Week 2

Question 1

What was a major historical criticism of the regulatory regime for auditors?

Answer 1

It lacked independence from the accountancy profession itself.

Question 2

What model contributed to the lack of independence in auditor regulation?

Answer 2

A self-regulation model where professional bodies like ACCA regulated their own members.

Question 3

What conflict arose from the self-regulation model?

Answer 3

It created a clear conflict of interest.

Question 4

Is the criticism of auditor independence still valid today?

Answer 4

The criticism is less forceful today but has not entirely disappeared.

Question 5

What is the key audit regulator in the UK?

Answer 5

The Financial Reporting Council (FRC).

Question 6

Why was the FRC reconstructed?

Answer 6

To be more independent, particularly after the collapses of companies such as Thomas cook which highlighted serious failings in audit quality

Question 7

What is the Audit, Reporting and Governance Authority (ARGA)?

Answer 7

The ARGA is set to replace the FRC, with a view to being a statutory regulator, independent of the FRC.

Question 8

What criticisms remain regarding the FRC?

Answer 8

Criticisms include issues with funding and staffing, enforcement action, and delays in reform.

Question 9

What is a concern regarding funding and staffing of the FRC?

Answer 9

The FRC is still particularly underfunded, leading to accusations of inefficiency.

Question 10

What is a concern regarding enforcement action by the FRC?

Answer 10

Some believe that sanctions imposed on large firms and individual auditors remain too lenient to be effective deterrents.

Question 11

What is a concern regarding delays in reform related to the FRC?

Answer 11

There are delays in reform, which affect the government’s commitment to replacing the FRC.

Question 12

What influence do directors have over auditors?

Answer 12

Directors wield significant influence over the auditor appointment process, particularly when there is no independent audit committee in place.

In practice, the board of directors, especially executive directors, heavily influence or control the process.

Question 13

What is a conflict of interest in the auditor selection process?

Answer 13

Auditors report on the financial statements prepared by directors. If those same directors influence auditor selection, independence is compromised.

Question 14

How can auditor objectivity be undermined?

Answer 14

Auditors may be incentivized to maintain a favorable relationship with directors to secure reappointment or additional consultancy fees.

Question 15

What effect does director influence have on shareholder confidence?

Answer 15

Auditors are perceived to be aligned with management, which undermines trust in the audit opinion.

Question 16

What are the three reasons why it is problematic that directors wield significant influence over auditor appointments

Answer 16

1. Conflicts of interest
2. Undermines objectivity
3. Erosion of shareholder confidence

Question 17

What is a mitigation strategy for reducing the influence of directors in audit roles?

Answer 17

Requiring companies to invite multiple audit firms to bid for the audit role reduces the chance of undue influence from directors.

Question 18

What does the UK Corporate Governance Code recommend for audit committees?

Answer 18

It recommends a strong, independent audit committee composed of non-executive directors (NEDs) to oversee auditor selection and monitor performance.

Question 19

What is suggested for external oversight in auditor selection?

Answer 19

There have been suggestions that an independent regulator should oversee the auditor selection process, especially in FTSE companies.

Question 20

What is the conclusion regarding the risk of undue director influence?

Answer 20

The risk of undue director influence remains significant, particularly in companies with weak governance structures.

Question 21

What are crucial elements in mitigating the risk of undue director influence?

Answer 21

Strong independent audit committees and external scrutiny are crucial in mitigating this risk.

Question 22

What is Corporate Governance?

Answer 22

Corporate Governance refers to the framework of rules and practices by which a company is directed and controlled.

Question 23

What is the purpose of Corporate Governance?

Answer 23

The purpose of Corporate Governance is to protect stakeholder interests, especially those of shareholders, and to promote long-term sustainability, ethical behaviour, and compliance with legal and regulatory obligations.
Ensure transparency and accountability in corporate decision making
Align interests of management with those of the owners and other stakeholders

Question 24

Who are the participants in Corporate Governance?

Answer 24

Participants in Corporate Governance include the board of directors, especially independent non-executive directors (NEDs), management who are responsible for operational decisions and shareholders, who ultimately own the company.
Other stakeholders such as employees and customets

Question 25

Who are considered other stakeholders in corporate governance?

Answer 25

Other stakeholders include creditors, employees, customers, and regulators.

Question 26

What is the purpose of good corporate governance?

Answer 26

Good corporate governance is seen as a preventative mechanism that establishes internal controls and monitoring systems to reduce the opportunity for mismanagement, fraud, or unethical conduct.

Question 27

What is auditing?

Answer 27

Auditing, specifically external auditing, is an independent examination of a company's financial statements and related disclosures.

Question 28

What is the main purpose of auditing?

Answer 28

The main purpose of auditing is to provide assurance that financial statements are free from material misstatement and present a true and fair view of the company's financial position.

Question 29

What are the key functions of auditing?

Answer 29

Auditing serves to enhance credibility and reliability of financial information, provide independent assurance to shareholders and other stakeholders, detect and deter errors, fraud or non-compliance with accounting standards, and support effective corporate governance.

Question 30

What enhances effective corporate governance?

Answer 30

Effective corporate governance enhances the quality of auditing.

Question 31

What is the role of the audit committee?

Answer 31

The audit committee provides oversight for the appointment and evaluation of auditors.

Question 32

What can lack of financial transparency indicate?

Answer 32

Lack of financial transparency can point to deficiencies in corporate governance.

Question 33

How do corporate governance and auditing relate?

Answer 33

Corporate governance and auditing are interdependent mechanisms designed to ensure accountability, transparency, and trust in business operations.

Question 34

What does corporate governance provide?

Answer 34

Corporate governance provides the structure for effective auditing.

Question 35

What is the role of the Audit Committee?

Answer 35

The Audit Committee serves as an independent, non-executive body that reviews the integrity of financial statements, monitors internal control systems and risk management, and oversees the effectiveness and independence of both internal and external audit functions.

Question 36

What is the role of the External Auditor?

Answer 36

The External Auditor provides an independent opinion on whether the financial statements are free from material misstatement and reports to the shareholders while maintaining regular contact with the audit committee.

Question 37

What must be communicated regarding audit findings?

Answer 37

Findings, audit scope, and concerns regarding governance.

Question 38

What is the role of the audit committee?

Answer 38

Acts as a bridge between the board and the external auditor.

Question 39

What does strong communication ensure in the audit process?

Answer 39

Auditor can raise concerns without fear of reprisal from management.

Question 40

What is one responsibility of the audit committee?

Answer 40

To monitor auditor independence.

Question 41

What topics should be discussed effectively by the audit committee?

Answer 41

Fraud risks, internal controls, and accounting treatments.

Question 42

What role does the audit committee play in auditor management?

Answer 42

Plays a role in auditor appointment, performance review, and approval of non-audit services.

Question 43

Why is the audit committee's role in non-audit services critical?

Answer 43

It is critical for maintaining auditor objectivity.