Audit Framework and Regulation

Question 1

What is the objective of an audit?

Answer 1

Auditor to state an opinion on wheter the FS’s

give a true and fair view

records are accurate and complete

accordance with financial reporting framework

in all material aspects

Question 2

What are the levels of assurance?

Answer 2

Reasonable
- sufficient evidence that the subject matter agrees to certain criteria
- high level of assurance
positive assurance

Limited

• Sufficne evidecne that the subject matter is plausabli in the circumstances
• moderate level of assurance
• Negattive assurance

Question 3

When isn’t the auditor aapoint by the shareholders?

Answer 3

If first appointment - made by directors because wont have a GM.

vacancy - When current auditor resigns

normal reappointment

Question 4

How is an auditor removed?

Answer 4

By majority at a general meeting

Resignation - submit statement stating circumstances

Question 5

Auditors responsibility in resignation

Answer 5

Statement stating cirucmstances

reply to requests for clearance from new auditors

Question 6

Auditors rights when resigning

Answer 6

request for extraordinary general meeting to explain circumstances of resignation
- require company to circulate notice of circumstances relating to resignation

Question 7

Definition of True and Fair

Answer 7

True:

Information is factual and conforms with reality

Complies with accounting standards and any relevant legislation

Data is correctly transferred from accounting records to the FS

Fair:

Information is clear, impartial and unbiased

Reflects plainly the commercial substance of the transactiosn

Question 8

Types of Audit

Answer 8

External

records are accurate and complete

accordance with financial reporting framework

in all material aspects

Non statutory

Auditor review the financial statemens with less evidence thatn required for an audit

Question 9

Review Engagement

Answer 9

Something you want assurance over.

Value for money review

Review of internal controls

System reliability reports

Risk assessment repots

Social environmental reports

Question 10

Levels of assurance

Answer 10

Reasonable

sufficient evidence that the subject matter agrees to certain criteria.

high level of assurance

Positive Assurance

prepared in accordance with the criteria required)

Limited

there’s sufficient evidence that the subject matter is plausible in the circumstances

moderate level of assurance

Negative Assurance not been prepared in line with the relevant criteria)

Question 11

Principles Auditor must follow

Answer 11

Accountability: holding those in charge responsible for explaining actions

Agency: perform tasks on behalf of principle

directors agents of shareholders

Steward: responsible for taking care of something on behalf

directors steward shareholders porperty

Answer 12

Integrity

Be straightforward and honest in all professional relationships

Objectivity

No bias or conflict of interest influencing your business judgements

Professional Competence & Due Care

Keep up your professional knowledge and skill so as to give a competent professional service, using current developments and techniques

Act diligently and within appropriate standards when providing professional services

Confidentiality

Don’t disclose any confidential information to third parties without proper and specific authority

You can, however, if there is a legal or professional right or duty to disclose

Obviously never use it for personal advantage of yourself or third parties

Professional behaviour

requires accountants to comply with the law and avoid any actions which discredit the profession.

Question 14

Auditor rights

Answer 14

The right of access to all accounting books and records at all times.

The right to all information and explanations (from management) necessary for the proper conduct of the audit.

The right to receive notice of all meetings of the shareholders (such as the annual general meeting) and to attend those meetings.

The right to speak at shareholders’ meetings on matters affecting the audit or the auditor.

Question 15

Development of ISA

Answer 15

Task force

Public meeting

Public comment

Receive comments

Approval by IAASB

Question 16

Sturcutre of the audit committee

Answer 16

At least one member of the committee should have recent and relevant financial experience.

There should be at least 3 non executive directors. In the case of smaller companies, this may be 2.

Question 17

Role of audit comittee

Answer 17

To improve the quality of financial reporting

To increase the confidence of the public in the financial statements.

Assist directors in meeting their responsibilities in respect of financial reporting.

Provide a channel to external auditors to report concerns or issues.

Review the company’s system of internal controls.

Strengthen the position of internal audit by providing greater independence from management.

Appointment of external auditor.

Question 18

Advantages of audit comittee

Answer 18

Advantages of a committee

Independent Reporting

Provides internal audit with an independent reporting mechanism. Without this management may be tempted to hide unfavourable reports.

Frees up Executive time

Leaves top executives free to manage by providing expertise on financial reporting

Corporate Governance monitored

Ensures that corporate governance requirements are brought to attention of the board

Appropriate Internal Controls

Should ensure that an appropriate system of internal control is maintained.

Better Communication

Better communication between the directors, external audit and management is facilitated.

Strengthens external audit independence

Strengthens independence of external audit as their appointment is now not made by the board.

Question 19

Disadvantages of audit comittee

Answer 19

Executive directors may perceive it as a threat to their authority.

Finding non executive directors with appropriate expertise may be difficult.

Additional costs will be involved.

Too much detail may be thrust upon non executive directors.

Communication with the audit committee

Why does the external auditor speak first to the Audit Committee?

To ensure independence between the board and the audit firm.

The audit committee consists of independent NEDs, who can therefore take an objective view of the audit report.

The audit committee has more time to review the audit report and other communications (eg management letters) than the board.

The auditor should therefore benefit from their reports being reviewed carefully

The audit committee can ensure that any recommendations from the auditor are implemented.

The NEDs can pressurise the board to taking action on auditor recommendations

The audit committee also has more time to review the effectiveness and efficiency of the work of the external auditor than the board.

The committee can therefore make recommendations on the re-appointment of the auditor, or recommend a different firm if this is appropriate