topic 3 Flashcards
audit/assurance firm issues
audit firm wants to:
make profit
retain clients
have good credit control
also want to avoid litigation, previous court cases found auditors may be liable when:
- they owe a duty of care- auditors owe a duty of care to shareholders, management and third parties (if they reasonably could have known the third party was relying on their information) and;
- the auditors have been negligent;
- there is a loss arising
Can limit liability by:
- making the firm a company or LLP to protect individuals assets
- agree a liability cap stipulating a maximum amount. must be fair, reasonable and approved by shareholders
- proportional liability agreement which apportions the blame between guilty parties
- liability disclaimer paragraph in auditors report, stating report is made by company’s members and no other party
- doing a good job
- getting professional indemnity insurance
- clarifying responsibilities in the audit report and engagement letter
quality control issues
whats needed to conduct a good quality audit?
Leadership- tone set from top, managers promote quality, discipline those who don’t follow procedures
Ethics- good systems to identify and deal with threats
Acceptance/continuance procedures- procedures in place, e.g. background checks, credit checks, resources, budgeting
Human resources- recruitment procedures to find ethical, competent staff. assign right expertise to right audits
Engagement performance (direction/supervision/review)- told what to do, have someone to ask if stuck, someone to check work
- for listed companies-need engagement quality review (EQCR) before sign off - HOT REVIEW
- if you are in the 10-15% range for a limited company this must be external
- for a limited company you could choose to add a second partner review as a safeguard 9same process as EQCR but optional)
Monitoring- COLD REVIEW after audit has been signed off (AIM: to identify improvements which can be made for future audits)
Tender/ acceptance
TRIMROT
technical competence
resources
independence
money laundering
references/risk (aka management integrity)
outgoing auditors
terms of engagement
tender / acceptance matters to consider and procedures
Technical Competence- does firm have skills expertise for work/industry ? - review profiles of team members/training/consider need for an expert
Resources-does the firm have enough staff available?-review staff planner
Independence- are there any ethical threats? can they be overcome?- implement safeguards
ML-indicators of dodgy transactions? client ID checks
References/risk- what is the directors background? can we rely on work they produce? - background and credit checks
Outgoing auditors- why did the old auditors resign/why were they removed? - see process detailed in other card
Terms of engagement- should be easy for an audit but need to clarify for other assurance- obtain signed engagement letter
also consider profitability and fee computation -for factors to consider see ICAEW code of ethics para 330.4 A1
contacting outgoing auditors - appendix to ICAEW code of ethics 320.4 onwards (7 steps)
1- explain to client that you have a duty to contact the outgoing auditors
2- obtain clients permission to contact
3-if not given, do not accept the audit
4-send letter to the outgoing auditors
5- outgoing auditor replies mentioning anything untoward
6-If no reply, then chase
7- still no reply? send them a letter informing them you take their silence as evidence there were no issues and you intend to perform the audit
contacting outgoing auditors - appendix to ICAEW code of ethics 320.4 onwards (7 steps)
1- explain to client that you have a duty to contact the outgoing auditors
2- obtain clients permission to contact
3-if not given, do not accept the audit
4-send letter to the outgoing auditors
5- outgoing auditor replies mentioning anything untoward
6-If no reply, then chase
7- still no reply? send them a letter informing them you take their silence as evidence there were no issues and you intend to perform the audit
auditor appointment - plc and private co
plc:
- Auditor appointed at AGM
- Resolution passed by >50% of shareholders
- If no auditor has been appointed, secretary of state will appoint one
Private co:
- No AGM
- Auditor automatically reappointed
- Unless 5% or more of shareholders register notice to change auditors
- then >505 needed for resolution to pass
removal of auditor
- possible at anytime if shareholders pass Ordinary resolution
- notice given to auditor (prior to removal)
auditor must:
-deposit statement of circumstances at companies registered office explaining removal
if listed MUST EXPLAIN, if not say ‘there are no circumstances’
-return all books and records to the company
-maintain confidentiality
-co-operate with income auditor
auditor has right to:
- write to shareholders ahead of general meeting
- attend GM where vote is made
responsibility of the company to inform companies house
auditor resignation
auditor must: -prep resignation letter -contact audit authority -deposit statement of circumstances at companies registered office explaining removal listed - explain, non listed 'no circumstances' -return all records and books to company -maintain confidentiality -cooperate with incoming auditor
auditor has right to:
- write to shareholders ahead of general meeting
- attend gm where vote is made
responsibility of the company to inform companies house
