Lecture 1 Flashcards
What is an audit?
Independent third party investigating and examining a company’s financial records to form an opinion as to whether they are true and fair
Features of audit engagement
Responsible party (Management/ Directors)
PREPARE
Subject matter (Company’s performance)
PRESENTED AS
Subject matter information (Financial Statements)
ISSUED TO
User (shareholders)
Purpose of an audit
To reduce (not eliminate) risk
Reasonable assurance =
Results in positive form of expression of opinion. No material misstatements. Year end audit opinion.
Limited assurance =
Negative form of expression of opinion. We did not detect any material misstatements. Half year end audit opinion.
Objective of an audit
Enables auditor to express opinion on whether FSs prepared in all material aspects in accordance with the applicable financial reporting framework.
Who needs audit?
Companies Act determines. All companies (including subs) unless small/ dormant
Small company after 1/1/16 (2 of 3 criteria for 2 consecutive years)
Turnover =
Small company before 1/1/16 (2 of 3 criteria for 2 consecutive years)
Turnover =
Inverted L test
Yr 1 Yr 2
Current size M S
Status for year M M
New audit exemption rules for subsids YE after
1/10/2012
New audit exemption rules for subsids (6)
Subsids don’t need audit report if parent agrees to guarantee liabilities and meets criteria:
- Parent established under law EEA state
- Shareholders’ unanimous agreement
- Subsid included consolidated accounts parent
- Disclose in notes accounts
- File docs at Companies House
- Company not quoted
Public company appointing auditor
Appointed by shareholders at AGM/ accounts meeting. Must be appointed/ reappointed each year.
If directors/ shareholders fail to appoint auditor in public company
Secretary of state has power to
Directors can only appoint auditors (3)
- To fill casual vacancy
- In company’s first period for appointing auditors
- Following period when company was audit exempt
Private company appointing auditor
Same as public, although AGM unlikely therefore appointed/ reappointed within 28 days of copy of prior year accounts being sent to shareholders
New audit report format
ISA 701 for periods ending on/ after 15th December 2016.
Expectation gap =
Gap between expectations of users of financial statements and audit firm’s legal responsibilities
Narrowing expectation gap: (4)
- Audit reports include link to FRS website detailing scope of audit
- All FSs include Director’s responsibility statement
- Engagement letter includes Director’s responsibility statement
- Recommendation for audit committees to be established
External regulators (2)
- FRC (Financial Reporting Council)
- Accountancy Bodies (ICAEW, ICAS, ACCA)
FRC roles (2)
- Sets standards and rules
- Polices application of standards
4 stages to an audit
1) Planning and design approach
2) Controls testing
3) Substantive testing
4) Completion
Plan and design approach (5)
- Client acceptance, independence checks and issue engagement letter
- Understanding client’s business and industry
- Assess business risk, signif risk and inherent risk
- Planning analytics/ materiality
- Understanding entity and process level control environment
Controls testing
Perform tests of process level and entity level controls (if relying on)
Substantive testing (3)
- Perform ToD and SAPs
- Perform additional procedures if testing didn’t provide sufficient comfort
- Perform testing on going concern
Completion (5)
- Perform tests for financial statement disclosures
- Issue audit report
- Communicate findings to management and audit committee
- Accumulate final evidence
- Complete assembly of audit file
