Topic 11 - Legal Environment

Question 1

as per the corp act 2001, which type of companies be audited? which companies can be requested to be audited?

Answer 1

s301-
Disclosing, Public Co. Reg. Scheme
Large Propriety companies
Company Limited by Guarantee Rev. > $1m.

Small Proprietary Company s302
Company Limited by Guarantee < $1m. s303

Question 2

what are the 4 criteria in the Corp Act 2001 for the regration of Auditors?

Answer 2

Education, experience, competence and

character.

Question 3

how are auditors monitored by the Corp Act 2001?

Answer 3

■ Keep working papers for 7 years (s307B)
■ Annual Return to ASIC (s1287A and s199G)
■ Authorised Audit Company - Company annual statement to be lodged with ASIC (or other body, e.g. APRA) (s99G)
■ Company Auditors and Liquidators Disciplinary Board (s1292)

Question 4

which law enforces the auditing standards?

Answer 4

the corp act 2001

Question 5

under the corp act 2001, what are an auditors obligations in reporting to members? 4

Answer 5

■ Report to members [s308]
■ Written questions to auditor [s250PA]
■ Auditor required to attend listed company’s AGM s250RA]
■ Questions by members of auditors at AGM

Question 6

what two additional requirements are there under the corp act 2001 for an auditor of a borrowing company?

Answer 6

• send audit report to the debenture holder trustee within 7 days of issue.
• report any matter prejudicial to the debenture holders’ interests within 7 days of becoming aware of the matter.

Question 7

what must an auditor report to ASIC as per the corp act 2001? 4

Answer 7

■ Contravention (or suspicion of) of Corp. Act
■ Undue influence, coerce, manipulate, mislead
■ Knowingly lodge false/misleading statement
■ Failing to take steps to avoid such

Question 8

as per the corp act 2001, what must large audit firms post on their websites?

Answer 8

annual transparency report

Question 9

what is the corp act 2001 definition of a conflict of interest?

Answer 9

■ A conflict of interest occurs when the auditor is not capable of exercising objective and impartial judgement in the conduct of an audit.
Or
■ A reasonable person with full knowledge of the relevant facts would conclude that the auditor is not capable of exercising objective and impartial judgement in the conduct of an audit.

Question 10

to avoid conflicts of interest, what relationships must an auditor consider? individual vs company

Answer 10

individual
him/her self and persons involved with the audited entity

company
■ current or former directors of the client;
■ current or former managers of the client.

Question 11

when is an auditor considered to have breached the conflict of interest requirements?

Answer 11

when:
■ Auditor is aware of a conflict of interest, and does not take reasonable steps to resolve it ASAP; and
■ If not aware, but should have been, if appropriate quality control practices were in place.

Question 12

in the case where Auditor is aware of a conflict of interest, and does take reasonable steps to resolve it ASAP, how long before the unresolved issue must be reported to ASIC?

Answer 12

7 days

If, after 7 days the conflict of interest is not resolved, must notify ASIC.

Question 13

what are 5 examples of relevant relationships?

Answer 13

• an officer of an audit client
• an audit critical employee of an audit client
• was an audit critical employee in the current period, or the 12 months prior, or the period during which the audit is being conducted/ report prepared
• has an investment in the audit client
• owes money to the audit client

Question 14

what is the definition of an Audit Critical Employee?

Answer 14

An employee who is able, because of
his/her position, to exert considerable influence over material aspects of the contents of the financial report being audited, or the conduct of efficacy of the audit

Question 15

what is the specific Rule for Former Auditors?

Answer 15

they must wait 2 years before becoming a director, company secretary or senior manager at an assurance client

Question 16

what must the Directors’ report to state?

Answer 16

names of officers who were formerly partners/directors of audit firms that are currently the entity’s auditors, and were in those positions at the time the audit firm conducted an audit of the company.

Question 17

what must be included in the independence declaration of an audit report?

Answer 17

■ No contravention of independence sections of Corporations Act
■ No contravention of independence sections of professional code

Question 18

who must the auditor be appointed by?

Answer 18

the members of a firm

Question 19

what a 2 key rights that the corp act 2001 gives auditors?

Answer 19

■ Right of access to records and registers; and entitlement to information and explanations from officers of the company
[s310]
■ Right to reasonable fees and expenses

Question 20

what are the rotation of Audit Partners requirements for listed companies?

which type of companies may be exempt from these requirements

Answer 20

■ Rotate partner after 5 successive years.
■ Rotate if involved in audit for 5 of 7 years.
■ Directors may extend the term for 2 more years [s 324 DAA]
■ Cannot return to the engagement for 2 successive years.

■ Relief for small/regional auditors.

Question 21

as per the corp act 2001, if a listed company received non audit services from the firm that audits them, what must they do?

Answer 21

board to state:
■ All N A S.
■ Fee for N A S
■ Explain why independence provisions of the Corps. Act are not compromised

Question 22

what four things need to be satisfied to prove that the auditor had a legal liability?

Answer 22

• duty was owed to the plaintiff
• duty was breached
• loss or damage was suffered
• breach of duty was what caused the loss or damage

Question 23

what it the auditors duty to the client under common law?

Answer 23

duty to exercise care and skill in relation to a client.

Question 24

are auditors responsible for accuracy of financial statements?

Answer 24

no, they are responsible for auditing the accuracy of the statements

Question 25

what is the auditor’s Duty: Duty to Consider Fraud, mean?

Answer 25

He is a watch dog but not a bloodhound… If there is anything calculated to excite suspicion he should probe it to the bottom, but in the absence of anything of that kind, he is only bound to be reasonably cautious and careful

Question 26

what is the auditors Liability to Third Parties Under Common Law? what is required for a third party to be successful?

Answer 26

■ No contractual relationship exists.
■ Common law duty of care to third parties.
■ Any liability of the auditor for damages caused to third party by negligence of auditor is brought under Tort Law.

Proximity- Auditor is not under a duty of care unless:
the auditor intended to induce the plaintiff to act in reliance on the audit report.