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EY - Assurance And Reporting > Module 8 - The Requirement For Audit > Flashcards

Module 8 - The Requirement For Audit Flashcards

1
Q

The CA 2006 permits audit exemption for what types of company?

A

Small companies (£10.2m turnover, £5.1m balance sheet, 50 employees)

Small charitable companies (differences between England and Wales and Scotland

Dormant companies

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2
Q

Can shareholders veto audit exemptions?

A

Yes

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3
Q

What % of shareholders are required to veto audit exceptions (or what % does one individual have to own of a company)

A

10%

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4
Q

What does an external, or statutory auditor do?

A

Examine companies financial statements

Provide an opinion on whether the financial statements give a ‘true and fair’ view to the shareholders

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5
Q

Does an auditor guarantee the accuracy of the financial statements?

A

No

It provides reasonable assurance that the financial statement give a ‘true and fair’ view

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6
Q

What is the expectations gap?

A

The difference between the understanding that the public has about the auditors responsibilities and the actual responsibilities of the auditor

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7
Q

What is the main way that the auditor can manage the expectations gap?

A

Through the audit report

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8
Q

Auditor credibility is dependent on personal qualities such as:

A

Competence, integrity, ethics and independence

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9
Q

What is the value of an auditor dependent on?

A

Whether shareholders can trust their work

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10
Q

How does the CA control the eligibility to audit?

A

By formalising qualification, supervision and registration procedures

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11
Q

To become a statutory auditor, what must happen in the qualification stage:

A

Meet minimum entry requirements

Three years’ practical experience

Pass formalised exams

(Do this with a Recognised Qualification Body (‘RQB’)

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12
Q

To become a statutory auditor, what must happen in the Supervised Stage:

A

Must become a member of one of the four Recognised Supervisory Bodies (‘RSB’)

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13
Q

To become a statutory auditor, what must happen in the Registered Stage:

A

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

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14
Q

When becoming a statutory auditor, in the registered stage, what is considered the practising certificate part

A

Two years’ post qualified experience

Able to confirm compliance with the Continuing Professional Development

Have professional indemnity insurance

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15
Q

Are registered auditors monitored on a regular basis?

A

Yes

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16
Q

Does the Authorisation Committee have the power to requisition monitoring visits?

A

Yes

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17
Q

There are some exemptions to audit available relating to what type of companies?

A

Small companies

Dormant companies

Some charities

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18
Q

For small company audit exemption

Companies are entitled to audit exemption if they meet two out of the three following criteria

A

Balance sheet total not more than £5.1m

Turnover (revenue) of not more than £10.2m

They have not more than 50 employees

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19
Q

The rules on small company audit exemptions are subject to what rule?

A

A ‘two-year rule’

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20
Q

With the two year rule,

The company will firstly qualify as ‘small’ and therefore exempt from audit if:

A

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

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21
Q

For companies that have previously been classified as small (and exempt from audit), will only cease to be classified as small if:

A

Conditions are not met for two consecutive years

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22
Q

What companies can never be exempt from audit:

A

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

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23
Q

How does it work with audit exemptions and subsidiary companies?

A

Most subsidiary’s are exempt as long as parent company guarantees their liabilities

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24
Q

Why is there a more rigours audit programme for charities?

A

There is an enhanced public interest

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25
Q

How is a more rigours programme achieved for charities with audit exemptions

A

Charity law

Having a lower audit threshold

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26
Q

Reporting regimes for charitable companies in England and Wales: (when is an audit required)

A

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

27
Q

Difference between an independent examination and audit

A

It is a less onerous external review and provides limited rather than reasonable assurance

28
Q

When is an independent examination required for charities in England and Wales?

A

When audit has not been received unless it’s gross income is below £25,000

29
Q

When is audit required for charitable companies in Scotland?

A

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

30
Q

When is an independent examination required for charities in Scotland

A

Where an audit has not been received

31
Q

What constitutes a dormant company?

A

If it has had no significant accounting transactions during the period

32
Q

Directors using an audit exemption must include what in a balance sheet?

A

An additional narrative section

33
Q

When directors of a company use audit exemption, what must they include in their additional narrative section in the balance sheet?

A

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

34
Q

What is the primary purpose of an auditor

A

To add credibility to financial statements

35
Q

What are the key responsibilities of the auditor as defined by the CA 2006

A

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

36
Q

Who must the auditor express their opinion of the financial accounts to?

A

The company’s shareholders

37
Q

What is the commonly accepted view of ‘true and fair’ in the UK?

A

Compliance with company law and applicable accounting standards

38
Q

How is an auditors opinion expressed? (Which document)

A

A document called an audit report

39
Q

When does an external auditor come in?

A

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

40
Q

The main requirements relevant to UK auditors are contained where?

A

In the International Standards of Auditing (UK) (‘ISAs (UK)’)

41
Q

What is the expectations gap?

A

The difference between the understanding that the public has about the auditors responsibilities and the actual defined responsibilities of the auditor

42
Q

How can an auditor take steps to reduce the expectations gap?

A

Including an explanation of the auditors and directors responsibilities within the audit report

The audit report also describes the scope of the audit

43
Q

What does integrity mean with an auditor?

A

The auditor should be straightforward and honest in all professional and business relationships

44
Q

Definition of ethics

A

A set of principles of proper conduct or a system of moral values

45
Q

What does independence mean with being an auditor

A

Must be completely free from situations which could make their job less objective

46
Q

What is a RQB?

A

Recognised Qualifying Body

47
Q

How many RQBs are there?

A

5

48
Q

What are the RQBs?

A

ACCA

AIA

ICAEW

CAI

ICAS

49
Q

The CA 2006 lays down three areas of requirement that must be achieved to gain ‘appropriately qualified’ status:

A

Entry requirements

Practical experience

Examinations

50
Q

Each RQB has a minimum entry requirement of:

A

A university entry level

Seven years of practical experience in the fields on finance, law and accountancy

51
Q

Upon acceptance by the by the RQB what must a trainee complete?

A

Three years practical training at an authorised training firm

52
Q

What is an RSB?

A

Recognised Supervisory Body

53
Q

What are the RSBs?

A

ACCA

ICAEW

CAI

ICAS

54
Q

Does a practice certificate have to be renewed each year?

Does it have an annual fee?

A

Yes

Yes

55
Q

What must have happened to be eligible for a practising certificate?

A

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

56
Q

What must an individual have to be entitled to sign audit reports?

A

Statutory auditor status and be part of a registered audit firm

57
Q

Who is responsible for awarding statutory (or registered) auditor status?

A

The Authorisation Committee of the relevant RSB

58
Q

The Authorisation Committee only awards statutory auditor status to individuals who can demonstrate what?

A

Hold an audit qualification

‘Fit and proper persons’

Hold a practising certificate

A member of a registered audit firm

Have adequate professional indemnity insurance

59
Q

Who grants statutory auditor status to firms?

A

The Authorisation Committee

60
Q

For a firm to be granted registered auditor status, what must be present?

A

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

61
Q

What is the Audit Compliance Principle?

A

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

62
Q

Does each RSB has an up-to-date list of auditors that are registered?

If so, is the list available to the public?

A

Yes

Yes

63
Q

Are registered auditors monitored on a regular basis?

A

Yes

64
Q

Each RSB must maintain and enforce rules to check on the relevant people of statutory audit status, what are the rules?

A

Registration and disclosure of auditors

High standards of audit work

Monitoring of quality

Investigation and discipline

Accountability

EY - Assurance And Reporting (19 decks)

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