Week 1: Introduction to Audit Flashcards
What is an audit?
Audit is the means by which one person is assured by another of the quality, condition or status of some subject matter which the latter has examined.
The need for such an audit arises because the first-mentioned person is doubtful about the quality, condition or status of the subject matter, and is unable personally to remove the doubt or uncertainty.
What are the key responsibilities of the auditor, as defined by the CA 2006?
The auditor must express an opinion:
as to whether or not the financial statements give a true and fair view in accordance with the relevant financial reporting framework and the Companies Act 2006; and
on the consistency of the strategic report and the directors’ report with the financial statements and whether they have been prepared in accordance with applicable legal requirements.
The opinion is expressed to the company’s shareholders.
Why is an audit required?
Information hypothesis: the auditor makes the information more reliable and therefore useful
Agency theory: owner or providers of resources cannot trust managers to act in their best interest; they need an independent and expert agent (the auditor) to act on their behalf i.e., to monitor management and verify their reports.
Insurance hypothesis: users of the audited accounts may be able to sue the auditor if they incur a loss (note: negligence and duty of care must be proven)
Who is audited?
Companies & limited liability partnerships registered under the CA 2006
Public bodies e.g., local authorities
Not-for-profit bodies e.g., charities (as there is enhanced public interest in charitable entities, they are subject to a more rigorous programme of external scrutiny than non-charitable companies. Charity law therefore has a lower audit threshold.
NOTE:
Special (extra) requirements for PIEs
Exemptions for small companies and small charities
In regards to the small company exemption from audit, a company is exempt from statutory audit if it has at least 2 of the following:
revenue of no more than £10.2 million
total assets of no more than £5.1 million
50 or fewer employees on average
Companies can opt for an audit even if they are exempt
What are Public Interest Entities (PIEs)?
All listed entities (on stock exchanges etc); and
Entities for which the audit required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities e.g., building societies
Audit reform changes re PIE 750 rule
What are the PIE requirements?
Compliance with the UK Corporate Governance Code
Additional reporting requirements
Additional audit requirements
Additional requirements for their auditors
Who can audit?
Sole practitioners or firms can audit private companies if they are registered with a supervisory body eligible for appointment (qualified accountant)
Supervisory bodies: ICAS, ICAEW, ICAI, ACCA, AAPA
Statutory auditors and other practitioners or bodies can audit public sector organisations if allowed under enabling legislation e.g., Public Finance and Accountability (Scotland) Act 2000
Companies Act 2006 sets out:
Who can audit
Auditor’s right of access to information
Period of appointment
Auditor’s right if removed early or resigns early
Statutory relationships between the auditor and the relationship
According to ISA 200, what is the purpose of an audit?
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable reporting framework.
NOTE: the scope of audit does not, however, constitute an assurance engagement with respect to the future viability of the audited entity or on the efficiency or effectiveness with which the management or administrative body has conducted or will conduct the affairs of the entity.
What are the overall objectives of conducting an audit of financial statements?
ISA 200 requires the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. This enables the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
To report on the financial statements and communicate as required by the ISAs in accordance with the auditor’s findings
What is meant by reasonable assurance?
Reasonable assurance is a high level of assurance, obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level.
NOTE: reasonable assurance is not an absolute level of assurance, as there are inherent limitations of an audit.
What is meant by materiality?
Misstatements are considered to be material if individually or in aggregate they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
E.g., error of £100k material if turnover is £500k, but if turnover is £500m.
What are the requirements of ISA 200?
Ethical requirements
Professional scepticism
Professional judgement
Sufficient appropriate audit evidence and audit risk
Conduct of an audit in accordance with ISAs (UK and Ireland)
What is professional judgement?
The application of relevant training, knowledge and experience, within the context provided by the auditing, accounting and ethical standards in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
Professional judgement is essential to the proper conduct of an audit, particularly regarding decisions on materiality and audit risk etc.
