Chapter 3 - Professional standards Flashcards
Why is it important financial statements are audited to common standards?
It is important that financial statements are audited to common standards to ensure accuracy, transparency, and consistency in reporting.
Standards provide a uniform framework for auditors, allowing stakeholders to rely on the financial information when making decisions.
This promotes trust in the financial system, helps detect errors or fraud, and supports comparability across companies and industries.
What is the Financial Reporting Council (FRC)? What are their main functions? (4)
The Financial Reporting Council (FRC) is the UK’s regulatory body responsible for overseeing financial reporting, auditing, and corporate governance. Its main functions include:
* Setting Standards: The FRC establishes accounting and auditing standards, such as UK GAAP and IFRS.
* Regulating Auditors: It supervises audit firms and ensures that audits are conducted to high standards, providing oversight of the audit profession.
* Monitoring and Enforcement: The FRC monitors compliance with financial reporting and auditing standards, investigating potential breaches and taking enforcement action when necessary.
* Promoting Good Governance: The FRC encourages best practices in corporate governance, aiming to improve the transparency and accountability of organizations.
Through these functions, the FRC aims to enhance the integrity and reliability of financial reporting in the UK.
How does the FRC promote improvement in audit quality? (6)
- Issuing Audit Standards (ISAs): The FRC issues International Standards on Auditing (ISAs), which outline auditors’ responsibilities, methodologies, and procedures. These standards ensure consistency and high-quality audits across firms and sectors.
- Issuing Ethical Standards: The FRC sets ethical standards that promote auditor objectivity, independence, and integrity. These standards help ensure auditors avoid conflicts of interest and maintain impartiality during their work.
- Issuing Practice Notes: The FRC provides practice notes, such as guidance on professional scepticism, to encourage auditors to critically assess evidence and challenge management assertions, which improves audit quality and helps identify potential risks.
- Monitoring Compliance: The FRC monitors adherence to ISAs and ethical standards through its Audit Quality Review (AQR) Team, which conducts reviews and inspections of audit firms to assess their compliance with the required standards.
- Disciplinary Action for Misconduct: The FRC has the authority to investigate and take disciplinary action against auditors or firms that fail to comply with audit and ethical standards, ensuring accountability and maintaining the quality of audits.
- Overseeing the UK Corporate Governance Code: The FRC oversees the UK Corporate Governance Code, which includes guidelines for Audit Committees. The Code outlines the role of Audit Committees in monitoring and ensuring the effectiveness of the external audit process, reinforcing high-quality audits across listed companies.
What current issues surrounding auditing and assurance will we consider in this chapter?
- Technological disruption
- Future changes to audit
- Sustainability and climate change
What is big data in the context of audit data analytics?
Big data refers to large or complex datasets that may be unstructured and cannot be easily handled with traditional tools. In auditing, it allows auditors to analyse full data sets (not just samples), often on a continuous basis.
How does big data benefit the audit process? (6)
Big data benefits the audit process by enabling:
- Full population testing – Auditors can analyse entire datasets rather than samples, increasing audit coverage and reliability.
- Continuous auditing – Real-time or more frequent monitoring allows for earlier detection of risks or irregularities.
- Anomaly detection – Helps uncover unusual transactions or patterns that may indicate fraud, errors, or areas requiring further investigation.
- Efficiency and focus – Automates routine tasks, freeing auditors to focus on high-risk or judgemental areas.
- Enhanced audit quality – Supports better decision-making, reduces human error, and improves overall audit assurance.
- Risk reduction – Helps auditors identify and address potential issues earlier, reducing the risk of issuing inappropriate audit opinions and limiting legal liability.
What other technological disruptions may impact auditing?
- Robotic Process Automation (RPA) - Automates repetitive audit tasks (e.g. data extraction, reconciliations), improving efficiency and reducing manual errors.
- AI & Cognitive Computing - Enables intelligent analysis of complex data, natural language processing, and predictive insights—enhancing judgement in high-risk areas.
- Blockchain - Offers transparent, real-time, and tamper-proof records, reducing the need for some traditional audit tests (e.g. confirmations) and improving data reliability.
These technologies enhance audit quality, speed, and reliability while reshaping traditional audit procedures.
What are the three major reviews influencing the future of audit in the UK?
- Kingman Review
- Competition and Markets Authority (CMA) Review
- Brydon Report
Each aims to improve audit quality, restore trust, and address corporate failures, covering regulation, market reform, and redefining audit purpose.
What prompted the Kingman Review and what did it recommend?
Prompted by failures like Carillion and BHS – where some stated that the audit was a colossal waste of time and money providing only false assurance.
The review recommended abolishing the FRC and replacing it with the Audit, Reporting and Governance Authority (ARGA).
What actions is ARGA expected to take (according to the Kingman Review)?
- Directly regulate the biggest audit firms – Strengthens oversight and accountability.
- Impose greater sanctions in cases of corporate failure – Acts as a deterrent and reinforces auditor responsibility.
- Require rapid explanations from companies – Enhances transparency and allows faster response to potential issues.
- Publish reports about company conduct and management – Increases public trust through openness and better governance insight.
What are the key recommendations from the Competition and Markets Authority (CMA) Review?
- Greater oversight of audit committees – Ensures audit committees focus more on audit quality rather than cost or convenience.
- Split between the Big Four’s audit and non-audit businesses – Reduces conflicts of interest and promotes auditor independence.
- Five-year review of the audit industry – Encourages continuous improvement and accountability.
- Mandatory joint audits – Allows smaller firms to gain market share, increases competition, and reduces Big Four dominance.
These reforms aim to improve audit quality, increase market competition, and rebuild confidence in the audit profession.
What are joint audits, as recommended by the CMA Review?
Joint audits involve 2 audit firms jointly performing the work and signing the report, making them both liable. This allows smaller firms to compete with the Big Four.
What was the aim of the Brydon Report and what did it recommend?
The Brydon Report aimed to rebuild public trust in audit by proposing a fundamental reform of its role and scope. Key recommendations included:
- Separate the audit profession from accounting – To avoid conflicts and clarify auditors’ unique responsibilities.
- Redefine the purpose of audit – To provide insight and assurance to a broader range of stakeholders, not just shareholders.
- Shift from suspicion to professional scepticism – Promotes objective, balanced judgement rather than a cynical approach.
- Expand audit beyond financial statements – Address non-financial risks and broader aspects of corporate reporting.
Additional proposals included:
- More engagement with shareholders – Ensures the audit process addresses stakeholder concerns.
- Change the language of audit opinions – Make audit reports clearer and more meaningful.
- Clarify the audit committee’s role – Improve governance and oversight of the audit process.
- Enhance auditor transparency – Builds credibility and public confidence.
These reforms are intended to modernize audit, align it with public expectations, and improve its relevance and effectiveness in today’s corporate environment.
SUSTAINABILITY
