Responsibilities - Chapter 4 Flashcards
what sets out the duties of management?
companies act 2006
how should directors of a company act?
in a way that promotes the success of the company for the benefit of its members
directors’ responsibilities?
- safeguarding the companies’ assets
- keeping proper accounting records
- preparing company FS & giving them to companies house
- promote the success of the company
- comply with laws & regs
ESG?
environmental, social and governance
ESG considers sustainability issues through a corporate lens
management responsibilities regarding ESG?
management must consider sustainability issues
it’s important to consider the term ESG in a corporate context
explain the dual nature behind ESG
impacts & dependencies
impacts - the impact the company has on ESG
dependencies - the impact ESG has on the company
define ESG
environmental = reduce environmental footprint & consider the climate
social = focus on the wellbeing of society
governance = practices implemented from the top down in a company
examples of ESG dependencies?
(the impact ESG has on the business)
workplace diversity, risks to organisational reputation, levels of resources
examples of ESG impacts?
(the impact of the company on ESG)
human/worker rights, waste, water usage, health & safety policies
what 3 aspects does sustainability impact?
- risk management
- assurance
- law & regs
how does climate change create risks for businesses?
risks can be physical risks or transitional risks
physical risks?
transition risks?
physical = more frequent/severe weather events
transition = related to the shift to a low-carbon economy
ISSB?
international sustainability standards board
responsible for developing a set of sustainability disclosure standards
IFRS S1?
IFRS S2?
S1 = entities must disclose significant sustainability related risks & opportunities
S2 = entities must disclose climate related risks & opportunities
transition risk regarding the transition to net zero?
significant transition risk where FS may contain stranded assets
some businesses rely on fossil fuels to operate
legislation change to limit or prohibit fossil fuels would result in stranded assets
stranded assets?
assets which have suffered from an unanticipated/premature write down, devaluation or conversion to liabilities
e.g., due to legislation change, social norms changing, climate change
what determines the responsibilities of the assurance provider?
- terms of engagement
- ethics
- ISQMs
- laws & regs
auditor’s responsibilities?
- form an opinion
- confirm correct preparation of FSs
- ensure consistency w/ director’s report
how does the auditor ensure they achieve their objectives?
they must
- plan the audit
- obtain sufficient evidence
- draw valid conclusions
two types of fraud?
- misappropriation
- fraudulent financial reporting
must auditors form an opinion on whether FSs are free from material misstatement?
yes
is fraud material or immaterial?
fraud is always material in nature
management & auditor responsibilities with respect to fraud?
management = prevent / detect fraud
auditor = obtain reasonable assurance that FS are free from fraud
what procedures must an auditor do to identify misstatement caused by fraud?
- perform a risk assessment
- exercise pro scepticism
- discuss fraud among engagement team
- respond appropriately to level of fraud risk
- consider if specialist skills are required
auditor’s response to suspected/alleged fraud?
- make inquiries of management (are they aware of suspected or actual fraud)
- report to management
- report to shareholders (only if the fraud causes a material misstatement/uncertainty in FSs)
- report to 3rd parties only if there’s a right/duty to disclose
should the auditor always report fraud to management?
not always
the auditor should consider if the fraud constitutes money laundering
in that case, avoid tipping off
can non-compliance cause a material misstatement?
yes
the auditor must obtain an understanding of the legal framework within which the company operates
ISA250?
covers the auditor’s responsibilities in relation to compliance with laws & regs
responsibilities of management and auditor regarding compliance w/ laws & regs?
management = responsible for complying with relevant laws & regs
auditor = must obtain sufficient appropriate evidence of compliance w/ laws & regs
auditor procedures to identify misstatement caused by non-compliance w/ laws & regs?
- risk assessment
- obtain evidence about compliance
who should auditors discuss non-compliance w/ laws & regs with?
management = if suspected management involvement, report to TCWG
shareholders = only if non-compliance causes material uncertainty/misstatement
3rd parties = only if there’s a duty/right to disclose
bribery act 2010?
penalties exist for individuals/organisations for offering/accepting a bribe or bribing a foreign public official
how can organisations prevent bribery?
- top level culture
- risk assessment
- due diligence
- communication & training
- monitoring & reviewing
how does the auditor comply with the 2010 bribery act?
- assess risk of non-compliance w/ the bribery act
- exercise pro scepticism
- assess bribery prevention policies of the client
who should the auditor report suspicions of bribery to?
the NCA under the proceeds of crime act 2002
details regarding the sarbanes oxley act 2002?
this act was passed after the enron scandal
often refferred to as sarbox or SOX
not UK law, but relevant to some UK auditors due to the US subsidiaries collateralised
sarbanes oxley act 2002?
management = CEO & CFO must attest to the veracity of the FS
auditor = stricter enforcement of auditor independence rules &
= PCAOB can inspect audit files of US PLCs (including subsidiaries which aren’t US based)
define veracity
truthfulness
related party?
a related party is a company or person that might have, or be expected to have undue influence on the company being audited
e.g., directors’ families, key management, other companies in the same group
why are related party transactions problematic?
they’re not done at arms length
undisclosed related party transactions are deemed material to the FSs
e.g., director buys property at less than market value from their friend
accounting rule around related party transactions?
should be disclosed in FS
management & auditor responsibilities around related party transactions?
management = responsible for disclosing related party transactions in FS
auditor = responsible for identifying/assessing & responding the risk of material misstatement arising from failure to correctly disclose related party transactions
why are related party transactions seen as high risk?
- complex
- hard to identify
- fraud risk
- transactions may take place for no consideration
how do auditors identify misstatements caused by non-disclosure of related party transactions?
- obtain list of related parties from management
- carry out tests of transactions & balances
- review investment transactions
- obtain written reps from management that all related party transactions have been disclosed
define money laundering?
aims to disguise the origins of funds from criminal conduct so they can be used
using, acquiring, retaining, controlling, concealing, disguising, converting, transferring and removing from the UK the proceeds of criminal conduct
also dealing w/ criminal financial behaviour such as selling illegal drugs, tax evasion, saving costs by failing to comply w/ laws & regs & bribes
who should the auditor report money laundering suspicions to?
MLRO
the MLRO then reports to the NCA
offences by auditors with respect to money laundering?
- failure to report
- failure to train staff
- tipping off the money launderer
auditor penalties for money laundering?
most severe can be imprisonment for up to 14 years
