Module 8 - The Requirement For Audit Flashcards
The CA 2006 permits audit exemption for what types of company?
Small companies (£10.2m turnover, £5.1m balance sheet, 50 employees)
Small charitable companies (differences between England and Wales and Scotland
Dormant companies
Can shareholders veto audit exemptions?
Yes
What % of shareholders are required to veto audit exceptions (or what % does one individual have to own of a company)
10%
What does an external, or statutory auditor do?
Examine companies financial statements
Provide an opinion on whether the financial statements give a ‘true and fair’ view to the shareholders
Does an auditor guarantee the accuracy of the financial statements?
No
It provides reasonable assurance that the financial statement give a ‘true and fair’ view
What is the expectations gap?
The difference between the understanding that the public has about the auditors responsibilities and the actual responsibilities of the auditor
What is the main way that the auditor can manage the expectations gap?
Through the audit report
Auditor credibility is dependent on personal qualities such as:
Competence, integrity, ethics and independence
What is the value of an auditor dependent on?
Whether shareholders can trust their work
How does the CA control the eligibility to audit?
By formalising qualification, supervision and registration procedures
To become a statutory auditor, what must happen in the qualification stage:
Meet minimum entry requirements
Three years’ practical experience
Pass formalised exams
(Do this with a Recognised Qualification Body (‘RQB’)
To become a statutory auditor, what must happen in the Supervised Stage:
Must become a member of one of the four Recognised Supervisory Bodies (‘RSB’)
To become a statutory auditor, what must happen in the Registered Stage:
Appropriately qualified
At least two years’ post-qualifying experience
Able to confirm compliance with the Continuing Professional Development
Have professional indemnity insurance
Be a member of a registered audit firm
Apply to Authorisation Committee of RSB
When becoming a statutory auditor, in the registered stage, what is considered the practising certificate part
Two years’ post qualified experience
Able to confirm compliance with the Continuing Professional Development
Have professional indemnity insurance
Are registered auditors monitored on a regular basis?
Yes
Does the Authorisation Committee have the power to requisition monitoring visits?
Yes
There are some exemptions to audit available relating to what type of companies?
Small companies
Dormant companies
Some charities
For small company audit exemption
Companies are entitled to audit exemption if they meet two out of the three following criteria
Balance sheet total not more than £5.1m
Turnover (revenue) of not more than £10.2m
They have not more than 50 employees
The rules on small company audit exemptions are subject to what rule?
A ‘two-year rule’
With the two year rule,
The company will firstly qualify as ‘small’ and therefore exempt from audit if:
It is the company’s first accounting period and the usual small company audit exemptions conditions are met
If the company met the small company audit exemption conditions for the current and preceding year
For companies that have previously been classified as small (and exempt from audit), will only cease to be classified as small if:
Conditions are not met for two consecutive years
What companies can never be exempt from audit:
Public company (unless dormant)
Banking company
E-money issuer
Insurance company
MiFiD investment firm or an UCITS management company
A corporate body whose shares have been admitted to trading on a regulated market
A public sector entity
How does it work with audit exemptions and subsidiary companies?
Most subsidiary’s are exempt as long as parent company guarantees their liabilities
Why is there a more rigours audit programme for charities?
There is an enhanced public interest
How is a more rigours programme achieved for charities with audit exemptions
Charity law
Having a lower audit threshold
Reporting regimes for charitable companies in England and Wales: (when is an audit required)
Gross income is over £1m OR
Gross assets are over £3.26m and gross income over £250,000 OR
An audit is required by the charity’s constitution or due to trustee or donor preference
Difference between an independent examination and audit
It is a less onerous external review and provides limited rather than reasonable assurance
When is an independent examination required for charities in England and Wales?
When audit has not been received unless it’s gross income is below £25,000
When is audit required for charitable companies in Scotland?
Gross income is £500,000 or more OR
Gross assets are over £3.26m OR
An audit is required by the charity’s constitution or due to trustee or donor preference
When is an independent examination required for charities in Scotland
Where an audit has not been received
What constitutes a dormant company?
If it has had no significant accounting transactions during the period
Directors using an audit exemption must include what in a balance sheet?
An additional narrative section
When directors of a company use audit exemption, what must they include in their additional narrative section in the balance sheet?
Shareholders have not required an audit using the shareholder veto
Company is entitled to audit exemption
Acknowledgement of directors responsibilities to maintain proper accounting records and to prepare accounts which give a ‘true and fair’ view
Statement saying accounts have been prepared following the special provisions of the CA 2006 for small companies
What is the primary purpose of an auditor
To add credibility to financial statements
What are the key responsibilities of the auditor as defined by the CA 2006
Auditor must express an opinion
- whether financial statements are true and fair
- the consistency of the strategic report and the directors report with the financial statements, and whether they have been prepared in accordance with acceptable legal standards
This opinion must be expressed to the company’s shareholders
Who must the auditor express their opinion of the financial accounts to?
The company’s shareholders
What is the commonly accepted view of ‘true and fair’ in the UK?
Compliance with company law and applicable accounting standards
How is an auditors opinion expressed? (Which document)
A document called an audit report
When does an external auditor come in?
First directors prepare financial statements that they claim (truthfully or not) show a true and fair view of companies financial performance
The external auditor must then come in and give their opinion on whether the financial statements do in fact present a true and fair view
The main requirements relevant to UK auditors are contained where?
In the International Standards of Auditing (UK) (‘ISAs (UK)’)
What is the expectations gap?
The difference between the understanding that the public has about the auditors responsibilities and the actual defined responsibilities of the auditor
How can an auditor take steps to reduce the expectations gap?
Including an explanation of the auditors and directors responsibilities within the audit report
The audit report also describes the scope of the audit
What does integrity mean with an auditor?
The auditor should be straightforward and honest in all professional and business relationships
Definition of ethics
A set of principles of proper conduct or a system of moral values
What does independence mean with being an auditor
Must be completely free from situations which could make their job less objective
What is a RQB?
Recognised Qualifying Body
How many RQBs are there?
5
What are the RQBs?
ACCA
AIA
ICAEW
CAI
ICAS
The CA 2006 lays down three areas of requirement that must be achieved to gain ‘appropriately qualified’ status:
Entry requirements
Practical experience
Examinations
Each RQB has a minimum entry requirement of:
A university entry level
Seven years of practical experience in the fields on finance, law and accountancy
Upon acceptance by the by the RQB what must a trainee complete?
Three years practical training at an authorised training firm
What is an RSB?
Recognised Supervisory Body
What are the RSBs?
ACCA
ICAEW
CAI
ICAS
Does a practice certificate have to be renewed each year?
Does it have an annual fee?
Yes
Yes
What must have happened to be eligible for a practising certificate?
Members must apply to the relevant RSB and prove:
Two years post-qualifying experience
Confirm compliance with Continuing Professional Development laws
Have professional indemnity insurance
What must an individual have to be entitled to sign audit reports?
Statutory auditor status and be part of a registered audit firm
Who is responsible for awarding statutory (or registered) auditor status?
The Authorisation Committee of the relevant RSB
The Authorisation Committee only awards statutory auditor status to individuals who can demonstrate what?
Hold an audit qualification
‘Fit and proper persons’
Hold a practising certificate
A member of a registered audit firm
Have adequate professional indemnity insurance
Who grants statutory auditor status to firms?
The Authorisation Committee
For a firm to be granted registered auditor status, what must be present?
Each of the principals (partners or directors) must be a member of RSB, a statutory auditor, an audit affiliate of an RSB or equivalent
Majority of principles must have appropriate qualification, be a statutory auditor or equivalent
Firm has appointed an audit compliance principal
Firm must be ‘fit and proper’
Firm must have adequate professional indemnity insurance
What is the Audit Compliance Principle?
Someone who is responsible for monitoring the audit firm has complied and is likely to continue to comply with relevant regulations
Their identity is notified in writing to the RSB and is the first point of contact with the relevant RSB in connection with regulations
Does each RSB has an up-to-date list of auditors that are registered?
If so, is the list available to the public?
Yes
Yes
Are registered auditors monitored on a regular basis?
Yes
Each RSB must maintain and enforce rules to check on the relevant people of statutory audit status, what are the rules?
Registration and disclosure of auditors
High standards of audit work
Monitoring of quality
Investigation and discipline
Accountability
