Lesson 2: Audit Regulation

Question 1

Define regulation

Answer 1

a rule or directive made and maintained by an authority

Question 2

What does regulation do ?

Answer 2

Regulation provides some assurance consumers of a service by a professional firm that certain standards are met.

Question 3

What does audit regulation reduce ?

Answer 3

Regulation helps to reduce risk for users of auditing service. Risk is an important concept for auditors.

Question 4

Why set regulation standards?

Answer 4

Setting of standards, to which audit practitioners must adhere, ensures work is done properly – standards increasingly set at an International level: EU and IFAC.

Question 5

Regulation increases…

Answer 5

Confidence!

Question 6

State 4 ways in which auditors are regulated ?

Answer 6

1. Company law
2. The international federation of accountants
3. International Audit and Assurance Standards Board
4. National regulatory bodies

Question 7

In the UK which two bodies are recognised by company law as to regulate auditing professions?

Answer 7

Recognised supervisory body (RSBs) and Recognised qualify body (RQBs)

Question 8

State the four RSBs in the Uk

Answer 8

(ACCA) Association of Chartered Certified Accountants
(CAI) Chartered Accountants Ireland
(ICAEW) Institute of Chartered Accountants in England and Wales
(ICAS)Institute of Chartered Accountants of Scotland

Question 9

What do RSBs do?

Answer 9

They are responsible for supervising and maintaining the conduct and technical standards of auditors performing statutory audits

Question 10

State the (RQBs) in the Uk

Answer 10

Association of Chartered Certified Accountants(ACCA)
Association of International Accountants(AIA)
Institute of Chartered Accountants in England and Wales(ICAEW)
Chartered Accountants Ireland(CAI)
Institute of Chartered Accountants of Scotland(ICAS)

Question 11

Who are the International Federation of Accountants

Answer 11

IFAC) is the global organisation for the accountancy profession, who promotes international regulation by ensuring minimum requirements for accountancy qualifications, post qualification experience and guidance on accounting and assurance for accountants around the world, there will be greater public confidence in the profession as a whole.

Question 12

what’s the subsidiary if the IFAC ?

Answer 12

International Audit and Assurance Standards Board

Question 13

What is the responsibility of the International Audit and Assurance Standards Board

Answer 13

It is their responsibility to develop and promote International Standards on Auditing howeverISAs do not override a country’s regulations governing audit practices.

Question 14

What do most countries do?

Answer 14

Most countries, base their auditing standards on ISAs, modified as to suit for each country’s regulatory environment.

Question 15

What doNational regulatory bodies do? (3)

Answer 15

National regulatory bodies:
enforce the implementation of auditing standards
have disciplinary powers to enforce quality of audit work
have rights to inspect audit files to monitor audit quality.

Question 16

There are two possible schemes for regulation at the national level what are they ?

Answer 16

1. Self regulation by the audit/accountancy profession - where by auditing bodies are given the right to come with there own standards by which to audit by
2. Regulation by government or by some independent body set up by government for the purpose.

Question 17

The UK is primarily self regulated by the …

Answer 17

FRC

Question 18

Who may work as auditor?

Answer 18

To be eligible to work as auditor, a person must be:
a member of a Recognised Supervisory Body (RSB), e.g. ACCA, and allowed by the rules of that body to be an auditor or
someone directly authorised by the state.

Question 19

Who may work as an external auditor?

Answer 19

To be an external auditor, you’ll need to be a qualified chartered accountant and a member of one of the following professional bodies: ACCA , ICAEW, AIA

Question 20

If you’re qualified as an accountant with theChartered Institute of Management Accountants (CIMA)…

Answer 20

…you can carry out internal audits.

Question 21

What do you have to be a member of in order to carry out audits in the public sector .

Answer 21

You’ll need to be a member of the Chartered Institute of Public Finance and Accountancyto carry out audits in the public sector

Question 22

What is internal auditing ?

Answer 22

Internal auditing is an appraisal or monitoring activity established within an entity as a service to the entity

It functions by examining, evaluating and reporting to management and the directors on the adequacy and effectiveness of components of the accounting and internal control systems

Question 23

Difference between external and internal audit role

Answer 23

Internal auditors look at all the risks facing an organisation and what is being done to manage these risks. External auditors on the other hand look at financial accounts

Question 24

What are the 6 factors we look at when determining what the role of auditors in general are?

Answer 24

Objective , Reports, Reports to, scope, relationship/status, and qualification.

Question 25

Internal audit : Objective

Answer 25

Sound risk management & control

Question 26

Internal audit : Reports

Answer 26

Reports are private and for the directors and management of

the company.

Question 27

Internal audit: Reports to

Answer 27

Reports to the board of directors, or other people charged with governance, such as the audit committee

Question 28

Internal audit : Scope

Answer 28

Work relates to the operations of the organisation.

Question 29

Internal audit : Relationship/status

Answer 29

Often employees of the organisation

Question 30

Internal audit: Qualifications

Answer 30

Need not be a member of a professional body, though in recent times there has been a move towards an Institute of Internal Auditors (IIA

Question 31

External audit : Objective

Answer 31

express an opinion on the financial statements.

Question 32

External audit : Reports

Answer 32

Audit report is publicly

available to the shareholders and other interested parties

Question 33

External audit: Reports to

Answer 33

Reports to the shareholders or members of a company on the truth and fairness of the accounts.

Question 34

External audit : Scope

Answer 34

Work relates to the financial statements.

Question 35

External audit : Relationship/status

Answer 35

Independent of the company and its management.

Question 36

External audit :Qualifications

Answer 36

member of a professional body and the audit firm has a practicing license from a professional body

Question 37

State the functions of the internal audit (7)

Answer 37

The role of internal audit can vary depending on the requirements of the business and includes;
Whether the company is demonstrating best practice in corporate governance.
Risk identification and management.
Effectiveness of internal controls.
Reliability of financial and operating information.
Economy, efficiency and effectiveness of operating activities.
Assessing compliance with laws and regulations.
Prevention and detection of fraud.

Question 38

State the Additional functions of the internal audit (6)

Answer 38

internal audit will carry out ad hoc assignments, as required by management, such as;
Fraud investigations –this may involve detecting fraud, identifying the perpetrator of a fraud, quantifying the loss to the company as a result of a fraud, providing recommendations on how the company can protect itself against such frauds in future.
IT systems reviews-performing a review of the computer environment and controls.
Value for money assessing the economy, effectiveness and efficiency of operations
Mystery shopper visits-for retail and service companies the IA staff can pose as customers to ensure that customer service is at the required level.
Asset verification such as performing cash counts and physical inspection of non current assets to verify existence.
Providing direct assistance to the external auditor

Question 39

Limitations of internal audit (3)

Answer 39

1. Internal auditors may be employees of the company they are reporting on and therefore may not wish to raise issues in case they lose their job.
2. In smaller organisations in particular, internal audit may be managed as part of the finance function. They will therefore have to report upon the effectiveness of financial systems that they form a part of and may be reluctant to say their department (and manager) has deficiencies.
3. If the internal audit staff have worked in the organisation for a long time, possibly in different departments, there may be a familiarity threat as they will be audited the work of long standing colleagues and friends.

Question 40

What is Outsourcing the internal audit function

Answer 40

Outsourcing is where the company uses an external company to perform its internal audit service instead of employing its own staff.

Question 41

What are the advantages of outsourcing Internal audit (7)

Answer 41

Staff may be drawn from a broader range of expertise.
Risk of staff turnover is passed to the outsourcing firm.
Specialist skills may be more readily available.
Costs of employing permanent staff are avoided.
May improve independence.
Access to new market place technologies, e.g. audit methodology software without associated costs.
Reduced management time in administering an inhouse department.

Question 42

What are the disadvantages of outsourcing Internal audit (5)

Answer 42

Pressure on the independence of the outsourced function due to, e.g. threat by management not to renew contract.
Risk of lack of knowledge and understanding of the organisation’s objectives, culture or business.
The decision may be based on cost with the effectiveness of the function being reduced.
Flexibility and availability may not be as high as with an in house function.
Lack of control over standard of service.

Question 43

Can accountants and audits face criminal charges for their work ?

Answer 43

Yes, Accountants and auditors may face criminal charges under a number of UK statutes.

Question 44

What are the 3 acts that auditors and accountants can be charged against?

Answer 44

1. The Theft Act 1968
2. Fraud Act 2006
3. Companies Act 2006

Question 45

Explain the Theft Act 1968

Answer 45

The Theft Act 1968 – provides that individuals commit an offence if they gain or cause someone to lose by:

a) destroying, concealing, falsifying documents/records required for accounting purposes
b) supplying information making use of records or documents known by them to be materially false, misleading or deceptive.

Question 46

Explain the Fraud Act 2006

Answer 46

Fraud Act 2006 – a person can be guilty of fraud in three ways:
Fraud by false representation.
Fraud by failing to disclose information.
Fraud by abuse of position.

Question 47

Explain the Companies Act 2006

Answer 47

Companies Act 2006
Auditors who knowingly or recklessly issue an audit report that is misleading, false or deceptive is guilty of a criminal offence.
Auditors commit a criminal offence if they fail to provide statements in the audit report of certain circumstances.
Business carried on for fraudulent purposes: anyone knowingly a party is liable to a fine or imprisonment, or both.

Question 48

What can happen if auditors give a clean opinion on a financial statement which turns out to not to be true and fair ?

Answer 48

If auditors have given a clean opinion on financial statements which turn out not to be true and fair, a user who loses through reliance on the statements may feel auditors are one of those at fault.
Auditors give an opinion and not a guarantee that the financial statements are true and fair.
But company, shareholders or others may sue them for damages to compensate for any loss they have suffered as a result of alleged negligent work.

Question 49

For a company to sue for negligence what must there be ?

Answer 49

For action of negligence to succeed, it must be shown that the auditors owed a duty of care to the person bringing the action.
Auditors having contractual relationship with the company van can be sued by the company under contract law.
But many liability cases have been brought by third parties, under tort and case law has developed as a result.

Question 50

Liability for Fraud ;Gross negligence may be interpreted as

Answer 50

Fraud

Fraudulent intent or scienter
Scienter is the intent to deceive, manipulate, or defraud

Question 51

How does gross negligence occur

Answer 51

Gross negligence, or constructive fraud, occurs when the auditor acts so carelessly in the application of professional standards that it implies a reckless disregard for the standards of due care

Scienter is the intent to deceive, manipulate, or defraud

Question 52

How do auditors defend themselves against claims for damages and what are the limitations

Answer 52

Compliance with auditing standards is a logical first step for auditors to avoid claims for damages.

However, some limitations in using the standards as a means of defence:
Standards in issue do not cover all areas of auditing.
They only contain general guidance and leave scope for interpretation and implementation.
The standards and guidelines are the auditing profession’s view of what constitutes good practice but it is what the courts believe to be good practice that matters.

Question 53

State some of the professional conduct needed in accounting

Answer 53

Rules of accounting bodies: misconduct encompassing acts likely to bring discredit to member, accounting body, or accounting profession; may lead to disciplinary action.
Liability to disciplinary action can arise both from offences relating to the individual’s professional work and from the individual’s personal life.
If accountants or auditors are to be trusted by clients, they must be seen to be honest and persons of integrity.
Auditors can even be disciplined by their professional body if formal complaints made about quality of the auditors’ work.
Further example: case of a company changing its auditors, where the outgoing auditors persistently refused to answer questions put to them by the new auditors and pass on to them papers which are the property of the client.