Section 2 Flashcards
4 misconceptions relating to the expectations gap
Responsibility of preparing FS lie with auditor
Auditor detects fraud
Auditor checks all transactions
Reasonable assurance = correct
How does the FRC promote audit quality (6)
Issues ISAs
Issues ethical standards
Issues practice notes eg going concern
Monitors compliance through audit quality review teams
Oversees matters of misconduct
Oversees the uk code of corporate governance which outlines responsibility of audit committee
Why should auditors be professionally sceptical (4)
Management may conceal fraud
Management biased in creating FS
Evidence not reliable
FS contain complex judgemental elements
What are the 3 reviews which may affect future audit quality and give some facts
Kingman review: published dec 2018 in wake of corrillion and bhs, called for the removal of the FRC and replace with the ARGA (audit, reporting and governance authority). Made specifically to regulate the big audit firms
CMA review: recommended split of big 4 audit and non audit businesses to ensure focus on quality and mandatory joint audits
Brydon report: urgent reform to rebuild trust in the public. Recommended to increase the audit responsibilities beyond the FS, change the language of the opinion given and improved auditor transparency, increased use of tech
What are the 5 IFAC ethical principles
Objectivity
Confidentiality
Professional behavior
Professional competence and due care
Integrity
What are the 6 threats facing auditors ethically
Self review threat
Self interest threat
Advocacy threat
Management threat
Familiarity threat
Intimidation threat
3 safeguards in place to help auditors stay ethical
Training
ICAEW support system
Quality management systems
What is part A of the FRC ethical standard
Fundamental concepts - integrity, objectivity, independence
What is part b section 1 of FRC ethical standard
What should firms do to comply (4)
What does it set out requirements to report on (3)
General requirements and guidance
Create ethical policies
Monitor compliance
Have reporting systems
Evaluate implications of possible or potential breaches
Family and other personal relationships
Financial interests in an entity audited by the firm
Decisions to join an audited entity
What are the key roles set out in part 1 of section B of FRC ethical standard
Ethics partner
Engagement partner
Independent partner (for listed clients)
Other auditors
What are the 5 parts of section 2 of the FRC ethical standard
Give more detail on them
- Financial interests
- Close business relationships
- Client —-> auditor
- Auditor —-> client
- Immediate family
- Person in position of influence in engagement can’t have financial interest or enter loan agreement with audited entity excl bank
2.inconsequential in view of an objective reasonable and informed 3rd party, not material to either party
- Director or sig. influence moves to auditor. Should not be assigned position where they can influence outcome of audit for 2 years following leaving client.
- Firm must resign if partner joins client key management within 2 years of leaving, can’t accept reappointment for 2 years or until they leave client
- Individual removed from audit team if immediate family is director or someone with sig influence.
What is section 3 of the FRC ethical standard
What is the rule for listed entities
What is the rule for non listed
Long association
5 on-5off which can be extended for 2 years if necessary to safeguard audit quality. Engagement quality reviewers 7 on- 5off. Audit tender carried out every 10 years and mandatory rotation every 20
Non listed: after 10 years firm must consider if a ‘reasonable informed 3rd party would question partner objectivity’. If so put in safeguards
Which section is the remuneration, gifts part of the FRC ethical standard
What is the rule for total audit +non audit fees
What is the rule for NAS
Section 4
Audit cannot be taken on contingent fee basis
Total fees audit +non audit can’t regularly exceed 15% (10% listed) —-> no audit. If regularly exceed 10% (5% listed) then disclose to ethics partner and TCWG and consider safeguards - external quality review must also occur
NAS limited to no more than 70% of audit fee on a rolling 3 year basis
What is the policy for gifts and hospitality on section 4 of the FRC ethical standard
What are the evaluation policies for section 4 of ethical standard (4)
Must be clearly insignificant
Should be a firm policy on gifts/ hospitality
Audit staff should not be assessed on ability to cross sell firms products
Hot review must be taken for LISTED clients
Firm should resign where actual or potential litigation between firm and regulated entity
Which section contains information about NAS in the ethical standard
What is a PIE
Section 5
Certain listed companies, credit institutions, insurance
