can help with raising finance 
Bridge between auditor and board 

Disadvantages
Suitable directors may be difficult to find
Board often see the NEDs as having to much responsibility
Slow decision making as another layer to the business
Cost - director fees

Question 14

3 key internal risk

Answer 14

Financial risk - risks affecting entities cash flow (interest rates, exchange rates)
Compliance risk - laws and regulations
Operation risks - affecting day-to-day operations such as loss of key staff, inventory management

Question 15

Need for auditors to communicate with management - ISA number
Who and what

Answer 15

ISA 260 - Communication with Those Charges with Governance

Those charges with governance means persons with responsibility over
Strategic directions
Overseeing of the financial reporting

Communications with the highest level of management

What should be communicated
Scope and timing of audit
Significant findings including changes in accounting policies, risk and exposure of litigation, audit adjustments (even if not material), material uncertainty (something that casts doubt on going concern), disagreements with management, expected modifications and material weaknesses in internal control

Question 16

Professional ethics and code of ethics

ACCA’s 5 fundamental principles of ethical behaviour

Answer 16

Integrity - honest and straightforwardness
Objectivity - Not to compromise professional judgement because of bias/conflicts of interest
Professional competence and due care - Maintain professional knowledge (CPD) and act diligently with professional standards
Confidentiality - Not to disclose client information without permission except if for Obligatory responsibility (i.e concern of money laundering etc.) and Voluntary disclosure (i.e in the public’s best interest or to defend themselves against claims of negligence)
Professional behaviour - comply with relevant laws and regulations and avoid conduct that might discredit the profession

Question 17

Threats to an auditors independence (5 threats)

Answer 17

ACCA’s code of ethics can be applied in a “conceptual framework” to identify, evaluate and address threats to independence

Self-interest threat - Shareholder in company, undue dependence on their fees (if 1 client = >15% of total firms fees) for 2 consecutive years. Auditor must: disclose this to client mgmt, reduce % by getting other clients, consider resigning.

Self-review threat - When the audit firm re-evaluates previous work performed by them

Advocacy threat - when an auditor represents client (in litigation / public offering), may become accustom to supporting their work

Familiarity threat - become too familiar with client and may be sympathetic / friends and lose objectivity (having family or friends at client, accept gifts / hospitality, long association (listed clients need a new audit partner ever 7 years), audit firm staff move to client

Intimidation threat - actual or perceived threats (can be threats of dismissal, litigation or having forces unreasonable time constraints)

Question 18

Safeguards to audit independence threats

Answer 18

If audit firm cannot appropriately mitigate risks then they should resign

Use different staff to mitigate familiarity
Rotate audit partners frequently
Use a second audit partner (hot reviewer) before sign off
Decline requests for other non-audit work if unable to mitigate risks

Question 19

Conflicts of interest - for accountant

Answer 19

Performing a service in competition of clients i.e. BPPs bookkeeper offering bookkeeping classes (need to notify BPP)

If being offered work for a current clients competitor (need to notify both sides and get approval from both, advise both to seek advice, use different teams to service each, physical controls such as passwords, NDAs)