Lesson 2: Audit Regulation Flashcards
Define regulation
a rule or directive made and maintained by an authority
What does regulation do ?
Regulation provides some assurance consumers of a service by a professional firm that certain standards are met.
What does audit regulation reduce ?
Regulation helps to reduce risk for users of auditing service. Risk is an important concept for auditors.
Why set regulation standards?
Setting of standards, to which audit practitioners must adhere, ensures work is done properly – standards increasingly set at an International level: EU and IFAC.
Regulation increases…
Confidence!
State 4 ways in which auditors are regulated ?
- Company law
- The international federation of accountants
- International Audit and Assurance Standards Board
- National regulatory bodies
In the UK which two bodies are recognised by company law as to regulate auditing professions?
Recognised supervisory body (RSBs) and Recognised qualify body (RQBs)
State the four RSBs in the Uk
(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
What do RSBs do?
They are responsible for supervising and maintaining the conduct and technical standards of auditors performing statutory audits
State the (RQBs) in the Uk
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)
Who are the International Federation of Accountants
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.
what’s the subsidiary if the IFAC ?
International Audit and Assurance Standards Board
What is the responsibility of the International Audit and Assurance Standards Board
It is their responsibility to develop and promote International Standards on Auditing howeverISAs do not override a country’s regulations governing audit practices.
What do most countries do?
Most countries, base their auditing standards on ISAs, modified as to suit for each country’s regulatory environment.
What doNational regulatory bodies do? (3)
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.
There are two possible schemes for regulation at the national level what are they ?
- 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
- Regulation by government or by some independent body set up by government for the purpose.
The UK is primarily self regulated by the …
FRC
Who may work as auditor?
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.
Who may work as an external auditor?
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
If you’re qualified as an accountant with theChartered Institute of Management Accountants (CIMA)…
…you can carry out internal audits.
What do you have to be a member of in order to carry out audits in the public sector .
You’ll need to be a member of the Chartered Institute of Public Finance and Accountancyto carry out audits in the public sector
What is internal auditing ?
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
Difference between external and internal audit role
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
What are the 6 factors we look at when determining what the role of auditors in general are?
Objective , Reports, Reports to, scope, relationship/status, and qualification.
Internal audit : Objective
Sound risk management & control
Internal audit : Reports
Reports are private and for the directors and management of
the company.
Internal audit: Reports to
Reports to the board of directors, or other people charged with governance, such as the audit committee
Internal audit : Scope
Work relates to the operations of the organisation.
Internal audit : Relationship/status
Often employees of the organisation
Internal audit: Qualifications
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
External audit : Objective
express an opinion on the financial statements.
External audit : Reports
Audit report is publicly
available to the shareholders and other interested parties
External audit: Reports to
Reports to the shareholders or members of a company on the truth and fairness of the accounts.
External audit : Scope
Work relates to the financial statements.
External audit : Relationship/status
Independent of the company and its management.
External audit :Qualifications
member of a professional body and the audit firm has a practicing license from a professional body
State the functions of the internal audit (7)
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.
State the Additional functions of the internal audit (6)
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
Limitations of internal audit (3)
- 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.
- 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.
- 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.
What is Outsourcing the internal audit function
Outsourcing is where the company uses an external company to perform its internal audit service instead of employing its own staff.
What are the advantages of outsourcing Internal audit (7)
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.
What are the disadvantages of outsourcing Internal audit (5)
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.
Can accountants and audits face criminal charges for their work ?
Yes, Accountants and auditors may face criminal charges under a number of UK statutes.
What are the 3 acts that auditors and accountants can be charged against?
- The Theft Act 1968
- Fraud Act 2006
- Companies Act 2006
Explain the Theft Act 1968
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.
Explain the Fraud Act 2006
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.
Explain the Companies Act 2006
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.
What can happen if auditors give a clean opinion on a financial statement which turns out to not to be true and fair ?
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.
For a company to sue for negligence what must there be ?
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.
Liability for Fraud ;Gross negligence may be interpreted as
Fraud
Fraudulent intent or scienter
Scienter is the intent to deceive, manipulate, or defraud
How does gross negligence occur
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
How do auditors defend themselves against claims for damages and what are the limitations
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.
State some of the professional conduct needed in accounting
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.
