Chapter 1 Flashcards
Principles of Auditing and Professional Ethics
Advantage of being a company?
Limited Legal liability
- The most any investor can lose is their overall investment
- Separate legal entity concept
2 Responsibilities of being a company in relation to statements and records?
- Duty to keep accounting records
- The need to provide financial statements
3 Responsibilities in regards to the ‘duty to keep accounting records’
- Must keep adequate accounting records
- Contain entries in relation to income and expenses and the reasonings for why they incurred.
- Keep a record of the assets and liabilities
Private Limited and Public Limited companies in relation to the duration of accounting records?
- Private Limited Company (Ltd)
Valid for 3 years from the date they are prepared. - Public Limited Company (Plc)
Valid for 6 years from the date they are prepared.
What is The Agency Problem?
A conflict of interest that occurs when an agent is supposed to act in the best interests of the principal but may instead act in their own self-interest.
What does it mean to be ‘True and Fair’ from a financial statement perspective?
FYI: 3 Characteristics
- Factual
- Unbiased
- Free from discrimination
What does ‘Faithful Representation’ from a financial statement perspective mean?
FYI: 4 Characteristics CNFR
- Complete
- Neutral (prudence)
- Free from error
- Represents the economic reality of what it portrays
What is ‘Audit’ and what does it provide for users?
- Audit is a review of the financial statements and disclosures produced by directors to ensure they are in line with criteria.
- Provides assurance to users.
Assurance Engagements (flow chart)
FYI: 6 Elements
- Responsible Party
- Subject Matter
- User
- Practitioner
- Evidence aligned with Criteria
- Written Report
What is ‘Audit Appointment’ and who selects this/ and where?
- The process of hiring or selecting an auditor to examine a company’s financial records.
- Usually appointed by shareholders at an Annual General Meeting (AGM).
Audit Exemptions
FYI: 3 Criteria
- Criteria (at least 2 of them met for 2 consecutive years):
1. Revenue not more than £10.2 million during the year
2. Balance sheets total not more than £5.1mm
3. No more than 50 employees
When can Audit Exemptions not be requested?
FYI: 3 Criteria
- Criteria:
1. A public or listed company (Plc)
2. Bank or insurance company
3. Part of a group of companies that are public, bank, or insurance companies
Dormant Companies and Audit Exemptions
- Definition
- 3 criteria for them to be exempt
- A company that is not currently doing any business/making any money.
- Exempt from audit, provided they aren’t:
1. Bank or insurance companies
2. Not required to produce group accounts
3. Fulfil at least 2/3 of the initial criteria
What is an ISA and who are they produced and adopted by?
- An Auditing standard that provides guidelines for auditors on how to perform an audit of financial statements to obtain reasonable assurance for users.
- Produced by the International Auditing and Assurance Standards Board (IAASB)
- Adopted by the Financial Reporting Council (FRC)
What are the 2 overall objectives of the Auditor?
- Obtain reasonable assurance
- To report on the financial statements
Regulation (in regards to what they are)
- FRC
- IAASB
- Financial Reporting Council (FRC)
- The independent regulator of accounting and auditing
- Adopts ISA’s - International Audit and Assurance Standards Board (IAASB)
- The independent body that sets the international standards for auditing
- Responsible/ set up ISA’s
Responsibilities for producing financial statements
- Auditors
- Management
- The Board of Directors
- Auditors
- Not responsible for producing the financial statements - Management
- Responsible for producing financial statements, with oversight from those charged with governance - The Board of Directors
- Responsible to the shareholders and delegate the task of preparing financial statements to management
- Charged with governance
What is Corporate Governance?
The system by which companies are directed and controlled (e.g. FRC).
What are the 5 purposes/ principles of The Board leadership and company?
- Company is led by an effective and entrepreneurial board
- Establish the company’s purpose, values and strategy and ensure these are aligned with promoting a desired culture
- Ensure that resources in place meet its objectives and the measure performance that is against them
- Ensure effective engagement with relevant users
- Ensure that workforce policies/ practices are consistent with the companies values and supports long term success
What are the purposes and principles of the division of responsibilities for the following stakeholders:
- Chair Leads (2)
- Non Executive Directors (2)
- The Board of Directors (4)
- Chair leads
- Oversee the board of directors
- Responsible for overall effectiveness and directing the company - Non-Executive Directors
- Hold management accountable
- Support Executives - The Board of Directors
- Includes Executive and Non-Executive directors
- Run the company on the chair leads behalf
- Expected to be independent
- Ensures it has the policies, processes and information to function effectively and efficiently
What is the ‘Principles-Based approach’?
Providing general/ broad principles and guidelines that companies should follow and allows companies to adapt them to their specific situations.
Internal and External Auditor roles
- Internal
- Support the management of a company by helping to address issues within preparing financial statements - External
- Review the statements and produce reports based on faithful representation and true and fair principles
What is an Audit Committee?
Audit committees are a collection of Non-Executives responsible with overseeing controls in place over audited financial statements.
What are the 4 responsibilities of the Audit Committee ?
- Monitoring the integrity of financial statements
- Whether statements are reflective of the companies position
- Review risk management and internal controls
- Handle the companies relationship with the external auditor