Ch 1 Assurance STATUTORY AUDITS (A2)

Question 1

STATUTORY AUDITS (A2)

Answer 1

Statutory audit is the name given to the audit of annual financial statements. It is called statutory because across the world, individual countries have passed Companies Acts that require an audit of the annual financial statements.

Question 2

Regulatory environment of statutory audit (A2a)

Answer 2

Auditors are expected to register with an auditing body. Then the auditing body expects that auditor to follow the International Standards on Auditing (ISA). The ISA are the rules governing audit and cover the whole process of audit from
planning through testing to reporting.

Question 3

The mechanisms for regulation of auditors (A2b)

Answer 3

The principal mechanism is the monitoring unit. The monitoring unit in each country audits the auditors. The monitoring unit does this by going from auditor to auditor verifying adherence to ISA. Failure to adhere to ISA results in discipline by
the auditing body

Question 4

Statutory regulations (A2c)

Answer 4

Auditors are appointed and removed by a simple majority of shareholders. But during removal, the auditor has the right to communicate to shareholders to present the auditor’s views. Resignation during a year-long engagement is rare. So auditors resign simply by not offering themselves for reappointment. When they do so, they are expected to explain why. During the audit, the auditors will need to see the books and ask questions, of course. So auditors have the statutory right to records and explanations.

Question 5

The value and limitations of statutory audit (A2d,e)

Answer 5

The improvements in audit appear to be part of the
improvement in corporate governance that has resulted in improved financial reporting. But audit scandals like Enron do undermine the credibility of statutory audit.