Chapter 2- Responsibilities

Question 1

Management responsibilities

Answer 1

• Management is responsible for the following:
  – Managing the business so as to achieve company objectives
  – Assessing business risks to those objectives being achieved
  – Safeguarding the company’s assets
  – Keeping proper accounting records
  – Preparing company financial statements and delivering them to the Registrar
  – Ensuring the company complies with applicable laws and regulations
• It is not the responsibility of the auditors of a company to do any of the above

Question 2

Assurance provider’s responsibility

Answer 2

• The assurance provider is responsible for the following:
  – Carrying out the assurance service in accordance with professional and ethical standards
  – Carrying out the assurance service in accordance with the terms of engagement
• In the case of statutory audit, the auditor is, in addition, responsible for the following:
  – Forming an independent opinion on the truth and fairness of the annual accounts
  – Confirming that the annual accounts have been properly prepared in accordance with the Companies Act 2006
  – Confirming that the information contained within the directors’ report is consistent with the annual accounts
  – Confirming that the director’s use of the going concern basis of accounting in the preparation of the financial statements is appropriate
• While the assurance provider does not bear the management responsibilities outlined above, many of them will impact strongly on the audit and, in particular, the risk assessment that the assurance provider carries out

Question 3

Related parties

Answer 3

• Accounting standards require that all transactions with related parties are disclosed
• Auditors need to consider the risk of there being undisclosed related party transactions
• The auditors should ask the directors for a list of related parties and watch out for transactions
  with those parties during the course of testing
• Auditors need to carry out specific tests to seek to identify related parties
• The auditors need to ensure that appropriate disclosures have been made about related party
  transactions
• Written representations about related parties must be obtained from directors

Question 4

ISA (UK) 550 Related Parties

Answer 4

ISA (UK) 550 Related Parties details the audit work required in respect of related party transactions.
The work can be split into the three main stages of the audit:
* Planning
* Detailed work
* Review

Question 5

ISA (UK) 550 Related Parties
PLANNING STAGE

Answer 5

PLANNING-
The auditor needs to consider the risk of there being undisclosed material related party transactions.
The normal rule judges materiality by reference to the company being audited, whereas material related party transactions are judged both by that and by reference to the
individual related party (which may be much smaller than the company being audited).

ISA (UK) 550 recognises that risks of material misstatement are higher where there are related party transactions because of the following:
* The complexity of related party relationships and structures
* Information systems that may be ineffective at identifying related party transactions
* Normal market terms may not apply, for example transactions may be conducted with no exchange of consideration

The auditor will also need to bear in mind that fraud may be more easily committed through related parties, and audit procedures will need to be designed accordingly.

Question 6

ISA (UK) 550 Related Parties
DETAILED TESTING STAGE

Answer 6

DETAILED TESTING STAGE-
The auditors should ask the directors, for a list of
related parties and consider if this is complete. The whole audit team should be aware of the list so that they can keep an eye out for those names when carrying out all of the other audit work needed.
For example, an entry in the cash book may give an indication of a related party, so it needs to be
picked up by the person auditing cash and bank.

Where related party transactions are found the auditor checks that the appropriate disclosures are made in the accounts. Remember that all transactions with related parties need to be disclosed, even if they are at a normal market rate. However, any disclosures should include information that is needed for a proper understanding of the transaction and this would, of course, include whether the transaction was or was not at a market rate.

Question 7

ISA (UK) 550 Related Parties
REVIEW STAGE

Answer 7

REVIEW STAGE-
Written representations should always be requested from directors, who are in the best position to know the identities of related parties. The auditor then reviews the accounts, together with the audit evidence available, in order to reach a conclusion on the appropriate audit opinion.