Summary Notes AA Flashcards
What are the diff types of assurance
Reasonable, high assurance level, +ve opinion/concl. E.g. audit of FI
Limited, moderate assurance level, -ve opinion/conclusion. E.g. review of FI
What are the objectives of an audit?
Per ISA 200
Obj is to obtain reasonable assurance about whether FS are free from MM and properly prepared in accordance with an applicable financial reporting framework
Report on FS
Communicate with those charged with governance
What is the audit threshold?
CA exempts small private ltd companies from mandatory audit if they meet 2 of the following 3 criteria
- Less than 50 employees
- Turnover doesn’t exceed £10.2m
- Gross assets total doesn’t exceed £5.1m
Subsidiaries don’t need audit is parent guarantees their liabilities
What firms must have an audit, even if they meet the rules for not having one
PLCs
Insurance companies and banks
Where SH owning at least 10% ask for it
What are the benefits of an audit?
Indep scrutiny of the bus by experts
Additional assurance may be necessary for third parties e.g. banks
Growing business will need an audit one day
Subsidiary benefits of audit e.g. reports to man
Describe a statutory audit
Reports to SH
Scope determined by CA2006, ISAs and other audit regulation
Reporting opinion on FS (T&F) and certain other matters e.g. info in directors report is consistent with FS
Level of assurance is reasonable
Report circulated in public domain once the acc are filed
Describe other assurances
Reports to man usually
Scope determined by terms of eng and relevance ISAEs or ISREs
Reports a conclusion depending on nature of work performed
Level of assurance is usually limited
Circulation of report is likely to be restricted
What are man’s responsibilities
Managing the businesses to achieve comp objectives and assessing bus risks to those obj being achieved
Fulfilling stat duties under CA2006
Safeguarding comp assets
Keeping proper acc records
Preparing comp FS and delivering them to registrar
Ensuring comp complies with applicable laws and regulations
What are the auditors responsibilities?
Form an opinion on FS - T&F - properly prepared - Directors report consistent with FS Identify material misstatements (whether due to error, fraud or non-compliance)
What are the fraud procedures required?
ISA 240
Performed fraud risk assessment
Exercise professional scepticism
Discuss fraud among eng team
Respond appropriately to assessed level of fraud risk
Consider implications for other areas of audit
E.g. if fraud is suspected it may cast doubt over reliability of man respresentations
Describe the process of reporting suspected fraud
Internally
- Report to man
- If man suspected of fraud, report to those charged with gov
SH
- Only if fraud causes MM or uncertainty in FS
Third parties
- If there is a duty or right to disclose
E.g. to a regulator
What are the non-compliance procedures required?
ISA 250
Perform risk assessment
Obtain evidence about compliance
If non-compliance suspected, document and discuss with management
Describe the process of reporting non-compliance
Internal
- Report to management
- If man suspected to be involved with non-compliance, report to those charged with gov
- If there is no higher level of man, consider legal advice
SH
- Only if non-compliance causes MM or uncertainty in FS
Third parties
- if there is a duty to disclose e.g. to regulator
How must suspicions of Bribery be dealt with?
Under Bribery Act 2010
Must be reported to NCA under Proceeds of Crime Act 2002
Anti-bribery policies should focus on
- Top level culture in which bribery is unacceptable
- Risk assessment
- Due diligence procedures taking a risk-based approach
- Communication to staff including training
- Monitoring and review
What are the implications of the Sarbanes Oxley Act 2002 for management
CEO and CFO must attest to the veracity of FS (criminal penalties apply for false attestations)
Greater disclosure of the amendments made to FS during audit
What are the implications of Sarbanes Oxley Act 2002 for auditors
Stricter enforcement of auditor independence rules
Public Company Accounting Oversight Board (PCAOB) can inspect audit files of US listed companies, including major subsidiaries of US listed companies wherever the subsidiary is based
What are the party transaction procedures required?
ISA 550
Obtain list of all related parties from man
Carry out detailed tests of transactions and balances (as normal on audit but looking out for related party trans)
Review minutes of meetings of SH and directors where RP transactions may have been discussed
Review bank confirmation letters for evidence of guarantor relationships
Reviewing investment transactions e.g. identifying new subs which are RP
Confirming that correct disclosures have been made in FS
Obtain written man representations confirming the all related party transactions have been disclosed
What are money laundering responsibilities?
Reported actual or suspected money laundering to firms MLRO
MLRO reports to NCA if necessary
Must avoid tipping off client
What assurance eng regulation is applicable to all engagements
And what is additional guidance for audits?
Ethical standards
Risk assessment
Terms of eng
ISQCs
Additional guidance for audits
CA2006
ISAs
What is the role of the International Auditing and Assurance Standards Board/ (IAASB)
Subsidiary of IFAC
Develops international standards
issues ISAs, ISQCs and other standards
What is the role of the FRC?
Supervises acc related issues in UK Issues ISAs (UK) Also issues other standards and guidance for auditors - Ethical standards - Practice notes - Bulletins - Standards for reviews of interim info - Audit quality- thematic reviews
What are the role of EU Directive and Regulations 2014 provisions?
Improve quality of audit and reporting
Mandatory retendering for audits (10 yrs) and auditor rotation (20 yrs)
Ban on providing NAS to public interest entities
Cap of audit fees for NAS
What are the basic fundamental ethical principles per ICAEW Code of Ethics
Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour
What are the threats to objectivity and independence?
Self-interest Self-review threat Advocacy threat Familiarity threat Intimidation threat Management threat
How must policies and procedures be designed for an audit firm?
Section 1 General requirements and guidance
Designed to ensure audit firm and covered persons act with integrity, objectivity and independence
Firm must be able to demonstrate compliance with Ethical Standards
What must leaders of audit firm establish?
Control env within the firm that ensures compliance with standards
What must audit Ethicals Partner be responsible for?
Responsible for the firm’s policies and procedures relating to integrity objectivity and indep
What action must be taken for breaches against general requirements?
Must be assessed by eng partner and ethics partner
Can auditors be involved in management / decision making?
No!
When should eng partner consider threats to objectivity?
At all stages of audit Acceptance/continuing Planning Forming an opinion Considering whether to provide NAS When threats are reported to them
What should a partner do when a threat is identified?
Assess the effectiveness of the available safeguards
Decline or discontinue the eng if safeguards are not effective
When is an EQCR required?
For a listed company or high risk company
Expanded EQCR can be used when there are high risk areas
What must be communicated to those charged with governance?
All significant matters that bear upon the auditor’s objectivity
Can auditors hold shares in the firm and why?
No shares can be purchased by the partners or persons closely associated with self
Because of self-interest
Can audit firms make loans to client?
NO
Unpaid audit fees for previous year can act like a loan
So should aim to have last years fees paid before starting new audit
Can audit firm/ their employees accept a loan from a client and why?
No
Unless the client is a bank and the loan is made in the ordinary course of business
Self interest
Intimidation threats
Can audit firm enter into business relationships with the client?
Audit firm, covered persons and closely associated with them shouldn’t enter into bus relationships.
Self-interest
Advocacy
Intimidation
Is dual employment allowed and why?
Audit firm can’t employ someone who is also employed by audit client
Management
Self-review
Can loaned staff from audit firm be involved in the audit and why?
After completing loan staff assignment, partner or employee must not have any role on short period of time and care must be taken to comply with Section 5
Management
Self-review
What must be done re potential employment with clients and why?
Partner and members team must notify the firm of any potential employment with client
Firm seal remove the indiv from audit team and review the work carried out by them on the current audit
Self-interest
Familiarity
Intimidation threats
What action must be taken when partner (eng/QCR) leaves the firm to become director/key man at audit client?
Firm must resign as auditor and can’t accept reappointment for 2 year period
What action must be taken when audit team member other than partner (eng/QCR) leaves the firm to become director/key man at audit client?
Audit firm must consider the composition of the audit team
What must be done if a member of the audit team has a person closely associated with them/close family member employed by audit client and why?
They may need to be removed from the team
Audit staff should report close family or personal relationships with client staff to the eng partner
Familiarity
Self-interest
Intimidation
Can audit partner or employee of audit firm perform role of auditor and why?
No!
Management
Self review
How must audit procedures be created in ref to fraud?
Must design so they have a reasonable chance of detecting material frauds
i.e. must think about fraud risk
E.g. do they sell desirable item that increases likelihood of them being stolen
E.g. Small firm that can’t segregate duties
What action should be taken if fraud was detected in the previous year?
Check opening bal are correct
Was it corrected properly last year
Was internal control put in place to prevent it occurring again?
Heighten testing/sample size/ audit expertise in that area
Less likely to rely on internal controls in that area
How does non-compliance potentially affect the FS
May need to account for a provision
Fines upcoming?
Sued by employees if lack health and safety
May lose license to trade, could have GC implications
How do you answer an ethics questions?
Identify the threat
Explain the threat and how it impacts the obj/integrity (MOST MARKS FOR THIS)
List the applicable safeguards
FRC Bulletin can help with this in exam
What action is restricted when former director/employee of audit client joins the audit firm?
Can’t be involved in audit of that client for 2 years
period may need to be extended in some circumstances
Self Interest
Self review
Familiarity
What are ‘persons closely associated’?
immediate family members
e.g. spouse and dependents
What are ‘other close family relationships’?
Comprises of parents, non-dependent children and siblings
Why are persons closely associated and other close family relationships included in limitations?
As they are generally presumed to be aware of matters concerning persons closely associated with them and be able to influence their behaviour
How should eng partner deal with use of external consultants involvement in audit?
Should consider the integrity and objectivity of any external consultants involved in the engagement and document the rationale for the conclusion
Why must the auditor monitor the length of time the partners and senior staff work on a client?
Self-interest
Self-review
Familiarity
What are the safe-guards that can be implemented to deal with threats to length of time partners have been in place?
Rotation of partners
Involve another partner not previously involved on eng to review work done by partner and other senior staff members
EQCR (expanded if PLC and require EQCR anyway)
How often must non-listed client eng partners be rotated and what safeguards can be put in place
After 10 years, should review their ability to continue as eng partner Safeguards: Apply safeguards (rotation, EQCR, indep partner review) Document reasoning and communicate with those charged with governance at the client
How often should eng partner of a listed company be rotated?
Rotate every 5 years
No return within 5 years
Can stay for additional 2 years if there has been a major change in company (e.g. FD left) to maintain audit quality
Must disclose extension to SH
Must have safeguards in place e.g. EXPANDED EQCR
What are the rules for eng partner if they have already been eng partner and firm becomes listed?
If they have been eng partner for 4 or more years, can stay on for max of another 2 years
Must implement safeguards
How often must EQCR and other key partners involved in the audit be rotated for a listed company?
Every 7 years
No return within 5 years for EQCR and 2 years for key partners involved
How often must partners/senior staff be rotated on listed companies?
Rotated every 7 years
Can fees be influenced by NAS?
No
How must staff members be selected for an audit?
Should select staff that have sufficient time and skills to complete the audit, regardless of fee charged
Prevents self-interest
Are contingent fees permitted and why?
No
Due to self-interest
What must be done if last years audit fee amount is still outstanding?
last years fee and payment plan must be agreed with client before accepting next appointment
If fees are overdue and amount is not trivial, the audit firm should consider whether they can continue (self-interest)
It is ‘akin to a loan’ and audit firm can’t provide a loan to the client
What must be done if fees charged for NAS exceed audit fee for that year?
Must be disclosed to ethics partner
Consider the need for safeguards
For a listed and unlisted client, what are the limits for fees for accepting the client?
Where regular fees are expected to exceed
10% must refuse audit for listed (15% for unlisted)
5% - should put safeguards in place but can still accept. Must disclose to TCWG and Ethics partner (10% for unlisted)
when should external QC reviewers be used?
When new firms find the economic dependence requirements difficult to comply with
Can audit staff be paid based on their cross-selling ability?
NOT ALLOWED
Can hospitality ever be accepted and why?
Audit firm, partners, covered persons and persons closely associated with them shouldn’t ever accept non-trivial gifts or hospitality
Self interest
Familiarity
What must be done if there is litigation between audit firm and client and why?
Resign
Self interest
Advocacy
Intimidation
What are the requirements for those providing an NAS to an audit client?
Must communicate details of this to audit engagement partner
What test can help decide if obj and indep has been achieved?
Consider whether a reasonably informed third party would consider the relationship obj and independent
When should NAS not be accepted?
Where safeguards can’t mitigate the threats sufficiently
What are the general safeguards for NAS services?
Separate teams
EQCR to review audit work and conclusions of audit team in relation to NAS services
Consider whether there is informed management
What should be done to consider whether there is informed management?
Important for NAS
Objective and indep info is provided to the client
Client has a genuine opportunity to decide between alternate courses of action
Member of man designed to receive the result of NAS- this indiv must have the capability to make judgements and decisions based on info provided
Without informed man, it is unlikely that any safeguards can be effective against the management threat
What must you consider re a management threat and why?
Whether there is informed management in place
Without informed man, it is unlikely that any safeguards can be effective against the management threat
What matters must be communicated to TCWG re NAS?
Any matters that have a bearing on auditors objectivity and independence related to the provision of the NAS
What must be documented when considering NAS?
All reasoning and safeguards related to NAS
What are the threats to indep and obj re NAS?
Self-review : reviewing own work
Management threat/advocacy : NAS are giving advice
Self-interest: doing more work for client
Familiarity - on site more for NAS
What NAS services are prohibited for listed clients?
Tax services
Taking part in man/decision making
Bookkeeping and preparing acc records/FS
Payroll services
Design and implementation of internal controls, risk man procedures or info technology procedures re to FI
Valuation services (including actuarial valuation)
Legal services
Internal audit
Corporate finance services (incl financing, investment strategy and promoting/dealing in or underwriting shares)
Human Resources services
All set out in Section 5
What is the general requirement re fees for audit
EQCR if regular fees are expected to exceed 10% regularly for non-listed (5% for listed) and can’t accept if above 15% (10% for listed clients)
What are the provisions available for audit of small entities?
No requirement for EQCR if fees exceed 10% but not over 15%, must just disclose to Ethics partner and TCWG
Not required to apply safeguards to address self-review threat providing there is
- Informed management
- More regular ‘cold review’ of audits where NAS are provided
- Disclosure of NAS in audit report
if an audit partner joins the client, not restricted to not be able to do the audit for 2 years. Can continue as auditor providing there is no significant threat to audit teams integrity, obj and independence, and disclosure of partner joining client must be made in audit report
What does the confidentiality requirement mean for auditors?
Should not disclose client info unless there is a right or a duty to do so
Should take all reasonable steps to maintain confidentiality
Should not use confidential info for personal advantage
When is there a duty for auditors to disclose info?
Required by regulator
Ordered by a court
Money laundering / terrorism
When is there a right for auditors to disclose info?
Client permission granted
Public interest
To defend the firm in legal proceedings
What must be done when a conflict of interest arises?
Firm should notify the clients of the situation and seek their consent to continue to act
Confidentiality is key issue, as leakage of info could be detrimental
If continue to act, should implement safeguards
Separate teams
Info barriers
Confidentiality agreement signed by employees and partners
review of the application of safeguards by INDEPENDENT partner
