Chapter 7: External Audit Flashcards
Are all companies required to have their annual accounts audited?
Yes, unless they qualify for an exemption. Under CA2006 s. 475, all companies must have their annual accounts audited, except those that qualify for specific exemptions.
What are the three main categories of companies that are exempt from audit?
A company is exempt from audit if it qualifies as:
A micro or small company (CA2006 s. 477)
Must meet two out of three criteria:
Turnover: ≤ £10.2 million
Balance sheet total: ≤ £5.1 million
Number of employees: ≤ 50
A subsidiary company (CA2006 s. 479A)
A parent company guarantee must be provided.
The subsidiary must be included in the consolidated group accounts of its parent company.
A dormant company (CA2006 s. 480)
A company is dormant if it has had no significant accounting transactions during the financial year.
What is the primary function of an external auditor?
The auditor’s primary function is to report to the company’s members on the statutory accounts prepared by the directors under:
CA2006 s. 394 – Individual company accounts
CA2006 s. 399 – Group accounts
The auditor’s report must confirm whether the financial statements:
Give a true and fair view of the company’s financial position.
Comply with accounting standards and legal requirements.
Does an audit assess a company’s future viability or management effectiveness?
No. Under Article 25a of the Statutory Audit Directive, an audit:
Does not assess the future viability of the company.
Does not judge the efficiency or effectiveness of management decisions.
Only focuses on historical financial statements and compliance with reporting requirements.
Can a company that is exempt from audit still choose to have its accounts audited?
Yes. Even if a company qualifies for an audit exemption, directors can voluntarily opt for an audit to improve transparency and credibility.
Can shareholders or members request an audit even if the company is exempt?
Yes. Under CA2006 s. 476, members holding at least 10% of share capital (or 10% of membership for companies without shares) can require an audit.
When must shareholders give notice for requesting an audit?
The notice must be given:
At any time during the financial year in question.
No later than one month before the end of the financial year.
If a valid request is made, the company must conduct an audit even if it qualifies for an exemption.
Who is the primary point of contact for auditors in a company?
The finance function is the main point of contact for auditors, but the company secretary may be asked to assist with non-financial queries and provide corporate governance documentation.
What specific tasks might the company secretary be responsible for in the audit process?
The company secretary may be asked to:
Provide minutes of meetings (directors, committees, and members) from the start of the financial year to the present.
Review and arrange for a director’s signature on the auditor’s formal engagement letter.
Provide details of related parties.
Assist with directors’ remuneration disclosures.
Act as an intermediary between auditors and the chair of the remuneration committee for remuneration report queries.
Assist in responding to corporate governance queries, particularly relating to s. 172 compliance.
What legal rights do auditors have in relation to company records?
Under CA2006, auditors have extensive rights to access information, including:
Right to access books and records – Auditors can examine all financial records at any time (CA2006 s. 499(1)(a)).
Right to request explanations from directors and officers – Auditors can demand any information necessary for their audit (CA2006 s. 499(1)(b)).
Right to obtain information from UK subsidiaries – UK-incorporated subsidiaries must provide auditors with requested information (CA2006 s. 499(2)).
Right to obtain information from overseas subsidiaries – Parent companies must make reasonable efforts to obtain information from overseas subsidiaries, if required by auditors (CA2006 s. 500).
Right to receive notice of general meetings – Auditors must be informed of all general meetings (CA2006 s. 502(2)).
Right to attend and speak at general meetings – Auditors can attend and speak on any business that concerns them as auditors (CA2006 s. 502(3)).
What are the consequences of providing false or misleading information to auditors?
Under CA2006 s. 501, it is an offence for an officer of the company to provide:
False, misleading, or deceptive information to auditors.
Penalties include fines and/or imprisonment.
What must the auditor review in a quoted company’s remuneration report?
Under CA2006 s. 497, auditors must:
Examine the auditable parts of the directors’ remuneration report.
State in their audit report whether the remuneration report has been properly prepared in accordance with the Companies Act.
Who do auditors usually contact regarding queries on the remuneration report?
Queries are directed to the chair of the remuneration committee, often through the company secretary.
What must the auditor confirm in relation to corporate governance?
Under CA2006 s. 497A, the auditor must:
Review the corporate governance statement.
State in the audit report whether the statement is consistent with the accounts
Who is the main point of contact for corporate governance queries?
Auditors will typically direct their corporate governance-related queries to the company secretary.
What new obligation exists for large companies regarding s. 172 compliance?
For financial years starting on or after 1 January 2019, directors of large companies must provide evidence of how they complied with their duty under CA2006 s. 172 (to promote the success of the company while considering stakeholders).
What are the three categories of companies that can claim exemption from audit?
Small companies
Dormant companies
Subsidiaries
What sources of evidence might auditors request to assess s. 172 compliance?
Board minutes and board packs – To review discussions on key decisions.
Discussions with the company secretary – To identify instances of s. 172 compliance that may not have been formally recorded in minutes.
Which documents and records are auditors entitled to have access to?
All.
Is an audit intended to provide reassurance as to the future prospects of the company?
No
Why are reliable financial statements important?
Reliable financial statements are critical to capital markets because they:
Ensure transparency and investor confidence.
Allow accurate valuation of companies.
Support efficient decision-making by shareholders and regulators.
What is the primary objective of an external auditor?
The auditor’s main objective is to obtain reasonable assurance that the financial statements:
Are free from material misstatements (whether due to fraud or error).
Have been prepared by management in compliance with legal and accounting standards.
Upon completion of the audit, the auditor must issue a report to the company’s members that contains their opinion on the accuracy and reliability of the financial statements.
Who is responsible for the accuracy of financial statements?
Directors are responsible for ensuring accuracy and transparency in financial reporting.
Auditors are responsible for independently verifying financial statements and maintaining audit quality.
Why is auditor independence essential?
Independence is crucial because auditors must be objective and unbiased when reviewing financial statements.
If auditors have conflicts of interest (e.g., close ties to company management), they may lose objectivity, leading to compromised audit quality.
How does CA2006 ensure auditor independence?
CA2006 s. 1214 prohibits certain individuals from being appointed as statutory auditors to prevent conflicts of interest.
An individual cannot be appointed as an auditor if they are:
An officer or employee of the company (e.g., a director, manager, or staff member).
A partner or employee of the audit firm if the auditor is a company or partnership.
An officer or employee of an associated undertaking of the company.
A partner or employee of an auditor (if the auditor is an individual or part of a partnership), where there is a direct or indirect business relationship with the audited company.
What happens if an auditor loses independence after an audit has started?
If, during the course of an audit, an auditor becomes ineligible under CA2006 s. 1214, they must:
Immediately resign as auditor.
Provide written notice to the company, stating that the resignation is due to a loss of independence (CA2006 s. 1215).
This ensures that companies promptly appoint a new independent auditor to maintain audit integrity.
Why is the provision of non-audit services by audit firms controversial?
There is a long-standing debate over whether auditors should be allowed to provide non-audit services to their audit clients due to concerns about independence and audit quality.
Key concerns include:
Conflict of interest – Auditors may prioritise lucrative non-audit fees over objective auditing.
Self-review threat – Auditors might audit their own work, compromising independence.
Over-familiarity – Long-standing relationships could reduce professional scepticism.
Advocacy risk – Auditors may act in a role supporting their client’s interests, rather than remaining neutral.
What is an associated undertaking in relation to an audited company?
An associated undertaking includes:
A parent undertaking or subsidiary undertaking of the audited company.
A subsidiary undertaking of a parent company of the audited company.
This means any entity within the same corporate group is considered an associated undertaking, and auditors must ensure they have no direct or indirect business relationships with them.
What is the accounting profession’s argument in favour of non-audit services?
The profession supports a principles-based approach rather than a strict ban. Their arguments include:
A blanket prohibition on non-audit services is not in clients’ best interests.
Auditors often need to understand transactions to ensure audit quality.
Independence should be actively monitored and mitigated rather than outright prohibited.
The approach follows the “substance over form” principle in accounting.
However, critics argue that allowing non-audit services creates an inherent risk of auditor bias.
What restrictions exist for non-audit services under EU audit regulations?
Under Article 5 of the Audit Regulation, statutory auditors of PIEs are prohibited from providing certain non-audit services to their audit clients.
What are the key categories of prohibited non-audit services?
The following 11 categories of services are strictly banned for auditors of PIEs:
Tax services
Preparing tax forms, payroll tax calculations, and identifying tax incentives (unless legally required).
Assisting in tax inspections (unless legally required).
Providing tax advice or calculating deferred tax.
Management decision-making services
Auditors cannot participate in decision-making or management processes.
Bookkeeping & financial statement preparation
Auditors cannot prepare accounting records or draft financial statements.
Payroll services
Preparing payroll reports is not allowed.
Internal controls & risk management design
Designing or implementing internal control systems.
Creating financial IT systems related to financial reporting.
Valuation services
Performing valuations for actuarial services or litigation support.
Legal services
Acting as general counsel for the audited entity.
Representing the company in legal disputes or negotiations.
Internal audit services
Auditors cannot take part in the company’s internal audit function.
Financial strategy consulting
Advising on capital structure, investment strategy, and financing.
Issuing comfort letters (except for financial statement assurance).
Dealing in company shares
Promoting, dealing, or underwriting the company’s shares or securities.
Human resources consulting
Searching for, selecting, or screening candidates for management positions.
Advising on organisational structure or cost control.
These restrictions prevent conflicts of interest and ensure auditor independence.
Can auditors provide non-audit services that are not explicitly prohibited?
Yes, but only if:
The auditor assesses whether the service compromises their independence.
The service does not create a self-review or advocacy risk.
The client’s audit committee approves the service.
Even permitted services must be carefully managed to maintain professional scepticism.
What are the restrictions on non-audit fees for PIEs?
Article 4 of the Audit Regulation imposes a cap on non-audit fees to limit financial dependence on non-audit work.
The cap is 70% of the average audit fees over the previous three financial years.
If non-audit fees exceed this threshold, the auditor must not provide further non-audit services.
This rule ensures that auditors do not become financially reliant on non-audit fees.
What type of individual or firm cannot be appointed as a company’s auditor?
An officer or employee of the company or an officer or employee of a connected undertaking, any person or firm that has
a business relationship with the company
What additional disclosure requirements exist for subsidiaries?
Under SATCAR2016 (Statutory Auditors and Third Country Auditors Regulations 2016), subsidiaries must:
Disclose audit and non-audit fees in their own accounts if their auditor differs from the group’s main auditor.
This ensures greater transparency when different firms audit different parts of a group.
There are a number of non-audit services that auditors are prohibited from providing to a PIE,
name five of them.
Tax services
Any part in management or decision-making
Bookkeeping and preparation of accounting records
Payroll services
Design or implementation of internal control of risk management processes
Valuation services
Legal services
Internal audit
Services linked to financial, capital structures, investment strategies
Promoting, dealing or underwriting in shares of the audit entity
HR services
What is the ratio of permitted audit: non-audit services fees for public interest entities?
70% over a rolling three year basis
Can contracts include clauses that restrict the choice of auditors?
No.
Regulation 12 of SATCAR2016 states that any contractual clause restricting auditor selection is unenforceable.
This ensures companies can freely choose their auditors without external interference.
When must a private company appoint its first auditor?
The first auditor must be appointed before the deadline for sending accounts to members.
If the accounts are sent earlier, the appointment must be made by that date (CA2006 s. 485).
Deadlines for appointing the first auditor:
Private companies – Within 9 months of the year-end.
Public companies – Within 6 months of the year-end
What must Public Interest Entities (PIEs) report regarding auditor choice?
PIEs must:
Confirm that no restrictive contractual clauses have been imposed (CA2006 ss. 485A(5)(c)(ii) & 489A(5)(c)(ii)).
Report any third-party attempts to influence auditor choice to the Financial Reporting Council (FRC).
Example:
If a bank or lender insists that a company use a specific auditor as a condition for granting a loan, the PIE must report this attempt to the FRC.
Who appoints the first auditor in a private company?
The directors appoint the first auditor.
In what situations can directors appoint an auditor (pvt co.)?
Directors may appoint an auditor in the following circumstances:
For a new company requiring its first audit.
If the company was previously exempt from audit but now requires one.
To fill a casual vacancy caused by the resignation or death of the previous auditor (CA2006 s. 485(3)).
What happens in subsequent years after the first audit (pvt co)?
Auditors are either reappointed annually by the members at a general meeting.
If no general meeting is held and no objections are raised, the auditor is automatically reappointed.
What happens if a private company fails to appoint an auditor?
If a company does not appoint an auditor within the required time frame, the Secretary of State may intervene and appoint an auditor (CA2006 s. 486).
The company must notify the Secretary of State within seven days if auditors have not been appointed.
Example:
If a company’s financial year ends on 31 December 2024, the deadline to appoint auditors would be:
30 September 2025 (private company, 9 months after year-end).
If no auditor is appointed, the company must inform the Secretary of State by 7 October 2025.
When does an auditor get automatically reappointed (pvt co)?
Automatic reappointment occurs unless:
The directors originally appointed the auditor.
The company’s Articles of Association require an actual reappointment vote.
Members prevent reappointment by using their statutory rights (CA2006 s. 488).
A resolution to reappoint the auditor is lost at a general meeting.
Directors resolve not to appoint an auditor for the financial year.
How is an auditor reappointed in a private company?
There are two methods of reappointment:
Formal reappointment – If a general meeting is held, members vote to reappoint the auditor.
Automatic (deemed) reappointment – If no objections are raised, the existing auditor remains in place by default (CA2006 s. 487).
Can shareholders prevent the automatic reappointment of an auditor (pvt co)?
Yes. Under CA2006 s. 488, shareholders holding at least 5% of total voting rights can prevent automatic reappointment by:
Giving written notice to the company.
The notice must be given before the end of the accounting reference period.
Example:
If a company’s financial year ends on 31 December 2024, shareholders must submit their objection before 31 December 2024 to prevent automatic reappointment of the auditor for the 2025 audit.
Summary:
Restrictive clauses on auditor choice - Banned under SATCAR2016, PIEs must report any third-party influence to the FRC.
First appointment for private companies - Must be made before the deadline for sending accounts to members.
Who appoints the first auditor? - Directors (CA2006 s. 485(3)).
Failure to appoint an auditor - Secretary of State may intervene (CA2006 s. 486).
Automatic reappointment - Occurs unless prevented by specific conditions (CA2006 s. 487).
Shareholder rights to block reappointment - Requires 5% of total voting rights, written notice before the end of the financial year (CA2006 s. 488).
Must all public companies appoint auditors?
Yes, all public companies must appoint auditors, except in the case of a dormant company.
When must auditors be appointed for the first financial year (public)?
Auditors must be appointed before the meeting at which the accounts are laid before the members (CA2006 s. 489(1)).
Who appoints the first auditors (public)?
The first auditors are usually appointed by the directors. However, if the directors fail to do so, the members can appoint the auditors (CA2006 s. 489(3) and (4)).
When must auditors be appointed for subsequent financial years (public)?
Auditors must be appointed or reappointed at the conclusion of the meeting at which the accounts for the previous financial year are laid before the members (CA2006 s. 489(2)).
In what other circumstances can directors appoint an auditor (public)?
Directors may appoint an auditor in the following situations (CA2006 s. 489(3)):
If the company was previously exempt from audit and now requires one.
To fill a casual vacancy caused by the resignation or death of the previous auditor.
What happens if a public company fails to appoint an auditor?
If a public company fails to appoint an auditor in accordance with CA2006 s. 489, the Secretary of State may appoint an auditor to fill the vacancy (CA2006 s. 490).
What is the company’s obligation if it fails to appoint an auditor?
The company must notify the Secretary of State within seven days of the conclusion of the meeting at which the previous accounts were laid before the members (CA2006 s. 490).
Under what legal provisions can an auditor be appointed to a non-PIE public company?
An auditor can only be appointed pursuant to CA2006 sections 489 and 490.
Does the appointment of an auditor automatically renew for public companies?
No, the appointment does not automatically renew. It ceases at the conclusion of the meeting at which the accounts are laid before the members, unless they are reappointed (CA2006 s. 491).
What legislation applies to PIEs, statutory auditors, and audit firms?
The Statutory Audit Directive applies to PIEs, statutory auditors, and audit firms.
How was the Statutory Audit Directive implemented in the UK?
The Statutory Audit Directive was implemented in the UK through:
Companies Act 2006 (CA2006) – specifically, Part 16 (Audit) and Part 42 (Statutory Auditors).
A number of statutory instruments.
DTR 7.1, which introduced additional regulatory requirements.
Are companies listed on AIM or the NEX Growth Market considered PIEs?
No, AIM and NEX Growth Market are not regulated markets. Therefore, companies listed on these markets are not PIEs, unless they also qualify as:
A credit institution.
An insurance undertaking.
How is a Public Interest Entity (PIE) defined under CA2006?
Under CA2006 s. 519A, a company is considered a PIE if it meets at least one of the following criteria:
An issuer with transferable securities admitted to trading on a regulated market.
A credit institution (e.g., a bank or financial institution).
An insurance undertaking (e.g., an insurance company).
Have there been any amendments to the Statutory Audit Directive?
Yes, the Statutory Audit Directive has been amended by:
An Amending Directive.
The Audit Regulation, both of which were implemented in the UK by SATCAR2016 (The Statutory Auditors and Third Country Auditors Regulations 2016).
Why does the definition of a PIE refer to “transferable securities” rather than just “equity shares”?
The legislation applies to all transferable securities, not just equity shares. This means that:
Issuers of listed debt instruments (such as bonds) are subject to the rules even if their equity shares are not listed or traded.
Why were new rules introduced regarding the appointment of auditors to PIEs?
Concerns were raised about:
Lack of competition in audit services for large businesses.
Complacency among audit firms, leading to a potential decline in vigilance and objectivity.
Findings from the Competition and Markets Authority (CMA) in the UK, which led to measures restricting auditor appointments.
Pan-European legislation, introduced through the Audit Directive, which set limits on the length of auditor appointments.
When did the Statutory Audit Directive introduce restrictions on auditor appointments to PIEs?
The restrictions applied to financial years beginning on or after 17 June 2016.
What is mandatory audit firm rotation under the Statutory Audit Directive?
Mandatory audit firm rotation requires that:
An audit firm cannot be reappointed unless a tender process for audit services has been carried out at least once every 10 years.
An audit firm cannot be appointed at all if they have continuously served as the auditor for 20 years or more.
What happens if an audit tender has not been conducted in the last 10 years?
If a PIE appoints an auditor without having conducted a tender process in the previous 10 years, then:
The audit committee (or directors, if there is no audit committee) must undertake a public tender process.
This requirement is based on Article 16(3) of the Audit Regulation, implemented in UK law through CA2006 ss. 485A, 485B, 489A, and 489B.
Which sections of CA2006 apply to public and private companies regarding audit tenders?
CA2006 ss. 485A & 485B → Apply to private companies.
CA2006 ss. 489A & 489B → Apply to public companies.
Who must carry out the audit tender process?
If a company has an audit committee, the audit committee must follow the detailed tender process in Article 16(3).
If a company does not have an audit committee, the directors must conduct the tender process and determine how it should be carried out.
How many audit firms must be invited to tender?
At least two audit firms must be invited to tender, and both must have a reasonable chance of being appointed.
What role does the audit committee play in the appointment of auditors for PIEs?
At the conclusion of the tender process, the audit committee must recommend two preferred audit firms to the full board.
The committee must formally confirm that the recommendation is free from third-party influence or contractual restrictions.
The board as a whole makes the final decision on which of the two firms to appoint.
If the directors disagree with the audit committee’s choice, they must provide reasons.
Are any companies exempt from the mandatory audit tender process?
Yes, the following are exempt:
Small or medium-sized enterprises (SMEs) as defined in Article 2(1)(f) of the Prospectus Directive.
Public companies with a reduced market capitalisation, as per Article 2(1)(t) of the Prospectus Directive.
What is the maximum term of office for an auditor of a PIE?
The maximum term of office is the longer of the following (CA2006 ss. 487(1C) and 491(1C)):
10 years from the first financial year for which the auditor was appointed (CA2006 ss. 487(1C)(a) and 491(1C)(a)).
20 years, provided that a tender process has been held at least once every 10 years (CA2006 ss. 487(1C)(b) and 491(1C)(b)).
A period not exceeding 20 years, ending on the last day of a relevant 10-year period from the first appointment (CA2006 ss. 487(1C)(c) and 491(1C)(c)).
How often must PIEs undertake a tender process for audit services?
PIEs must undertake a tender process at least every 10 years to ensure competition in the audit market.
What is the absolute maximum period an auditor can serve a PIE?
20 years maximum unless extended.
The Financial Reporting Council (FRC) may grant a two-year extension in exceptional circumstances (CA2006 ss. 487(1C) and 491(1C)).
However, an auditor cannot serve more than 22 years in total under any circumstances.
Can an auditor be reappointed after reaching the maximum engagement period?
No, an auditor is not eligible for reappointment if:
They, or a member of their network, have ceased to be auditor after serving the maximum engagement period in the last four years (CA2006 ss. 487(1E) and 491(1E)).
Are there rules for audit partner rotation within a PIE?
Yes, in addition to audit firm rotation:
An audit partner cannot serve as the lead auditor for a PIE for more than seven years from their first appointment.
After serving seven years, they cannot be reappointed for three years.
There must be gradual rotation of senior personnel involved in the audit to ensure independence.
Why is the UK’s maximum audit partner period shorter than the EU Directive?
The FRC exercised its member state option to impose a shorter rotation period for audit partners compared to the EU Directive, which allows for a longer period.
What are the key transitional provisions for mandatory audit firm rotation?
The following deadlines apply based on how long an audit firm has continuously audited a PIE:
From 17 June 2020
If a PIE had the same auditor for 20+ consecutive years as of 17 June 2016, it could no longer reappoint that auditor.
From 17 June 2023
If a PIE had the same auditor for more than 11 but less than 20 consecutive years as of 17 June 2016, it could no longer reappoint that auditor.
When a partnership is appointed as an auditor, does the appointment apply to the individual partners?
No, unless explicitly stated otherwise, the appointment applies to the partnership as a whole and not to the individual partners (CA2006 s. 1216).
What happens if the partnership ceases to exist?
If the partnership ceases, the appointment is automatically extended to:
A person who succeeds the partnership, provided they were previously part of that partnership and are eligible to act as an auditor.
A new partnership that is eligible and succeeds the ceased partnership.
When is a partnership considered to have ‘succeeded’ another partnership?
A new partnership is considered a successor if:
The majority of partners remain the same.
The new partnership takes over most or all of the business of the previous partnership.
How do the legal definitions of partnerships affect their continuity?
In England and Wales, Northern Ireland, and countries where partnerships do not have legal personality, a partnership ceases to exist when there is a change in partners or dissolution.
In Scotland, partnerships are legal persons and do not cease to exist when partners change.
What happens when an audit firm is incorporated as a limited company or LLP?
Many audit firms have incorporated as limited companies or limited liability partnerships (LLPs).
These are corporate bodies with legal personality, so the corporate entity itself is appointed as the auditor rather than the individual partners.
What happens if a partnership ceases and no successor firm exists?
If a partnership ceases and no eligible successor firm or individual automatically takes over, then:
The appointment may be extended by ordinary resolution of the members.
The resolution may extend the appointment to any person or firm that succeeds to the previous firm’s business (or the part of the business that comprised the audit appointment) (CA2006 s. 1216(5)).
Is an exempt company required to appoint auditors?
No, a company that is exempt from audit is also exempt from the obligation to appoint auditors.
Does becoming exempt from audit automatically terminate the appointment of existing auditors?
No, if a private company becomes exempt from audit, the appointment of existing auditors does not automatically terminate.
In such cases, the directors must pass a resolution stating that no auditors will be appointed for that financial year (CA2006 s. 487(2)(e)).
Are there any circumstances where an exempt company must appoint an auditor?
Yes, even if a company is exempt from audit, certain transactions require an auditor’s involvement, such as:
Solvency statements for capital reductions – The company’s auditor must confirm that the solvency statement made by the directors is reasonable.
Other specific regulatory requirements that require an independent auditor’s confirmation.
Who is responsible for fixing the remuneration of auditors?
The responsibility for fixing auditor remuneration depends on who appoints them:
If the auditors are appointed by the directors → Their remuneration is fixed by the directors.
If the auditors are appointed or reappointed by the members → Their remuneration is fixed by the members or in any other manner determined by the members (CA2006 s. 492).
How is auditor remuneration typically determined in practice?
Most companies seek authority from their members to allow the directors to determine the auditors’ remuneration.
In a public company, this resolution is usually combined with the resolution for reappointing the auditors when the accounts are presented to members.
What are the disclosure requirements for auditor remuneration?
Companies must disclose in their accounts:
The amount of auditors’ remuneration for their audit services.
Any expenses incurred by the auditors in their role.
The cash value of any benefits in kind provided to the auditors (CA2006 ss. 493 and 494).
Are companies required to disclose payments for non-audit services?
Yes, companies must disclose amounts paid to auditors and their associates for non-audit services, including:
Financial services
Taxation services
Are any companies exempt from disclosing auditor remuneration?
Yes, certain companies are exempt:
Small companies are exempt from disclosing both audit and non-audit remuneration.
Parent companies qualifying as medium-sized are exempt from disclosing non-audit remuneration.
These exemptions are set out in the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 (SI 2008/489) (C(DARLLA)R2008) regs. 4–6.
Can a company provide liability protection to its auditors?
No, there is a general prohibition on companies providing liability limitation or protection to their auditors, except in certain specified circumstances (CA2006 s. 532).
What are the two exceptions to this general prohibition?
There are two key exceptions:
Indemnification for specific legal costs (CA2006 s. 533) – A company may indemnify its auditor for liability incurred:
In defending legal proceedings (civil or criminal) where the auditor is acquitted or judgment is in their favour.
In connection with a court application for relief (CA2006 s. 1157) where the auditor is granted relief by the court.
Liability Limitation Agreements (LLAs) (CA2006 ss. 534–538) – A company may enter into an agreement with its auditor to limit liability for negligence, default, breach of duty, or breach of trust if:
The agreement only applies to one financial year.
It is authorised by an ordinary resolution of the members (private companies may waive this requirement).
What are the disclosure requirements for Liability Limitation Agreements (LLAs)?
If a company enters into an LLA with its auditor, its financial accounts must disclose:
The principal terms of the agreement.
The date of approval of the resolution authorising the agreement (or waiving the need for approval in private companies).
Who is the UK’s competent authority for audit regulation?
The Financial Reporting Council (FRC) is designated as the UK’s competent authority for audit regulation under the Statutory Audit Directive.
What are the key responsibilities of the FRC?
The FRC has ultimate responsibility for regulatory tasks, including:
Setting auditing standards.
Conducting inspections of audits, particularly for Public Interest Entities (PIEs).
Carrying out investigations and disciplinary actions where necessary.
Can the FRC delegate its responsibilities?
Yes, the FRC can delegate certain regulatory tasks to recognised supervisory bodies (RSBs).
What are the requirements for a body to be recognised as a supervisory body?
To qualify as a Recognised Supervisory Body (RSB), an organisation must meet the conditions set out in Schedule 10 of the Companies Act 2006, which include:
Ensuring auditors meet required professional standards.
Supervising auditors effectively.
Having appropriate disciplinary and enforcement mechanisms.
Can anyone be appointed as a company auditor?
No, must be a registered auditor, or audit firm and not be prohibited from being appointed
Can the liability of the auditor be limited?
Yes, but requires consent of the members
How many consecutive years can an auditor be appointed to a PIE?
Ten years plus an additional 10 years if a tender has been carried out
Are there any legal restrictions on how long an audit engagement partner can be associated with a company?
No, the Companies Act does not impose specific restrictions on how long an audit partner can be engaged with a company. However, the Auditing Practices Board (APB) provides ethical guidance to mitigate threats to auditor independence and objectivity.
What does the APB recommend regarding audit partner rotation?
The APB recognises the risks of long-term association between an audit partner and a client. It generally advises audit firms to set their own internal policies but highlights that an engagement of 10 years or more should be carefully assessed to determine if it compromises independence.
What are the specific rules for Public Interest Entities (PIEs) regarding audit partner rotation?
For PIEs, the APB recommends that:
Key audit partners must rotate every five years.
A five-year “cooling-off” period is required before they can participate in the statutory audit again.
Extensions beyond five years may be granted in exceptional circumstances, but additional safeguards must be implemented to maintain auditor independence.
Is there a maximum period for an audit firm’s engagement with a non-PIE company?
No, for companies that are not PIEs, there is no statutory limit on how long an audit firm can be appointed. The same audit firm can be reappointed indefinitely, one year at a time.
What are the rotation rules for PIE audit firms?
PIE audit firms are subject to stricter rules, which were discussed in previous sections. They must:
Tender their audit services at least every 10 years.
Change auditors after a maximum of 20 years (subject to certain extensions in exceptional circumstances).
What does audit partner rotation guard against?
Threat to auditor objectivity and independence
Do all companies need to change their audit firm regularly?
No, only Public Interest Entities (PIE)
When does an auditor of a PIE need to make a statement if they cease to hold office as auditor?
Always
Who are the relevant audit authorities?
The auditor’s recognised supervisory body and in the case of a PIE the FRC
Who is the audit report prepared for?
The members
Is the audit process expected to uncover all errors or fraud?
No – only material errors and omissions
How can an auditor’s appointment be terminated?
An auditor’s appointment can be terminated in the following ways:
Resignation of the auditor
Removal by the members
Application to the court
Not being re-appointed by the members
How does an auditor resign?
An auditor may resign by giving notice to the company.
The resignation takes effect immediately upon giving notice or on a later date specified in the notice (CA2006 s. 516).
What additional requirements apply when a PIE’s auditor resigns?
The resignation notice must include a statement outlining:
The reasons for resignation
Any matters the auditor believes should be brought to the attention of members or creditors
What statement must a resigning auditor provide for non-PIE companies?
The auditor must submit a statement explaining their reasons for resigning unless:
The resignation occurs at the end of an appointment period:
Private company: End of the period for appointing auditors
Public company: End of an accounts meeting
The resignation is for exempt reasons (CA2006 s. 519A(3)):
The auditor is stopping statutory audit work entirely.
The company is exempt from audit under CA2006 ss. 477, 479A, 480, or 482.
The company is a subsidiary of a UK parent that prepares group accounts, and the group auditor is replacing the individual company auditor.
The company is being wound up or liquidated under IA1986 or I(NI)O1989.
If none of the above apply, the auditor must still provide a statement, even if they believe there is nothing to bring to the attention of members or creditors.
What happens when a PIE auditor provides a statement with concerns?
If a resigning auditor of a PIE makes a statement with concerns:
They can request the directors to call a general meeting to discuss the resignation (CA2006 s. 518).
The directors must convene the meeting within 21 days and hold it within 28 days of issuing the notice.
The auditor’s statement must be sent to members with the meeting notice.
What happens if an auditor of a PIE resigns?
They can request a general meeting to explain their resignation.
The directors must convene the meeting within 21 days, and it must be held within 28 days of the notice.
The auditor’s resignation statement must be sent to members with the meeting notice.
The auditor has the right to attend and speak at the meeting (CA2006 s. 518).
What if the auditor’s statement contains defamatory material?
If the company believes the auditor’s statement contains defamatory material, they may apply to the court to prevent its circulation.
If the court agrees, the statement will not be sent to members.
What are the rights of a resigning auditor?
A resigning auditor has the right to:
Receive notice of and attend the general meeting called in response to their resignation.
Speak at any general meeting where:
Their term would have otherwise expired, or
A new auditor is being appointed to fill the vacancy left by their resignation (CA2006 s. 518(10)).
What happens if a PIE auditor resigns during the year?
The company must send a notice of the next general meeting (where accounts are presented) to the previous auditor.
If a new auditor is being appointed due to the resignation, a special notice must be given to the company, usually by a director.
Can members remove an auditor before their term ends?
Yes, auditors can be removed by an ordinary resolution of the members before their term expires (CA2006 s. 510)
What is the notice requirement for removing an auditor?
A special notice (at least 28 days before the meeting) must be given to the company.
The company must send a copy of the notice to the auditor without delay.
The company must circulate the removal resolution to members at least 14 days before the meeting.
What rights does the auditor have if they are being removed?
The auditor can submit written representations, which the company must send to members.
The auditor can attend and speak at the general meeting.
If their written representations are not circulated, they can request that the statement be read out at the meeting.
The company can apply to the court to prevent circulation if the representations are defamatory.
What are the reporting obligations if an auditor is removed?
If the company is a PIE, the Financial Reporting Council (FRC) must be notified of the removal, along with the reasons.
Can the court remove an auditor?
Yes, the court may remove an auditor if there are serious concerns about their conduct or ability to perform their duties.
Who can apply to the court for an auditor’s removal?
The company itself.
A director.
A member (shareholder).
The FRC, if the company is a PIE.
What are the grounds for court removal of an auditor?
The court may remove an auditor if:
They have failed to perform their duties properly.
There is evidence of misconduct or lack of independence.
They are incapable of performing their role.
What are the rights of an auditor who is being removed or not reappointed?
Auditors who are being removed before their term ends or are not reappointed have several rights, including:
The right to receive a copy of the special notice proposing their removal or non-reappointment.
The right to make written representations to the company.
The right to have their representations sent to shareholders before the meeting.
The right to have their representations read out at the meeting if they were not circulated.
The right to receive notice of, attend, and speak at the meeting where the resolution is being considered.
When must the company send a copy of the removal or non-reappointment notice to the auditor?
The company must send a copy of the special notice (for removal) or the written resolution (for non-reappointment) as soon as practical to:
The retiring auditor (who is being removed or not reappointed).
The new auditor (who is being proposed for appointment) (CA2006 ss. 514(3), 515(3)).
Can an auditor challenge their removal or non-reappointment?
Yes. The auditor can:
Submit written representations to the company about the proposed resolution.
Request the company to circulate their representations to shareholders before the meeting (CA2006 ss. 514(4), 515(4)).
What happens if the auditor’s representations are received too late for circulation?
If the representations are received too late to be included with the meeting notice:
The company must inform shareholders that a representation has been made.
The company must send the representation separately to all shareholders entitled to receive the meeting notice (CA2006 ss. 514(5), 515(5)).
If the representations are not sent out, the auditor can require them to be read out at the meeting (CA2006 s. 515(6)).
Can an auditor attend and speak at the meeting where their removal is being discussed?
Yes. The auditor has the right to:
Receive notice of the general meeting.
Attend the meeting.
Speak at the meeting where their removal or non-reappointment is being considered.
Can the company prevent an auditor’s representations from being circulated or read at the meeting?
Yes, but only if the court approves. If the company believes the auditor is abusing their rights to gain needless publicity for defamatory content, it can apply to the court to block the circulation or reading of the representations (CA2006 ss. 514(7), 515(7)).
If the court agrees, it may also order the auditor to pay the company’s legal costs for making the application.
What must a company do when it receives a statement from an auditor ceasing to hold office?
If an auditor ceases to hold office and provides a statement containing reasons or matters they wish to bring to the attention of members or creditors, the company (if it is a Public Interest Entity (PIE) or any other company) must, within 14 days, either:
Send a copy of the statement to every person entitled to receive audited accounts (CA2006 s. 423).
Apply to the court for an order stating that it does not need to send the statement.
What happens if the company applies to the court to avoid distributing the auditor’s statement?
The company must notify the auditor about the application.
The court may:
Reject the auditor’s statement and order the auditor to pay costs.
Uphold the auditor’s statement, requiring the company to distribute it.
Within 14 days of the judgment, the company must:
Send the court’s decision to those entitled to receive audited accounts.
If the court upholds the auditor’s statement, distribute the auditor’s statement within 14 days (CA2006 s. 520).
What must an auditor do if they are not notified of a court application within 21 days?
If the auditor is not notified within 21 days that the company has applied to court, they must:
Send a copy of their statement to Companies House (Registrar of Companies) within the next 7 days (CA2006 s. 521).
If the company does apply to the court but the application is rejected, the auditor must:
Send a copy of their statement to Companies House within 7 days of being notified of the court’s decision.
When must an auditor notify the audit authority?
If an auditor sends a statement under CA2006 s. 519 to the company, they must also:
Send a copy of the statement to the appropriate audit authority at the same time (CA2006 s. 522).
When must a company notify the audit authority about an auditor’s cessation?
A company must notify the appropriate audit authority when its auditor ceases to hold office under certain conditions:
For PIEs, the relevant audit authority is the Financial Reporting Council (FRC).
For non-PIEs, the authority is usually the auditor’s recognised supervisory body.
When does an auditor of a PIE need to make a statement if they cease to hold office as auditor?
Always
Who are the relevant audit authorities?
The auditor’s recognised supervisory body and in the case of a PIE the FRC.
What is the primary objective of an auditor?
The auditor’s objective is to obtain reasonable assurance that the financial statements prepared by the directors are free from material misstatement, whether due to misunderstanding, error, or fraud, and to issue a report to the members of the company.
Under which standards are audits carried out in the UK?
Audits in the UK are conducted in accordance with International Standards on Auditing (UK) (ISA (UK)).
Does an audit provide a guarantee that there are no material misstatements?
No, an audit provides reasonable assurance, which is a high level of assurance, but not an absolute guarantee that all material misstatements will be detected.
What are the possible causes of material misstatements?
Material misstatements in financial statements can be caused by:
Error (unintentional mistakes).
Fraud (deliberate misrepresentation).
How does ISA (UK) 2006 define material misstatements?
According to ISA (UK) 2006, misstatements (including omissions) are considered material if they could reasonably be expected to influence the economic decisions of users based on the financial statements.
What key professional qualities must an auditor maintain during an audit?
An auditor must exercise:
Professional judgment – making informed decisions based on knowledge and experience.
Professional scepticism – maintaining a questioning mindset and being alert to potential misstatements.
To whom does the auditor report their findings?
At the conclusion of the audit, the auditor must make a report to the company’s members in accordance with CA 2006 s. 495.
How is the audit report delivered to members in private and public companies?
Private companies: The audit report must be sent to members in accordance with CA 2006 s. 423.
Public companies: The audit report must be laid before the members in a general meeting as required by CA 2006 s. 437.
What are the key investigations an auditor must carry out when auditing a company’s accounts?
An auditor must conduct sufficient investigations to determine whether:
Adequate accounting records have been maintained.
The accounts are consistent with the accounting records.
For a quoted company, the auditable part of the directors’ remuneration report is consistent with the accounting records. (CA2006 s. 498).
What must an auditor do if they cannot confirm any of the required statements?
If an auditor cannot confirm one or more of the required statements, they must state this fact in their report to the members.
What happens if an auditor does not obtain all necessary information or explanations?
If the auditor does not receive all the information or explanations they require, they must disclose this in their report.
What should the auditor report if the accounts do not include certain required disclosures?
If the accounts do not contain:
Directors’ remuneration, pensions, or compensation for loss of office as required by CA2006 s. 412
For quoted companies, the auditable part of the directors’ remuneration report as required by CA2006 s. 421
Then the auditor must include the missing details in their report (CA2006 s. 498(4)).
What must the auditor report if the company incorrectly claims small company status?
If the directors wrongly prepare accounts under the small companies’ regime, and the auditor believes the company does not qualify as a small company, they must state this in their report (CA2006 s. 498(5)).
What should the auditor do if the company fails to include a required corporate governance statement?
If a company is required to include a corporate governance statement in the directors’ report but fails to do so, the auditor must state this fact in their report (CA2006 s. 498A).
What statutory rights does an auditor have in relation to company information?
An auditor has the right of access at all times to the company’s books, accounts, and records (CA2006 s. 499(1)(a)).
Who can the auditor require to provide information or explanations necessary for the audit?
The auditor can require information from:
Any officer or employee of the company.
Any person holding or accountable for the company’s books, accounts, or vouchers.
Any UK-incorporated subsidiary undertaking of the company.
Any officer, employee, or auditor of such a subsidiary.
Any person holding or accountable for the books, accounts, or vouchers of the subsidiary (CA2006 s. 499(1)(a) & (2)).
What obligations does a parent company have if it has a subsidiary not incorporated in the UK?
If a parent company has a subsidiary that is not incorporated in the UK, the parent company must take all reasonable steps to obtain the required information from the subsidiary if requested by the auditor (CA2006 s. 500).
What are the legal consequences of providing misleading or false information to auditors?
It is an offence for an officer of the company to knowingly make a misleading, false, or deceptive statement when providing information to the auditors. This offence is punishable by a fine and/or imprisonment (CA2006 s. 501).
What rights does the auditor have concerning company general meetings?
The auditor has the right to:
Attend any general meeting of the company.
Receive all notices and communications relating to general meetings.
Speak at the meeting on any business that concerns them as an auditor (CA2006 s. 502).
What is the purpose of the auditor’s report?
The auditor is required to report to the members on their audit of the financial statements of the company (CA2006 s. 495).
What key elements must be included in the auditor’s report?
The report must include:
An introduction identifying the company.
A description of the accounts, including the financial year covered and the financial reporting framework used.
A description of the scope of the audit work performed and the accounting standards applied.
What must the auditor’s opinion cover?
The auditor must state whether the financial statements:
Have been properly prepared in accordance with the relevant financial reporting framework.
Have been prepared in compliance with the Companies Act 2006 and, if relevant, the IAS Regulations.
Provide a true and fair view of:
The state of affairs of the company at the end of the financial year (balance sheet).
The profit or loss of the company for the financial year (profit and loss account).
The state of affairs and profit/loss of a group (if applicable).
What are the possible types of auditor’s reports?
Unqualified (clean report) – No significant issues found.
Qualified – Some concerns exist.
Emphasis of Matter – Draws attention to specific issues without qualifying the report.
Going Concern Statement – Highlights material uncertainty regarding the company’s ability to continue as a going concern.
The report must also identify the auditor’s place of establishment.
What additional statements must the auditor include under CA2006 s. 496?
The auditor must state whether:
The strategic report (if any) and directors’ report are consistent with the financial statements.
These reports have been prepared in accordance with legal requirements.
Any material misstatements were found in these reports, and if so, the nature of each misstatement.
What are the additional requirements for auditors of quoted companies?
Under CA2006 s. 497, the auditor must:
Report on the auditable parts of the remuneration report.
State whether the directors’ remuneration report has been properly prepared in accordance with the Act.
What must the auditor report regarding corporate governance statements?
If a company prepares a separate corporate governance statement, the auditor must confirm (CA2006 s. 497A):
Whether the disclosures required by DTR 7.2.5 and 7.2.6 are consistent with the accounts and comply with legal requirements.
Whether any material misstatements were identified.
Whether the company has complied with DTR 7.2.2, 7.2.3, and 7.2.7, if applicable.
What is the purpose of the audit committee report for a Public Interest Entity (PIE)?
Article 11 of the Audit Regulation requires auditors of a PIE to provide a detailed report to the audit committee, covering key aspects of the audit process and findings.
What information must be included in the audit committee report?
The report must include:
Identity of the audit partner(s) responsible for the audit.
Use of other auditors or external experts – If audit work was done by another statutory auditor from a different network or by external experts, the report must: Disclose their involvement & Confirm that the other auditor/expert has provided assurance of their independence.
Description of audit scope and timing.
Methodology used, including: Balance sheet items directly verified; Items verified through system and compliance testing; Explanation of any major changes in testing approach compared to previous years.
Materiality level applied, including: Quantitative level of materiality;
Qualitative factors considered; Specific materiality levels for certain transactions, balances, or disclosures (if applicable).
Significant deficiencies in: The entity’s internal financial controls; The parent undertaking’s accounting systems (for consolidated accounts).
Non-compliance with laws and regulations – Any suspected or actual violations that could impact the audit committee’s oversight.
Significant difficulties encountered during the audit, including: Issues discussed with management, whether verbally or in writing.
Other significant matters that impact the financial reporting process, based on the auditor’s professional judgment.
Who is the audit report prepared for?
The Members.
Is the audit process expected to uncover all errors or fraud?
No, only material omissions and errors.
What are the requirements for signing the auditor’s report?
The auditor’s report must:
State the name of the auditor.
Be signed and dated (CA2006 s. 503).
Who should sign the auditor’s report?
If the auditor is an individual, they must sign it themselves.
If the auditor is a firm, the senior statutory auditor must sign the report in their own name on behalf of the firm (CA2006 s. 504).
Who qualifies as the senior statutory auditor?
The senior statutory auditor is the person identified by the audit firm as responsible for that particular audit.
They must be individually eligible to be appointed as an auditor of the company.
What must be included in published copies of the audit report?
Every published copy of the audit report must state:
The name of the auditor.
The name of the senior statutory auditor, where applicable (CA2006 s. 505).
Can the auditor’s name be omitted from the report?
Yes, under CA2006 s. 506, the auditor’s name may be omitted if there are reasonable grounds to believe that the auditor or anyone associated with them is at risk of violence or intimidation.
What must the company do if the auditor’s name is omitted?
If the exemption is used, the company must notify the Registrar, stating:
The company’s name and registered number.
The financial year to which the report relates.
The name of the auditor and, if applicable, the senior statutory auditor who signed the report.
What was the purpose of the audit and corporate governance reforms consultation?
On 18 March 2021, BEIS launched a consultation to modernize the UK’s audit and corporate governance regimes.
The aim was to prevent large company failures and increase transparency in financial reporting.
The reforms were based on recommendations from:
The FRC review by Sir John Kingman.
The Independent Review into the Quality and Effectiveness of Audit by Sir Donald Brydon.
The Competition and Markets Authority (CMA) study on the Statutory Audit services market.
What was the central focus of these reforms?
Reducing the dominance of the “Big Four” audit firms.
Enhancing financial transparency for large businesses.
Strengthening corporate governance and audit regulations.
What key proposals were made in the reforms?
Expanding auditors’ responsibilities
Auditors must consider a wider range of information.
The regulator will have powers to set enforceable principles for auditor conduct.
New reporting requirements
Large companies must report on anti-fraud measures.
Companies must disclose the level of independent scrutiny applied to published reports.
Voluntary audit schemes
Encouraging assurance of non-financial information beyond the statutory audit.
Creating a new audit profession
Moving away from audit being a subset of accountancy to a standalone profession.
Increasing competition in the audit market
Challenger firms to gain more market share.
Managed shared audit regime: Subsidiary audits to be conducted solely by challenger firms.
Possible market share cap on the Big Four audit firms.
New regulator – ARGA
The FRC will be replaced with the Audit, Reporting and Governance Authority (ARGA).
ARGA will have legal authority, improved funding, and clearer governance.
Stronger corporate governance for Public Interest Entities (PIEs)
The definition of PIEs will expand to include large non-listed companies.
The government may exempt newly listed firms from immediate PIE obligations.
Strengthened directors’ duties
New internal controls and risk management requirements.
Inspired by US Sarbanes-Oxley, but less burdensome.
Greater accountability for directors regarding audit and reporting obligations.
Stronger regulatory oversight
More scrutiny of corporate reporting (entire annual reports can be reviewed).
Tougher enforcement on accountants and actuaries.
Publication of full inspection reports on audit quality.
When did the consultation close, and what happens next?
The consultation closed on 8 July 2021.
The government will decide which changes to implement.
