Rules Flashcards
Why is there a need for regulation?
Role of the auditor under increased scrutiny over the last 30 years due to an increase in high profile, economically damaging fraud cases. Involving which companies?
In order to try and regain trust in the auditing profession national and international standard setters and regulators have tried to introduce 3 initiatives:
- harmonisation of auditing procedures, so that users of audit services are confident in the nature of audits being conducted around world.
- a focus on audit quality (user expectations met)
- adherence to a strict ethical code of ethical conduct
What are the 3 sets of regulatory guidelines?
1) The Code of Ethics
2) Auditing Standards (basis of this text is International Standards of Auditing)
3) National corporate law
Examples of national laws/guidance include:
- The Companies Act 2006 in the UK
- The Sarbanes Oxley Act in the US (enforcing standards of corporate governance)
- The Corporate Governance Code in the UK (formerly the Combined Code)
What is the International Federation of Accountants (IFAC)?
Global organisation for the accountancy profession.
Formed in 1977, based in New York
Has >160 member bodies of accountants, representing 2.5million accountants
Overall mission to “serve the public interest, strengthen the worldwide accountancy profession, and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards”
International Audit and Assurance Standards Board (IAASB) is a subsidiary. Responsible for developing and promoting ISAs (currently 38 and one International Standard of Quality Control)
EU member states audits carried out in accordance with ISAs
Does IFAC have any legal standing in individual countries?
NO
So countries need to have arrangements in place for:
- regulating the audit profession
- implementing auditing standards
What are national regulatory bodies?
Enforce the implementation of auditing standards
Have disciplinary powers to enforce quality of audit work
Have rights to inspect audit files to monitor audit quality
What are the 2 possible schemes for regulation on national levels?
Self regulation by the audit/accountancy profession
Regulation by government or by some independent body set up by the government
What are national standard setters?
May set their own auditing standards
May adopt and implement ISAs (possibly after modifying them to suit national needs)
Decision by EU to implement ISAs in all member states for all accounting periods beginning on or after 1 January 2005, countries with their own standard setting bodies such as UK had to decide whether to:
- modify own standards to bring in line with ISAs
adopt ISAs and modify them to suit national requirements.
What are the UK regulations?
In UK, FRC is national regulator responsible for overseeing accountancy profession. Will be replaced by ARGA (Audit, Reporting & Governance Authority).
Audit and Actuarial Regulation Division responsible for development of auditing standards and guidance in UK
Take ISAs as issued by IAASB and modify them for UK use
Audit and Assurance team also developed own ethical standards which must be followed. Either same as IFAC’s Code of Ethics or more comprehensive
Eg partner rotation rules in the UK more stringent
Audit Quality Review team monitors quality of work
Inspection reports (FRC website)
Accountancy profession primarily self-regulated by FRC
European countries – more government involvement
What is the law on audit in the UK?
Incorporation
In most countries, companies generally required to carry out an audit. It is a legal requirement.
But, small/owner-managed companies are often exempt.
Exempt as they don’t have resources or funds to undertake an audit.
Less risk associated with smaller companies.
Often third party accountants are used to create the reports etc and they may be audited.
What are the auditors duties? (3)
In accordance with ISA 200 the auditor’s fundamental objectives are to:
Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error;
Express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable reporting framework; and
Report on the financial statements, and communicate as required by ISA’s, in accordance with the auditor’s findings
What is the appointment process of the auditors?
Members (shareholders) of the company appoint the auditor by voting them in at the Annual General Meeting (AGM)
Directors can appoint the first auditor to fill a ‘casual vacancy’. This requires the members approval at next AGM
In some countries the auditors may be appointed by the directors as a matter of course
Auditors are appointed from one AGM until the end of the next one
Private companies may not hold an AGM if an elective resolution is made. Auditor is automatically reappointed unless a shareholder objects.
Who may act as an auditor?
Individuals:
A member of a recognised supervisory body eg (ACCA)
Allowed by the rules of that body to be an auditor
or
Someone directly authorised by the state
Firms:
Controlled by members of a suitably authorised supervisory body
A firm directly authorised by the state
Who may not act as an auditor?
Excluded by law:
An officer (director or secretary) of the company
an employee of the company
a business partner or employee of the above
Excluded by ethics:
Due to the lack of objectivity or independence-
Close business relations
personal relations
long association with client
fee dependency
non audit services provided
What is the removal of the auditor?
Arrangements for removal have to be structured in such a way that:
The auditor has sufficiently secure tenure of office, to maintain independence of management
Incumbent auditors can be removed if there are doubts about their continuing abilities to carry out their duties effectively
To enable this balance to be maintained, the removal of auditors can usually be achieved by a simple majority at a general meeting of the company (need specified notice period though)
In practice if auditors and management finding it difficult to work together, auditor will resign. Must submit a statement of circumstances surrounding resignation
What are the auditor’s responsibilities on appointment? and removal
On appointment:
- Obtain clearance from the client to write to the existing auditor (if denied, appointment should be declined)
- Write to existing auditor asking if there are any reasons why the appointment should not be accepted
