SYLLABUS AREA A - Chap 2

Question 1

Why and How are national standard setters regulating the audit profession?

Answer 1

To regain trust in the auditing profession, national and international standard setters and regulators have tried to introduce three initiatives:

• Harmonisation of auditing procedures, so that users of audit services are confident in the nature of audits being conducted around the world.

• Focus on audit quality, so that the expectations of users are met.

• Adherence to a strict ethical code of conduct, to try and improve the
perception of auditors as independent, unbiased service provider

Question 2

Describe the regulatory environments of audits

Answer 2

Auditors have to follow these regulatory guidelines:

1- national corporate law (eg. the companies act 2006 in the UK. Sarbanes oxley act in US)
2 - auditing standards (ISA)
3- code of ethics

Question 3

who needs an audit according to company law?

Answer 3

1- in most countries, companies are required by law to have an audit
2- small companies are often exempt from this.
however small financial services companies or those listed on a stock exchange are not exempt.

Question 4

what are the reasons for exempting small companies from audit?

Answer 4

• The owners and managers of the company are often the same people.
• The advice and value which accountants can add to a small company is more likely to concern other services, such as accounting and tax.
• The impact of misstatements in the financial statements of small companies is unlikely to be material to the wider economy.
• The audit fee and disruption of an audit are seen as too great a cost for any benefits the audit might bring.

Question 5

who may and may not act as an auditor?

Answer 5

To be eligible to act as auditor, a person must be:

• A member of a Recognised Supervisory Body (RSB), e.g. ACCA, and
allowed by the rules of that body to be an auditor or
• Someone directly authorised by the state.

Excluded by law: The law in most countries excludes those who manage or work for the company, and those who have business or personal connections with them from auditing that company.

Excluded by the Code of Ethics: Auditors must also comply with a Code of Ethics. The Code of Ethics requires the auditor to consider any factors that would prevent them acting as auditor, such as independence, competence or issues regarding confidentiality.

Question 6

who appoints the auditor?

Answer 6

1- members (shareholders) appoint by voting them
2- directors - can appoint first auditor or to fill a “casual vacancy” this requires members approval at a member’s meeting
3- secretary of state - if no auditor is appointed by members or directors

Question 7

what is the usual office tenure of an auditor?

Answer 7

auditors of public companies are appointed from one AGM to the next one.

auditors of private companies are appointed until they are removed.

Question 8

what is the procedure for removing an auditor?

Answer 8

Removal should be done in such a way that:
-must have had enough time, to maintain independence of management
-they can be removed if there are doubts about their continuing ability to carry out duties effectively

Removal process:
Auditor can be removed simply by a majority vote at the members meeting.
Directors can’t remove auditors without valid reason (like if there are doubts that auditor won’t be able to carry duties effectively)
If they want to remove without a reason, it needs to be approved by SH.

Safeguards: specified notice period must be given to make sure it’s not being done at short notice in order to influence outcome of members vote

Other things to be considered are that auditor should be given a specified notice period. To avoid removing decision being sprung on them.

If auditor thinks they shouldn’t be removed they have a right to be heard at an AGM, or can circulate such a statement to the members

Auditor must send a statement of circumstances to the company and the regulatory body (ACCA) and if there are no circumstances, then a statement saying so.

Question 9

how does resignation of auditor work?

Answer 9

• in practice, auditor will usually resign if auditor and management cant work together
• on resignation, auditor has to issue a written notice and a statement of circumstances to the members and regulatory authority. (ACCA)

Question 10

what are the rights of an auditor during appointment?

Answer 10

• Access to the company’s books and records at any reasonable time.
• To receive information and explanations necessary for the audit.
• To receive notice of and attend any general meeting of members of the company.
• To be heard at such meetings on matters of concern to the auditor.
• To receive copies of any written resolutions of the company.

Question 11

what are the rights of auditor on resignation?

Answer 11

• to request a GM of the company to explain the circumstances of the resignation
• to require the company to circulate the notice of circumstances relating to the resignation.

Question 12

what are the duties of an auditor?

Answer 12

Main duty is to audit the FS and give an opinion on whether the FS give a true and fair view.

Additional responsibility required by local law, such as confirming that the financial statements are properly prepared in accordance with those laws.

Question 13

what are the international regulatory bodies of accountants and what do they do?

Answer 13

IFAC- Abbu

The International Federation of Accountants (IFAC) is the global organisation for the accountancy profession.

IFAC promotes international regulation of the accountancy profession.

It ensures minimum requirements for accountancy qualifications, post qualification experience and guidance for accountants around the world

It does all this so there will be greater public confidence in the profession as a whole.

2) IFAC’S 1ST CHILD: IFAC code of ethics (imran chachu)
3) IFAC’S 2nd CHILD: IAASB (International audit and assurance standards board) (papa)

IAASB has two kids:
1) ISA (Ali)
IAASB has a responsibility to develop and promote ISA (Ali)
There are 37 ISAS (37 different achievements)

2) ISQC (me) International standards on quality control.
Only one ISQC.

Question 14

what are the main features of ISAs?

Answer 14

ISAs are international standards produced by IAASB:
-they are not a legal requirement, local law> ISAs
-they are a professional guidance that an auditor must follow to ensure quality and consistency
- can be applied to the audit of other historical financial info as well as FS
-ISAs must be applied in all but exceptional cases. where the auditor deems it necessary to depart from an ISA to achieve the overall aim of the audit, this departure must be justified.

• ISAs contain basic principles and requirements followed by application and other explanatory material to aid the auditor on how to follow the requirements.

Question 15

what is the procedure for the development of ISAs?

Answer 15

For an ISA to be issued, a lengthy process of discussion and debate occurs to ensure the members affected by the guidance have had an input.

An exposure draft (ED) is issued for public comment and these comments may result in revisions to the ED.

Approval of two thirds of IAASB members is required for the ISA to come into force.

Question 15

what is the relationship bw international and national standards of regulation?

Answer 15

IFAC is just a group of accountancy bodies, it has no legal standing in individual countries.
countries need to have their own arrangements for
-regulating the audit profession
-implementing audit standards

national standard setters:

• may develop their own audit and ethical standards
• may adopt and implement ISA after modifying.

if there is a conflict between local laws and ISA, local law will be applied.

Question 16

who is responsible for overseeing the accountancy profession in the UK? and for the development of auditing standards in UK?

Answer 16

FRC (financial reporting council)
The audit and ACTUARIAL regulation division within the FRC is responsible for developing audit standards in UK, guiding and monitoring of auditors of public entities.
the audit and assurance team within audit division take the ISAs as issued by IASB, and modify them for UK use.

Question 17

how do professional bodies promote quality within the accounting profession?

Answer 17

• Rigorous qualifications to acquire the knowledge and skills needed to provide a competent service
• Support to members to demonstrate high professional and ethical values
• Technical expertise to governments on accounting and business matters. This input may help shape the introduction of new laws and regulations affecting the professio

Question 18

what are the three things a person must do to obtain membership to a professional body?

Answer 18

• complete exams
• complete work experience requirement (usually a period of 3 years)
• complete an ethical assessment

Question 19

what is the need for regulation of auditors?

Answer 19

The role of the auditor has come under increased scrutiny over the last thirty years due to an increase in high profile audit failures.
The most high profile case, and the catalyst for regulatory change, was the collapse of Enron and its auditor Arthur Andersen. The collapse of enron caused a loss to the economy and billions of dollars in public money were lost.
It is important to regulate the audit profession to avoid future failures, to regain the trust of public in audit profession. and to provide consistency and quality so user’s expectations are met.

Question 20

Why does removal of auditor need to be approved by SH?

Answer 20

So directors can’t simply sack auditors that are too good.

Question 21

What is a statement of circumstances?

Answer 21

It tells anything that needs to be brought to the notice of SH or creditors. Or a statement that there are no such circumstances.

Question 22

What is CPD

Answer 22

To maintain membership a member must demonstrate continuing professional development (CPD) to ensure knowledge and skills are kept up to da

Question 23

What happens If a member is found not to have complied with the rules of the professional body?

Answer 23

disciplinary action will be taken which may involve fines, reprimands, suspension from membership for a limited time or withdrawal of membership.
Most disciplinary matters will be dealt with internally by the relevant professional body.
However, if the behaviour of the person or the firm is considered very serious, the matter can be referred to the national regulator (e.g. the FRC in the UK) and action can be taken at a higher level. This will generally be the case for significant public interest issues.