Chapter 2- Responsibilities

Question 1

What are the 2 fundamental jobs of the director?

Answer 1

Manage the business

Assess what business risks face the company and devise necessary strategies to deal with them

Question 2

What responsibilites, laid out in the Companies Act 2006 are director’s supposed to follow?

Answer 2

Safeguarding assets
Books and records of the company- proper accounting records
Preparation and delivery of company financial statements
Compliance with laws and regulations- i.e. Sarbanes-Oxley 2002 US law. CEO’s attest to veractiy of FSs, greater disclosure of amendments made to FSs during audit process.

Question 3

What determines the responsibility of external audit providers?

Answer 3

Legislation/regulation under which engagement is conducted.
Terms of engagement
Ethical and professional standards
Quality control standards

Question 4

What are the 2 types of risk of misstatement that can arise from fraud? Do auditors have responsibility to detect fraud and error?

Answer 4

Fraudulent financial reporting- manipulating accounts to increase profit etc.
Misappropriation of assets- e.g. stealing inventory
Auditors’ responsibility= detect mis-statements due to ERROR AND FRAUD

Question 5

What is the fraud triangle?

Answer 5

Incentives/Opportunites/Attitudes

Question 6

What’s the difference between fraud and error?

Answer 6

Fraud- intent- act to deceive

Error- unintentional.

Question 7

What should auditors’ do in terms of risk assessment of fraud?

Answer 7

Appendix 1 ISA240- list of fraud risk factors.

Be professional sceptical, discuss prior frauds with management.

Question 8

If fraud suspected, how should they respond to management, shareholders (those charged with governance) and 3rd parties?

Answer 8

Management: If fraud discovered. If fraud suspected.

Those charged with government: Only if fraud means FSs do not show a true and fair view

3rd parties: Only if public interest to disclose/ directors refuse to report to authorities

Question 9

What are auditors’ and managements responsibilities re. Error?

Answer 9

Auditors: detect material misstatements in FSs (however caused
Assess system of internal controls/determine reliance
Report material weaknesses to those charged with governance

Managements’ responsibilities:
Design and implement internal control system to prevent/detect/correct all errors in FSs

Question 10

RE. compliance how should an auditor obtian evidence?

Answer 10

Enquiries of management
Correspondence with relevant bodies
Discussions with those charged with governance.

Question 11

How could non-compliance impact the FSs?

Answer 11

Fines may arise (unrec liabs)

Company’s going concern may be threatened

Question 12

When should auditor report non-compliance to management/shareholders and 3rd parties?

Answer 12

To management: if suspecting non-compliance

Shareholders- ONLY if causes FSs to NOT shouw T + F view

3rd parties: Without delay if stat duty to report
If in public interest

Question 13

What should auditors do if they suspect the client of not complying with the Bribery Act 2010?

Answer 13

Report to Serious Organised Crime Agency (SOCA) under ‘Proceeds of Crime Act 2002’

Question 14

What is a related party?

Answer 14

ISA 550: A company or people that might have/be expected to have undue influence on company being audited.
Need to be disclosed in FS- written rep to auditors.

Question 15

What stages of the audit should you look for RPTs?

Answer 15

ALL stages:
Planning
Detailed testing
Review

Question 16

What is money laundering?

Answer 16

Proceeds of Crime Act 2002 - borad definition of money laundering to:
disguise origins of funds derived from illicit sources
Enable illicit funds to be used by those who control them.

Question 17

What is our responsibility to report re/ money laundering and to whom?

Answer 17

Statutory auditor- when have grounds for suspicion.
No tipping off.
Must report to nominated official: ‘Money Laundering Reporting Officer’- MLRO, who may report to SOCA.

Question 18

What is the punishment for failure to report money laundering?

Answer 18

Penalty up to 14 years imprisonment.

Question 19

What is the expectations gap?

Answer 19

Difference between auditors’ responsibilities and understanding/expectations of users of report.

Question 20

What steps are taken to try and reduce the expecations gap?

Answer 20

Audit Report: Sets out responsibilities, explains ho audit conducted (Test basis) only gives reasonable assurance.

Engagement letters- responsibilites set out

Audit committees- required for listed companies

Letter of representation- Management gives us this towards end of audit engagement- acknowledge their responsibility for prepping accounts.

Question 21

Why might auditors not detect material misstatements but no audit failure takes place?

Answer 21

Effect immaterial
Accounts still give T + F view.

If it is our fault it could be because we didnt’ assess/respond to audit risk well enough