Module 2 Intro to statutory audit

Question 1

Which companies are exempt from a statutory audit?

Answer 1

Companies meet 2/3 following criteria:

• Balance sheet total of no more than £5.1m
• Revenue of no more than £10.2m
• No more than 50 employees

Question 2

Which companies can never be exempt from an audit?

Answer 2

• A public company
• A banking company
• An e-money issuer
• An insurance company
• A corporate body whose shares have been admitted to trading on a regulated market
• A public sector entity

Question 3

What are the rules for needing to audit a charity in England/ Wales?

Answer 3

Audit required if 1 bullet point is met:

• Gross income is over £1m or
• Gross assets are over £3.26m and gross income is over £250,000 or
• An audit is required by the charities constitution

Question 4

What are the rules for needing to audit a charity in Scotland?

Answer 4

Audit required if 1 bullet point is met:

• Gross income is over £500,000 or
• Gross assets are over £3.26m or
• Required by constitution

Question 5

To obtain a practising certificate members must prove they:

Answer 5

• Have completed at least 2 years post qualifying experience
  AND
• Are able to confirm compliance with the continuing professional development laws
  AND
• Have professional indemnity

Question 6

What are the three situations in which the directors are allowed to appoint the auditor?

Answer 6

1) Any time before company’s first period (ie first period the company requires an audit)
2) To fill a casual vacancy
3) If the company had previously taken an audit exemption

Question 7

What are the auditors rights against unwarranted dismissal?

Answer 7

1. copy of motion to remove the auditors must be sent
   to the auditors;
2. An auditor has a right to make written statements regarding their removal and have these passed to the shareholders; and
3. The auditor retains the right to attend the normal AGM of the company in the year in which they were removed.

Question 8

What is an agency risk?

Answer 8

When directors seek power and monetary reward, they may not necessarily wish to maximise profit or maximise shareholder value in the long run

Question 9

What procedures can be implemented to reduce agency risk?

Answer 9

1) Using the directors remuneration package as incentives
2) Monitoring the directors performance
3) Appointing an external auditor

Question 10

What is an agency cost?

Answer 10

Costs borne by the shareholders to monitor the performance of the directors

Question 11

Who is responsible for appointing the directors and the external auditor?

Answer 11

Shareholders

Question 12

Who is the audit committee appointed by and who is in it?

Answer 12

Appointed by the board

Independent non-executive directors. Minimum of 3 people (2 for smaller companies)

Question 13

Which companies must adopt a ‘comply or explain’ approach to corporate governance?

Answer 13

Only entities with a premium listing on the LSE main market

Question 14

To become a statutory auditor you must be:

Answer 14

Qualified
Supervised
Registered

Question 15

RAPID

What is included in forming an opinion over the matters reported by exception:

Answer 15

-Returns have been received from branches not visited by the auditor
- Accounts agree with the underlying records
- Proper accounting records have been kept
- Information and explanations necessary for the purposes of the aduit have been received
- Directors benefit disclosures are complete

Question 16

When can a director appoint the auditor?

Answer 16

1) Any time before the companus first period
2) To fill a casual vacancy
3) Had previously taken an audit exemption

Question 17

What is an expectation gap?

Answer 17

The difference between the understanding the public has about the auditors responsibilites and the actual responsibilties of the auditor

Question 18

What are the seven stages of the audit process?

Answer 18

1) Acceptance
2) Planning
3) Systems and control analysis
4) Substantive testing
5) Completion

Ongoing:
6) Risk assessment
7) Engagement and client management

Question 19

The directors of a company using an audit exemption must include an additional narrative section in the balance sheet containing:

Answer 19

• A statement that the shareholders have not required an audit using the shareholder veto.
• A statement that the company is entitled to the audit exemption.
• An acknowledgement of the directors’ responsibilities to maintain proper accounting records and to prepare accounts which give a true and fair view.
• A statement that the accounts have been prepared following the special provisions of the CA 2006 for small companies.