Chapter 9. Fianncial reporting to SH and external audit

Question 1

Provide eight stakeholders who may be interested in a company’s financial, providing reasons why they may be interested

Answer 1

1. Investors - to assist in their decision to hold, buy or sell.
2. Creditors – interested in the security of their debt
3. Suppliers – to understand the company’s ability to pay for their goods or services
4. Employees – to understand the security of their employment
5. Customers - to understand the company’s ability to provide their goods or services
6. Governments – to assess company’s taxation
7. Regulators – to help assess whether company is complying with laws and regulations
8. Public – to understand ability to participate in local economy and activities

Question 2

Provide five ways in which a company may misreport their financial numbers to improve its financial position

Answer 2

1. accounting policies give flattering picture of co. position
2. Claiming that revenue or profits were earned earlier than it should have.
3. Taking debts off the company’s balance sheet.
4. Disguising money from loans as operating income.
5. Over-valuing the company’s assets.

Question 3

Provide nine functions of the Audit Committee

Answer 3

1. Monitoring the integrity of the financial statements of the company and any formal announcements relating to the company’s financial performance, and reviewing significant financial reporting judgements contained in them
2. Providing advice on whether the annual report and accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the company’s position and performance, business model and strategy
3. Reviewing the company’s internal financial controls and internal control and risk management systems, unless expressly addressed by a separate board risk committee
4. Monitoring and reviewing the effectiveness of the company’s internal audit function
5. Conducting the tender process and making recommendations to the board, about the appointment, reappointment and removal of the external auditor, and approving the remuneration and terms of engagement of the external auditor;
6. Reviewing and monitoring the external auditor’s independence and objectivity
7. Reviewing the effectiveness of the external audit process, taking into consideration relevant UK professional and regulatory requirements
8. Developing and implementing policy on the engagement of the external auditor to supply non-audit services
9. Reporting to the board on how it has discharged its responsibilities.

Question 4

Provide five ways in which the company secretary can support the Audit committee

Answer 4

1. Developing the terms of reference for the audit committee
2. Advising the board on the appropriate composition for the committee
3. Conducting an induction for new members of the audit committee
4. Developing an annual calendar of activities for the committee
5. Ensuring that the committee has sufficient resources to carry out its role.
6. Assisting committee members in their understanding of current and emerging issues, especially those from shareholders, regulators and other stakeholders
7. Assisting the committee in sourcing advice of experts on issues under the committee’s responsibility.
8. Organising professional development for committee members
9. Organising the annual evaluation of the performance of the committee and its chair
10. Drafting, in liaison with internal audit and the chair of the audit committee, the audit committee report to be included in the annual report
11. Acting as secretary to the committee providing governance and procedural advice and logistical support to the committee, its chair and other members

Question 5

What is the role of the external auditor?

Answer 5

1. To give an expert and independent opinion on whether the financial statements give a true and fair view of the financial position of the company
2. To give an expert and independent opinion on whether the financial statements comply with the relevant laws.
3. Listed company review the company’s compliance with the 2018 Code, and to obtain evidence to support the company’s statement, included in the annual report and accounts, of its compliance with the 2018 Code.
4. The external auditors’ report provides an opinion on compliance with the law and accounting standards and whether the accounts that have been prepared by the board present a true and (in some cases) fair picture of the financial reality of the company. They are not responsible for detecting fraud or errors in the organisation’s financial statements. This is the responsibility of the board of directors.

Question 6

What are the three types of modified audit opinion?

Answer 6

1. A qualified audit opinion
   Opinion of the external auditor, the financial statements would give a true and fair view except for a particular matter, which the external auditor explains.
2. An adverse opinion
   External auditor considers that there are material mis-statements in the accounts and that these are ‘pervasive’. In effect, the external auditor is stating that they believe that the information in the financial statements is seriously incorrect.
3. A disclaimer of opinion
   Given in cases where the external auditor has been unable to obtain the information that they need to give an audit opinion. The lack of information means that the auditor is unable to state that the financial statements give a true and fair view, and that there may possibly be serious mis-statements that the external auditor has been unable to check.

Question 7

What are the five threats to auditor independence?

Answer 7

1. Self-interest threat
2. Self-review threat
3. Advocacy threat
4. Familiarity threat
5. Intimidation threat

Question 8

List measures to protect auditor independence?

Answer 8

1. Appointment by shareholders
2. Restricting or prohibiting non-audit services
3. Assessment of independence of audit firm employees
4. Rotation of audit partner or of audit firm
5. Requesting that the auditor make public statements on behalf of the company
6. Management intimidation

Question 9

What are the two measures that a company can take, in respect of non audit work, to protect the independence of the auditor?

Answer 9

1. Restrict the amount of non-audit work that audit firms can undertake from these clients to <70% of the average fees from audit work over the previous three financial years
2. Impose a ban by audit firms on certain types of non-audit work, including: tax advice; services involving management/decision making for the client; book-keeping; and designing or implementing internal controls relating to financial information

Question 10

What is the role of the company secretary in relation to the external audit?

Answer 10

1. The appointment and remuneration of the external auditor.
2. The assessment of independence of the auditor
3. Ensuring that the external auditor attends the annual general meeting and is briefed about any questions that may be asked of them at that meeting.
4. Advising the board, (or audit committee) on any auditor rotation requirements.
5. Ensuring that an action plan is developed for the board for any recommendations for improvement set out in the auditor’s ‘management letter’.

Question 11

Requirements of audit committee under DTR? Compulsory

Answer 11

Chair must be independent

Majority of members must be independent NED’s

At least one member competent in accounting or audit

Members as a whole competent in sector