QB Notes - Regulations, Ethics, Current Issues & Managing/Accepting Engagements SFQs

Question 1

safeguards for familiarity?

Answer 1

reassess the composition of the safeguards

rotate partners

sell shares

remove from engagement

Question 2

who’s responsible for preventing fraud?

Answer 2

management are responsible for detecting fraud amongst their employees

Question 3

why is fraud hard to detect?

Answer 3

deliberate attempt to conceal

Question 4

auditor’s primary role in an audit?

Answer 4

to ensure FSs are free from material misstatement

Question 5

how do management handle fraud?

Answer 5

implement controls to ensure prevention

create a culture that inspires ethical behaviour

Question 6

who’s responsible for calculating a company’s valuation?

Answer 6

management

Question 7

what are the procedures when money laundering is suspected?

Answer 7

contact MLRO (money laundering reporting officer)

MLRO will then contact the NCA (national crime agency)

contact ethics partner

do not tip off the client

Question 8

fees threshold for listed & non listed companies?

Answer 8

listed companies - 5% review safeguards, 10% decline engagement

non-listed companies - 10% review safeguards, 15% decline engagement

Question 9

what happens to the engagement partner’s tenure when a client goes public?

Answer 9

if they’ve been the partner for >4 years, 2 years max before they must rotate

Question 10

how long until engagement partners must be rotated for listed clients?

Answer 10

5 years max, sometimes extended to 7 by the audit committee

reasons must be documented if the engagement partner continues to TCWG

Question 11

5 codes of ethics for auditors and their meaning?

Answer 11

integrity - be truthful and honest

objectivity - stay unbiased

pro behaviour - comply with laws & regs

pro competence & due care - maintain skills & act diligently

confidentiality - protect client information

Question 12

hot review?

Answer 12

review conducted before the audit report is finalised

typically conducted by an experienced audit partner who isn’t involved in the engagement

focuses on the adequacy of audit evidence, compliance w/ standards, accuracy of judgements, ensuring risks were addressed etc

helps ensure that errors or deficiencies are handled before the audit report is finalised and published

Question 13

cold review?

Answer 13

a review conducted after the engagement has finished and the audit report is published

used to assess the quality of the audit work that was conducted to identify areas of improvement

usually carried out by quality control team or independent partner

Question 14

staff appraisals?
why/when are they needed?

Answer 14

meetings with a member of staff

needed when a junior member’s work/performance requires evaluation

Question 15

responsibilities/rights of an auditor once removed by their client?

Answer 15

rights = to make written reps to & request directors to circulate this to members/shareholders, to speak at meetings, to know reasons why

responsibility = to return all books/docs, prepare statement of circumstances, maintain confidentiality

Question 16

how often must audit partners be rotated for listed/non listed clients?

Answer 16

5 years for listed & cooling off period for 2 years before re-engaging

10 years for non listed (not mandatory)

Question 17

why do management require a background check prior to engagement acceptance?

Answer 17

to ascertain management integrity

understand risk of harmful behaviour (e.g., intimidation, limitation of information, overdue fees risk, fraudulent/criminal activity)

Question 18

when are business relationships allowed?

Answer 18

• ordinary course of business
• arms length transaction
• immaterial for both parties

Question 19

can audit staff be involved in preparation of client’s FSs?

Answer 19

no, management threat

Question 20

safeguards when providing audit & non-audit services to a client?

Answer 20

separate engagement teams

non-disclosure agreements or confidentiality agreements

separate team locations/offices if possible

ethics partner to review effectiveness of safeguards

Question 21

can auditors provide non-audit services to listed/non-listed clients?

Answer 21

listed clients - prohibited, cannot provided non-audit services

non-listed clients - not prohibited, can provide non-audit services

Question 22

brydon’s report suggestions?

Answer 22

redefine audit’s purpose

increase use of technology

replace true & fair, with present fairly in all material aspects

fraud awareness training for auditors

resilience & public interest statements

Question 23

in short, what were the suggestions by brydon, kingman and the CMA?

Answer 23

brydon - focus on audit quality
kingman - focus on audit regulation
CMA - focus on audit market

Question 24

kingman’s review suggestions?

Answer 24

regulate big firms

require rapid explanations

larger sanctions for corporate failures

issue public reports detailing audit firms’ performance

Question 25

CMA review suggestions?

Answer 25

mandatory joint audits 5 year progress review by the regulator operational split between audit and non-audit parts of big 4 firms robust regulatory oversight committee to ensure quality

Question 26

CMA = ?

Answer 26

competition and market authority

Question 27

criticisms of audit in recent times?

Answer 27

lack of auditor independence lack of audit quality lack of separation between big 4's audit & non-audit businesses lack of pro scepticism non-audit services being provided to clients big 4 dominance/lack of competition

Question 28

who wanted to introduce ARGA?

Answer 28

kingman they want to really clamp down on the regulation of big 4 firms after a host of large-scale corporate failures in recent times (e.g., BHS, carillon etc)

Question 29

what money laundering procedures can audit firms implement?

Answer 29

hire an MLRO hire an MLCP register w/ supervisory body monitor compliance w/ laws & regs train staff to not tip off clients and report money laundering

Question 30

how can audit firms prevent self-interest from ownership of client shares amongst the engagement team?

Answer 30

firm writes up an up-to-date list of clients get written confirmations from employees regular training disciplinary action for breaches remove staff from engagements ensure disclosure upon hiring

Question 31

who wants to extend auditing beyond the scope of the FSs and into internal controls also?

Answer 31

brydon

Question 32

what must be done when auditors are removed by client from an engagement?

Answer 32

auditors should circulate written reps to TCWG/members auditors have right to speak at general meetings auditors must remain confidential must obtain permission to speak to new auditors must maintain confidentiality must return books/docs must prepare statement of circumstances to companies' house

Question 33

fraud prevention is who's duty?

Answer 33

management/directors by promoting fraud prevention, implementing adequate controls and monitoring the system

Question 34

how must suspected bribery be handled?

Answer 34

bribery's a criminal act under bribery act 2010 which is global in scope must be reporting to NCA

Question 35

how does the acceptance of non-audit work impair audit quality?

Answer 35

remuneration can't be based on selling non-audit services objectives of engagement team cant be selling non-audit services impairs objectivity (self-interest threat) criteria for staff evaluation can't be selling of non-audit services

Question 36

what is opinion shopping and why is it bad?

Answer 36

opinion shopping is when a company goes from auditor to auditor in pursuit of a clean/unqualified opinion indicates a lack of management integrity gives rise to self interest threat amongst auditors trying to secure the client threat to auditors' professional behaviour

Question 37

what must be stated in an other assurance engagement letter? specifically engagement for a review of cash flow forecasts

Answer 37

to whom the review will be available period covered & scope of work disclaimer that forecast may differ to actual outcomes ensure correct FR framework state director's responsibilities establish limited auditor liability state intended use of cash

Question 38

how must junior auditors be handled by senior auditors?

Answer 38

brief juniors on client and industry hold meetings to facilitate questions provide feedback monitor their work to ensure alignment with audit plan address contentious matters introduce audit team to the client

Question 39

auditors must renew engagement covenants when...

Answer 39

client shows confusion/misinterpretation change in ownership, size or senior management change in laws/regs or professional standards change in engagement partner

Question 40

engagement quality reviewer must be...

Answer 40

independent experienced with the specific clients in the specific industry must be qualified and competent with audit experience must have communicative access to all parties

Question 41

how to gain an understanding of new/prospective clients?

Answer 41

internet searches undertake client identification procedures inspect prior year audit report hold discussions w/ directors search relevant databases e.g., companies house obtain references from 3rd parties

Question 42

what factors play a role in audit fees?

Answer 42

seniority/experience of staff risk associated w/ the work inherent risk involved in the client/their industry complexity of their operations importance of work to client travelling expenses involved resources required whether auditor's expert is required extent to which internal audit team can be relied upon expenses involved

Question 43

distinctive factors of other assurance engagements?

Answer 43

limited assurance negatively expressed opinion engagement conducted in accordance with ISAE's and ISREs

Question 44

lack of management integrity indicates...

Answer 44

potential window dressing / aggressive accounting practices poor control environment restriction of access to necessary info (intimidation) unreliable management operations money laundering / criminal activity possibility

Question 45

is EQR only for listed/high risk clients?

Answer 45

yes AKA hot review conducted during the engagement / before the audit report is finalised

Question 46

EQR involves...

Answer 46

discuss significant matters w/ engagement partner review proposed auditor's report evaluation of proposed auditor's report

Question 47

cold review purpose?

Answer 47

ensures compliance with standards & regs (e.g., ethical standard, ISAs etc) identify areas requiring improvements

Question 48

which ISA requires engagement letters?

Answer 48

ISA (UK) 210

Question 49

purpose of engagement letters?

Answer 49

indicate auditor and management responsibilities to avoid confusion and expectations gap

Question 50

emphasis of matter paragraphs? other matter paragraphs?

Answer 50

EOM = area of the FS that auditors want users to pay attention to & place emphasis on OM = area that is relevant to users but not directly related to the FS

Question 51

risks associated with clients expanding their operations overseas?

Answer 51

- accurate translation of currency - language barrier - adequate resources - adequate management - appropriate controls

Question 52

difference between audits and other assurance engagements?

Answer 52

- level of assurance (reasonable vs limited) - type of opinion (positive vs negative) - reasonable = high, but not absolute assurance - limited = reduce risk to an acceptable level - 'FS provide true & fair view' vs 'no reason to disbelieve' = less bullish

Question 53

risks of taking on a new client?

Answer 53

- inherent risk - lacking intimate knowledge of their systems - lacking certainty over their opening balances

Question 54

risks when client is in a niche industry?

Answer 54

- threat to pro competence & due care - may require auditor's expert - need to know laws & regs of the industry - higher risk of non-compliance - industry may be heavily regulated - increases client risk - may deter us from accepting the engagement

Question 55

do external audits include auditing subsequent events?

Answer 55

yes

Question 56

threats arising from auditing a client for numerous years?

Answer 56

familiarity threat

Question 57

how do auditors reduce risk when providing a review for financial info?

Answer 57

- provide disclosures to reduce liability

Question 58

why is management integrity important?

Answer 58

lack of integrity may indicate - aggressive accounting policies - fraud - dishonesty - windowdressing - concealing information - intimidation - overdue fees

Question 59

how do you gauge management integrity?

Answer 59

- internet searches - interview w/ management - contact 3rd parties - contact previous auditor (upon client permission) - search companies' house