Audit Framework And Regulation, Rights, Duties, Appointment, Resignation & Removal Flashcards
What is assurance
-positive declaration intended to give confidence
-an assurance engagement in one which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation.
Five key elements of assurance engagement (IMPORTANT)
- Three party relationship
- Appropriate subject matter
- Suitable criteria
- Evidence
- Report
Three party relationship
- Practitioner = responsible for determining the nature, timing and extent of procedures and must pursue any doubts and queries (auditor)
- Responsible party = the person responsible for the info and assertions (directors)
- Intended users = persons whom the assurance report is prepared for (shareholders or directors)
Appropriate subject matter
-provided by reasonable party which needs assurance on
-identifiable + capable of consistent evaluation or measurement against the identifiable criteria
Suitable criteria
Benchmarks used to evaluate or measure subject matter. Without this individual interpretation and misunderstanding occurs.
-relevance
-completeness
-reliability (evaluation)
-neutrality (no bias)
-understandability (clear, comprehensive)
Evidence
-attitude of professional scepticism to obtain sufficient appropriate evidence on if subject is free of material misstatement
-questions validity of evidence + reliability
-collect evidence to support everything being claimed
Report
-reasonable assurance
-Limited assurance
(IMPORTANT)
Reasonable assurance
- is where there is sufficient evidence that the subject matter agrees to certain criteria
-high level of assurance
-positive assurance
-external audit
Limited assurance
-is where there is sufficient evidence that the subject matter is plausible in the circumstances
-moderate level of assurance
-negative assurance
-review engagement
Who uses financial statements (IMPORTANT)
- Shareholders = to keep up with performance
- Lenders/investors = confidence in financial position
- Employees = confirm corporate objective & future strategic direction
- Customers = assurance for long term relationships
- Suppliers = confidence in liquidity position and new products
- Competitors = review margins and future strategic options
- Government = confirm results before tax
Benefits of assurance engagement (IMPORTANT)
- Enhanced credibility of info
- Reduced risk of management bias, errors, fraud
- Draws attention to any deficiencies
- Professional, objective, unbiased opinion
Never absolute (IMPORTANT)
- Judgement
- Sample testing
- Inherent limitations of internal control
- Evidence persuasive over conclusive
- Impracticality of examining all items
- Fraudulent collusion or misinterpretation
What is an audit
- The independent examination of and expression of opinion on the financial statements of an entity by a duly appointed auditor in pursuit of that appointment
- True and fair
- Activity designed to check whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework
True v Fair (IMPORTANT)
-> free from material misstatement, free from bias, neutral, accurate, representation of actual state of affairs, compliant with accounting standards and legislations
True
-factual
-complies with legislation
-correctly transferred data
Fair
-clear, impartial, unbiased
Who needs an audit (IMPORTANT)
-companies act 2006, companies must appoint external auditor
-qualify for an exemption if it has 2 of below
1. Annual turnover > £10.2m
2. Total asset turnover > £5.1 (half of turnover)
3. Not more than 50 employees
Adv of an audit (IMPORTANT)
- Gives shareholders positive assurance
- Identify matters that improve the business
- Third parties more willing to lend money
- Limited liability
- More acceptable to tax authorities
Expectations gap (IMPORTANT)
-> difference between how auditors see their role and how clients and other stakeholders perceive the auditors role
-> resolution is the assurance engagement letter that will define what is required from both sides to reduce misunderstanding
FRC
-> financial reporting council
-> develops and maintains auditing standards for engagements that are performed in the public interest within the uk
Professional bodies
-> ACCA, ACA, CIMA, ICAEW
1. Offer professional qualification
2. Provide evidence of technical competencies
3. Competence is maintained
4. Monitor compliance by members with rules of regulatory body
Code of ethics
- Professional behaviour
- Integrity
- Objectivity
- Confidentiality
- Professional competence and due care
Issues in an audit
- Undue dependence on a client
- Family and personal relationships
- Shareholdings in client companies
- Accepting goods and services from clients
- Litigation
- Supply of non audit services to client
- Conflicts of interest between clients
Rights of an auditor
- Access to all records
- Information and explanation
- Attendance at and notice of general meetings
- Right to speak at general meetings on relevant matters (communicate directly with shareholders)
- Right to resign before audit completion
- Right to have info circulated to shareholders
Duties of an auditor (IMPORTANT)
- Report to members
- Consider if accounts give true and fair view
- Consider if accounts prepared in accordance with accounting standards and companies act 2006
- Investigate if proper accounting records kept
- Investigate if accounts in accordance with underlying records
Appointment
Shareholders appoint auditors at annual general meetings and they run till nect AGM
Before accepting an audit engagement… (IMPORTANT)
-> must determine whether acceptance would create any threats to fundamental ethical principles
-> need to carry out certain procedures:
1. Ensure professionally qualified to act
2. Ensure existing resources are adequate to act
3. Obtain references for key personnel within the entity to be audited if the entity is not already a client
4. Communicate with previous auditor to discover any reasons should not accept engagement
Consider before accepting engagement
Integrity of management, are they straightforward and honest
-> risk of management override or misstatement
-> risk of giving wring opinion
-> reputation at risk if management lack integrity
-recent or forecast performance
-lack of finance?
-lack of finance director?
-unexplained unusual transactions
Professional clearance
- Need permission from client to contact previous auditor
- If refused, decline engagements
- If accepted, discuss client with previous auditor
Accepting audit engagement
-outgoing auditor properly removed
-once accepted, sign engagement letter
-new auditor should obtain all client books and papers from outgoing auditor
-keep records about client and undertake client ‘due diligence’
-check identification of client before acceptance
1. Photo Id (full name and dob)
2. Proof of residential address
3. Obtain legal info of company from registrar of companies
-> keep for minimum of 6 years from end of year they relate to
Content of audit engagement letter ISA (UK) 210 (IMPORTANT)
- Objective and scope of the audit
- Auditors responsibilities
- Managements responsibilities
- Financial reporting framework applicable to financial statements
- Expected form and content of report on results of engagement
- Timetable
- Inherent limitations of audit
- Forms of communication
Auditor resignation
- Written notice and statement of circumstances
- Sent to regulatory authority and member of company (written notice)
- Sent to members of company and to regulatory authority by the auditor (statement of circumstances)
Auditor removal
-at general meeting, must have been a specified notice period
-auditor can make representations about why they should stay in office, if resolution passed, company notify regulatory authority
-auditor deposit statement of circumstance (or that there are none) at the company office and is sent to regulatory authority
-can speak at general meeting and explain
Objective of audit (IMPORTANT)
-> to reach an opinion on financial statements and prepare report expressing that opinion as to whether or not the financial statements present a true and fair view, are prepared in accordance with accounting standards and companies act 2006
