Financial reporting to shareholders and external audit Flashcards
Provide 8 stakeholders who may be interested in a company’s financial, providing reasons why they may be interested
- Investors - to assist in their decision to hold, buy or sell.
- Creditors – interested in the security of their debt
- Suppliers – to understand the company’s ability to pay for their goods or services
- Employees – to understand the security of their employment
- Customers - to understand the company’s ability to provide their goods or services
- Governments – to assess company’s taxation
- Regulators – to help assess whether company is complying with laws and regulations
- Public – to understand ability to participate in local economy and activities
Provide five ways in which a company may misreport their financial numbers to improve its financial position
- The adoption of accounting policies that give a more flattering picture of the company’s position.
- Claiming that revenue or profits were earned earlier than it should have.
- Taking debts off the company’s balance sheet.
- Disguising money from loans as operating income.
- Over-valuing the company’s assets.
Provide 5 ways in which the company secretary can support the Audit committee
- Developing the terms of reference for the audit committee
- Advising the board on the appropriate composition for the committee
- Conducting an induction for new members of the audit committee
- Developing an annual calendar of activities for the committee
- Ensuring that the committee has sufficient resources to carry out its role.
- Organising the annual evaluation of the performance of the committee and its chair
- Drafting, in liaison with internal audit and the chair of the audit committee, the audit committee report to be included in the annual report
- Acting as secretary to the committee providing governance and procedural advice and logistical support to the committee, its chair and other members
What is the role of the external auditor?
- 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
- To give an expert and independent opinion on whether the financial statements comply with the relevant laws.
- The external auditor of a listed company Is also required to 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.
- They are not responsible for detecting fraud or errors in the organisation’s financial statements. This is the responsibility of the board of directors.
What are the three types of modified audit opinion?
- A qualified audit opinion which is given when, in the 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.
- An adverse opinion which is given when the 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.
- A disclaimer of opinion which is 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.
What are the five threats to auditor independence?
FASSI
1. Self-interest threat
2. Self-review threat
3. Advocacy threat
an ethical rule that firms should not take on any non-audit work in which they may be required to act as ‘advocate’ for the client as this means the auditor is being asked to take sides which will affect its independence.
- Familiarity threat
- Intimidation threat
List 6 measures to protect auditor independence?
- Appointment by shareholders
- Restricting or prohibiting non-audit services
- Assessment of independence of audit firm employees
- Rotation of audit partner or of audit firm
- Requesting that the auditor make public statements on behalf of the company - should make sure that the audit isn’t in an advocacy role
- Management intimidation - Audit Co should meet once a year without directors present
What are the two measures that a company can take, in respect of non audit work, to protect the independence of the auditor?
- Restrict the amount of non-audit work that audit firms can undertake from these clients to no more than 70% of the average fees from audit work over the previous three financial years
- 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
What does the Companies Act 2006 (CA2006) require with regards to Financial reporting
The Companies Act 2006 (CA2006) requires every company to keep adequate accounting records which are sufficient to:
- show and explain the company’s transactions;
- disclose with reasonable accuracy, at any time, the financial position of the company at that time; and
- enable the directors to ensure that any accounts required to be prepared comply with the requirements of the CA2006 and, where applicable, International Accounting Standards (IAS).
What is an unmodified auditor’s report?
Auditors are stating that the company’s financial statements do present a true and fair view of the financial position of the company.
What is the Co Sec’ role in relation to external Auditors
- The appointment and remuneration process of the external auditor.
- The assessment of independence of the auditor
- 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.
- Advising the board, (or audit committee) on any auditor rotation requirements.
- Ensuring that an action plan is developed for the board for any recommendations for improvement set out in the auditor’s ‘management letter’.
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