QB Notes - Regulations, Ethics, Current Issues & Managing/Accepting Engagements SFQs Flashcards
safeguards for familiarity?
reassess the composition of the safeguards
rotate partners
sell shares
remove from engagement
who’s responsible for preventing fraud?
management are responsible for detecting fraud amongst their employees
why is fraud hard to detect?
deliberate attempt to conceal
auditor’s primary role in an audit?
to ensure FSs are free from material misstatement
how do management handle fraud?
implement controls to ensure prevention
create a culture that inspires ethical behaviour
who’s responsible for calculating a company’s valuation?
management
what are the procedures when money laundering is suspected?
contact MLRO (money laundering reporting officer)
MLRO will then contact the NCA (national crime agency)
contact ethics partner
do not tip off the client
fees threshold for listed & non listed companies?
listed companies - 5% review safeguards, 10% decline engagement
non-listed companies - 10% review safeguards, 15% decline engagement
what happens to the engagement partner’s tenure when a client goes public?
if they’ve been the partner for >4 years, 2 years max before they must rotate
how long until engagement partners must be rotated for listed clients?
5 years max, sometimes extended to 7 by the audit committee
reasons must be documented if the engagement partner continues to TCWG
5 codes of ethics for auditors and their meaning?
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
hot review?
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
cold review?
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
staff appraisals?
why/when are they needed?
meetings with a member of staff
needed when a junior member’s work/performance requires evaluation
responsibilities/rights of an auditor once removed by their client?
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
how often must audit partners be rotated for listed/non listed clients?
5 years for listed & cooling off period for 2 years before re-engaging
10 years for non listed (not mandatory)
why do management require a background check prior to engagement acceptance?
to ascertain management integrity
understand risk of harmful behaviour (e.g., intimidation, limitation of information, overdue fees risk, fraudulent/criminal activity)
when are business relationships allowed?
- ordinary course of business
- arms length transaction
- immaterial for both parties
can audit staff be involved in preparation of client’s FSs?
no, management threat
safeguards when providing audit & non-audit services to a client?
separate engagement teams
non-disclosure agreements or confidentiality agreements
separate team locations/offices if possible
ethics partner to review effectiveness of safeguards
can auditors provide non-audit services to listed/non-listed clients?
listed clients - prohibited, cannot provided non-audit services
non-listed clients - not prohibited, can provide non-audit services
brydon’s report suggestions?
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
in short, what were the suggestions by brydon, kingman and the CMA?
brydon - focus on audit quality
kingman - focus on audit regulation
CMA - focus on audit market
kingman’s review suggestions?
regulate big firms
require rapid explanations
larger sanctions for corporate failures
issue public reports detailing audit firms’ performance
CMA review suggestions?
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
CMA = ?
competition and market authority
criticisms of audit in recent times?
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
who wanted to introduce ARGA?
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)
what money laundering procedures can audit firms implement?
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
how can audit firms prevent self-interest from ownership of client shares amongst the engagement team?
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
who wants to extend auditing beyond the scope of the FSs and into internal controls also?
brydon
what must be done when auditors are removed by client from an engagement?
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
fraud prevention is who’s duty?
management/directors
by promoting fraud prevention, implementing adequate controls and monitoring the system
how must suspected bribery be handled?
bribery’s a criminal act under bribery act 2010 which is global in scope
must be reporting to NCA
how does the acceptance of non-audit work impair audit quality?
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
what is opinion shopping and why is it bad?
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
what must be stated in an other assurance engagement letter?
specifically engagement for a review of cash flow forecasts
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
how must junior auditors be handled by senior auditors?
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
auditors must renew engagement covenants when…
client shows confusion/misinterpretation
change in ownership, size or senior management
change in laws/regs or professional standards
change in engagement partner
engagement quality reviewer must be…
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
how to gain an understanding of new/prospective clients?
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
what factors play a role in audit fees?
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
distinctive factors of other assurance engagements?
limited assurance
negatively expressed opinion
engagement conducted in accordance with ISAE’s and ISREs
lack of management integrity indicates…
potential window dressing / aggressive accounting practices
poor control environment
restriction of access to necessary info (intimidation)
unreliable management operations
money laundering / criminal activity possibility
is EQR only for listed/high risk clients?
yes
AKA hot review
conducted during the engagement / before the audit report is finalised
EQR involves…
discuss significant matters w/ engagement partner
review proposed auditor’s report
evaluation of proposed auditor’s report
cold review purpose?
ensures compliance with standards & regs (e.g., ethical standard, ISAs etc)
identify areas requiring improvements
which ISA requires engagement letters?
ISA (UK) 210
purpose of engagement letters?
indicate auditor and management responsibilities
to avoid confusion and expectations gap
emphasis of matter paragraphs?
other matter paragraphs?
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
risks associated with clients expanding their operations overseas?
- accurate translation of currency
- language barrier
- adequate resources
- adequate management
- appropriate controls
difference between audits and other assurance engagements?
- 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
risks of taking on a new client?
- inherent risk
- lacking intimate knowledge of their systems
- lacking certainty over their opening balances
risks when client is in a niche industry?
- 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
do external audits include auditing subsequent events?
yes
threats arising from auditing a client for numerous years?
familiarity threat
how do auditors reduce risk when providing a review for financial info?
- provide disclosures to reduce liability
why is management integrity important?
lack of integrity may indicate
- aggressive accounting policies
- fraud
- dishonesty
- windowdressing
- concealing information
- intimidation
- overdue fees
how do you gauge management integrity?
- internet searches
- interview w/ management
- contact 3rd parties
- contact previous auditor (upon client permission)
- search companies’ house
