P2 - 7. External audit

Question 1

Which documents and records are auditors entitled to have access to?

Answer 1

All

Question 2

What are the three categories of companies that can claim exemption from audit?

Answer 2

Small companies
Dormant companies
Subsidiaries

Question 3

Is an audit intended to provide reassurance as to the future prospects of the company?

Answer 3

No

Question 4

What type of individual or firm cannot be appointed as a company’s auditor?

Answer 4

An officer or employee of the company or an officer or

employee of a connected undertaking, any person or

firm that has a business relationship with the company

Question 5

There are a number of non-audit services that auditors are prohibited from providing to a PIE, name five of
them.

Answer 5

Tax services
Any part in management or decision-making
Bookkeeping and preparation of accounting records
Payroll services
Design or implementation of internal control of risk management processes
Valuation services
Legal services
Internal audit
Services linked to financial, capital structures, investment strategies
Promoting, dealing or underwriting in shares of the audit entity
HR services

Question 6

What is the ratio of permitted audit:non-audit services fees for public interest entities?

Answer 6

70% over a rolling three year basis

Question 7

Can anyone be appointed as a company auditor?

Answer 7

No, must be a registered auditor, or audit firm and not be prohibited from being appointed

Question 8

Can the liability of the auditor be limited?

Answer 8

Yes, but requires consent of the members

Question 9

How many consecutive years can an auditor be appointed to a PIE?

Answer 9

Ten years plus an additional 10 years if a tender has been carried out

Question 10

What does audit partner rotation guard against?

Answer 10

Threat to auditor objectivity and independence

Question 11

Do all companies need to change their audit firm regularly?

Answer 11

No, only Public Interest Entities (PIE)

Question 12

When does an auditor of a PIE need to make a statement if they cease to hold office as auditor?

Answer 12

Always

Question 13

Who are the relevant audit authorities?

Answer 13

The auditor’s recognised supervisory body and in the case of a PIE the FRC

Question 14

Who is the audit report prepared for?

Answer 14

The members

Question 15

Is the audit process expected to uncover all errors or fraud?

Answer 15

No – only material errors and omissions

Question 16

What is the auditors primary function?

Answer 16

To report to the company’s members on the statutory accounts prepared by the directors in accordance with CA2006 ss. 394 or 399

For individual company accounts and group accounts respectively (CA2006 s. 475)

Question 17

Which rights do the companies auditor have?

Answer 17

• the right of access at all times to the company’s books, accounts and records (CA2006 s. 499(1)(a));
• to require from the company’s directors and officers such information and explanations as the auditor thinks
  necessary (CA2006 s. 499(1))(b);
• every UK incorporated subsidiary undertaking and their auditors must provide the auditors of the parent company such information and explanations as those auditors may reasonably require (CA2006 s. 499(2));
• a parent company, having an overseas subsidiary undertaking shall, if its auditors require, take all such steps as are reasonably open to it to obtain from the subsidiary such information and explanations as its auditors may reasonably require (CA2006 s. 500);
• an auditor is entitled to receive all notices and other communications relating to any general meeting (CA2006 s.502(2)); and
• an auditor is entitled to attend general meetings of the company and has the right to speak on any business of the meeting that concerns them as auditor (CA2006 s. 502(3)).

Question 18

Who is prohibited from being an auditor?

Answer 18

s. 1214 requires that a person may not be appointed as a statutory auditor in respect of a company if the proposed auditor is:
* an officer or employee of the company;
* a partner or employee of the auditor or any associated undertaking, where the auditor is a company or a
partnership;
* an officer or employee of an associated undertaking of the company; or
* a partner or employee of an auditor being a natural person, or a partnership of which such a person is a partner in a business directly or indirectly with the company or an associated undertaking of theirs.

Question 19

How can the appointment of an auditor be terminated?

Answer 19

An auditor may resign their office by giving notice to the company, with the notice taking effect on the date it is given or such later date as may be contained in the notice (CA2006 s. 516).

Question 20

What requirements must be adhered to where a resolution is to be proposed at a GM or by written resolution for removing an auditor before the expiration of their term of office, or for appointing as auditor a person other than a retiring auditor?

Answer 20

• Copies of the special notice or of the written resolution must be sent as soon as practical by the company to the person proposed to be appointed as auditor and to the retiring auditor, as appropriate (CA2006 ss. 514(3), 515(3)).
• The auditor proposed to be removed or not reappointed may make representations in writing to the company on the proposed resolution and may ask the company to circulate that representation to the shareholders of the company
  (CA2006 ss. 514(4), 515(4)).
• The company must comply with that request. If it is too late to include the representation with the notice of the meeting, a note that a representation has been made should be included and a copy of the representations should then be sent to all the shareholders entitled to receive notice of the meeting (CA2006 ss. 514(5), 515(5)).
• If the representation is received too late to be circulated to shareholders, or if the representation is not sent out, the auditor concerned may require the representation to be read out at the meeting (CA2006 s. 515(6)).
• The auditor proposed to be removed or not reappointed is also entitled to receive notice of, and to attend and speak at, the general meeting at which the resolution for their removal or non-reappointment is to be considered.

Question 21

At the conclusion of the audit, the auditor must make a report to the company’s members (CA2006 s. 495). Where are these reports sent?

Answer 21

Private companies = Audit report must be sent to members in accordance with CA2006 s. 423

Public companies = Audit report must be laid before the members in general meeting in accordance with CA2006 s. 437.

Question 22

Auditors form an opinion as to whether, what?

Answer 22

• adequate accounting records have been maintained;
• the accounts are consistent with the accounting records; and
• in the case of a quoted company, the auditable part of the directors’ remuneration report is consistent with the accounting records (CA2006 s. 498).

Question 23

The auditor can require individuals connected with the company to provide information or explanations necessary for the purposes of undertaking the audit. Which individuals?

Answer 23

• any officer or employee of the company;
• any person holding or accountable for any of the company’s books, accounts or vouchers;
• any subsidiary undertaking of the company which is a body corporate incorporated in the United Kingdom;
• any officer, employee or auditor of any such subsidiary undertaking or any person holding or accountable for any books, accounts or vouchers of any such subsidiary undertaking (CA2006 s. 499(1)(a) and (2)).

Question 24

What must the audit report to members state whether, the accounts?

Answer 24

1. have been properly prepared in accordance with the relevant financial reporting framework;
2. have been prepared in accordance with the requirements of the Act and, where relevant, the IAS Regulations; and
3. have given a true and fair view:
   (a) in respect of the balance sheet of the state of affairs of that company at the end of the financial year;
   (b) in respect of the profit and loss account in respect of the financial year; and
   (c) in respect of group accounts of the state of affairs of the group at the end of the financial year, the profit and
   loss account of the company for the year, and any undertakings included in the consolidation as they affect the
   members of the company

Question 25

What must the auditor’s report be?

Answer 25

• be either unqualified or qualified;
• include a reference to any matters to which the auditor wishes to draw attention by way of emphasis without qualifying the report;
• include a statement on any material uncertainty, if any, relating to events or conditions that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting; and
• identify the auditor’s place of establishment.