Chapter 2 - Rules and regulations

Question 1

What does national law affects?

Answer 1

• which companies are required to have an audit
• who can and cannot carry out an audit
• auditor appointment, removal and resignation
• The rights and duties of an auditor

Question 2

What is the reason for an audit?

Answer 2

to protect the shareholders from the directors who may be biased when preparing the financial statements

Question 3

Which companies are normally exempt from an audit?

Answer 3

small or owner-managed companies, as there is less value in an audit

Question 4

When would a small or owner-managed company not be exempt from an audit?

Answer 4

if there are a financial service company or company is listed on the stock exchange

Question 5

To be an eligible auditor, a person must be what?

Answer 5

• a member of a recognised supervisory body (RSB) e.g., AACCA, and allowed by the rules of that body to be an auditor, or
• someone directly authorised by the state

Question 6

When can a person not be auditor of a company?

Answer 6

• Excluded by law: manage or work for the company and who have business or personal connections
• Excluded by the code of ethics: must comply with the code

Question 7

Auditors can be appointed in what 3 ways?

Answer 7

• members
• directors
• secretary of state

Question 8

What is the most common method to appoint an auditor and how is it done?

Answer 8

• shareholders - by ordinary resolution. more than 50% of those voting must agree

Question 9

Auditors of public companies are appointed for how long?

Answer 9

from one AGM to the next

Question 10

Auditors of a private company are appointed for how long?

Answer 10

until they are removed

Question 11

Appointment by directors is mainly used when?

Answer 11

to appoint the company’s first auditors after it has been established.
or to fill a casual vacancy

Question 12

What is a casual vacancy?

Answer 12

arises when the current auditor leaves suddenly and a new one must be found quickly

Question 13

How long can a director appointment happen for?

Answer 13

one year

Question 14

When would the secretary of state appoint a auditor?

Answer 14

when the company cannot find one

Question 15

Arrangements for removing an auditor have to be structured in what ways?

Answer 15

• the auditor has sufficiently secure tenure of office, to maintain independence of management
• can be removed if there are doubts about their continuing ability to carry out their duties effectively

Question 16

How is removal of an auditor achieved?

Answer 16

by an ordinary resolution requiring a simple majority vote at a GM. At least 50% of members (shareholders) must vote.

Question 17

How many days notice must be given so that the members are aware about the removal of the auditor?

Answer 17

28 days

Question 18

What must be prepared if an auditor resigns?

Answer 18

they must issue a written notice of their resignation and submit a statement of circumstances to the company and to companies house

Question 19

What is the duty of an auditor?

Answer 19

to audit the financial statements and provide an opinion on whether the financial statements give a true and fair view. must also report on any other matters required by local laws or regulations (e.g., Uk companies must give details of directors’ remuneration)

Question 20

What are the 3 rights of an auditor during an appointment?

Answer 20

• Access: books and records of company
• Information: info and explanations which they think necessary for purpose. Copies of written resolutions
• Attend meetings: receive notice of and attend any general meeting of members, and to be heard at any GM

Question 21

When an auditor is removed, or decides to resign, what additional rights are given?

Answer 21

• auditor is allowed to request a GM of the members to be called to explain the circumstances of their resignation
• can require the company to circulate a written response relating to the resignation to the members

Question 22

What is the responsibility of the international federation of accountants (IFAC)

Answer 22

promotes international regulation of the accountancy profession

Question 23

What is one of the subsidiary boards of the OFAC and what is their responsibility?

Answer 23

The International Audit and Assurance Standards Board (IAASB) - to develop and promote International standards on auditing

Question 24

What are ISAs?

Answer 24

international standards of auditing - professional guidance that auditors must follow to ensure each audit is performed consistently and to a required standard of quality

Question 25

Are ISAs legal?

Answer 25

not a legal requirement. if a country has a law in place which is inconsistent with ISAs, local law should be followed

Question 26

When an ISAs is revised what happens?

Answer 26

the IAASB writes a proposed ISA, called an exposure draft, which is published on its website for public consultation. comments are requested, which are considered before finalising

Question 27

How do professional bodies (such as ACCA and ICAEW) promote quality within the profession?

Answer 27

through provision of:
- rigorous qualifications
- support to members
- technical expertise to governments on accounting and business matters

Question 28

To obtain membership to a professional body, a person must what?

Answer 28

• successfully complete the exams provided by the body
• be able to demonstrate appropriate practical experience (min 3 years)
• Complete an ethical assessment

Question 29

How does a person maintain a membership?

Answer 29

• demonstrate continuing professional development (CPD) to ensure knowledge and skills are kept up to date
• comply with a code of ethics and conduct and ensure they act in a professional manner at all times