9 - Financial reporting to shareholder and external audit

Question 1

Which statement must directors giver re. their annual report and accounts?

Answer 1

Taken as a whole, they are ‘fair, balanced and understandable, and provide the information necessary for shareholders to assess the company’s position, performance, business model and strategy’

Question 2

Why is fin. reporting so important?

Answer 2

s it provides crucial information to stakeholders which guides their decisions

Question 3

5 ways in which accounting position can be misreported?

Answer 3

• Adoption of certain accounting policies
• Choosing to place profits/losses in another FY (eg. if contract is long term)
• Taking debts off of balance sheets
• Disguising money from loans as operating income
• Over-valuing assets

Question 4

Key challenge faced today by annual report

Answer 4

Many demands from traditional and new users has led to a ‘confused’ document

Question 5

Which company type is required to have an audit committee?

Answer 5

Listed companies (and some financial institutions)

Question 6

Other than UKCG Code, where else is requirement for audit committee found?

Answer 6

Disclosure Guidance and Transparency Rules

Question 7

What does DTR 7.1 say?

Answer 7

• Listed companies are required to establish an audit committee

Should be comprised of:
- Majority of independent members
- At least 1 member with competencies in accounting or auditing, or both
- Members who as a whole have the competencies relevant to the sector in which the listed company is operating in

Question 8

5 responsibilities of the audit committee

Answer 8

• Reviewing and reporting on annual reports and other periodic reports
• Reviewing internal control and risk management systems
• Reviewing need to establish internal audit function
• Overseeing relations with the external auditor
• Reviewing and monitoring external auditors objectivity and independence

Question 9

What is the eligibility to be a co’s (external) auditor

Answer 9

Person or firm that is a member of a recognised professional accountancy body

Question 10

Briefly explain auditor’s liability

Answer 10

There has been uncertainty as to whether auditor’s owe a duty of care to third parties (as well as company and its shareholders).

Due to ruling in ‘Bannerman case’, auditors now include a disclaimer stating that they act for the company’s members only.

Auditor’s are now able to limit liability of auditors through entering into agreements

Question 11

2 main purposes of audit report

Answer 11

• Give an opinion on whether the FS giver true and fair view of fin position and fin performance
• Give an opinion on whether FS comply with relevant laws

Question 12

Additional requirement of auditor for listed co’s

Answer 12

Review compliance with 2018 Code

Question 13

What is meant by an unmodified auditors report

Answer 13

States that the FS do present a true and fair view of the fin position of the company

Question 14

What does he issuance of a modified audit report imply?

Answer 14

• There are potentially grave concerns about the FS and fin condition of the company
• External auditor and board could not agree on application of accounting policies and the content of the FS

Question 15

3 types of modified audit opinion

Answer 15

• Qualified audit opinion
• Adverse opinion
• Disclaimer of opinion

Question 16

What is a qualified audit opinion? (modified audit)

Answer 16

FS would give true and fair view except for a particular matter, which auditor explains

Question 17

What is an adverse opinion? (modified audit)

Answer 17

Material misstatements which are ‘pervasive’ - e. information in FS is seriously incorrect

Question 18

What is a disclaimer of opinion? (modified audit)

Answer 18

Unable to obtain information needed to give an audit opinion

Question 19

5 types of potential threats to auditor’s independence

Answer 19

• Self-interest threat
• Self-review threat
• Advocacy threat
• Familiarity threat
• Intimidation threat

Question 20

What is the self-interest threat to auditor’s independence?

Answer 20

Auditor may be earning such a large amount that their judgement will be affected by desire to protect income stream

Question 21

What is the self-review threat to auditor’s independence?

Answer 21

If audit firm does non-audit work for company, they will have to review this, and may not be as critical of its own work, to avoid raising questions over its professional competence

Question 22

What is the familiarity threat to auditor’s independence?

Answer 22

Familiarity with company or a director can lead to unconscious trust in company, and unwillingness to believe that company could make serious error or commit fraud

Question 23

What is the advocacy threat to auditor’s independence?

Answer 23

Non-audit work requiring the company to ‘advocate’ (give formal support) for the company by providing public statements or supporting it in a legal case should not be taken on, as it means the auditor is being asked to take sides

Question 24

What is the intimidation threat to auditor’s independence?

Answer 24

Real and imagined threats to auditor through ‘bullying’ can lead auditor to accepting what the bully is telling them

Question 25

6 measures which should be in place to protect independence of external auditor

Answer 25

• Appointment (and remuneration decided upon) by shareholders
• Restricting or prohibiting non-audit services (self-review check)
• Assessment of independence by audit committee
• Rotation of audit partner or firm
• Monitoring by audit com of which public statements auditor makes on behalf of Co (advocacy check)
• Audit committee meet with auditors and management once per year (intimidation check)

Question 26

2 ways in which audit committee can assess the independence of the auditor

Answer 26

• Seek reassurance that auditors have no relationship with company or execs/management that could affect independence
• Seek info from auditors on their policies for maintaining independence

Question 27

UK Law on non-audit work by audit firms

Answer 27

• Non-audit work fees can be no more than 70% of average fees over previous 3 years
• Certain non-audit work is outright banned - tax, decision-making, bookkeeping

Question 28

FRC Guidance on Audit Committees - audit committee should apply judgment concerning provision of non-audit services not prohibited by law, including assessing: (5)

Answer 28

• Threats to independence and objectivity
• Nature of non-audit services
• Whether audit firm is most suitable supplier of the non-audit service
• The fees incurred, individually and relative to audit fee
• Criteria governing compensation of those performing the audit

formal policy should be applied by audit committee in respect of the above

Question 29

UKCG Code requires an explanation in annual report of what, if the external auditor provides non-audit services?

Answer 29

How auditor independence and objectivity are safeguarded

Question 30

FRC’s recommendation of normal rotation period for audit engagement partner

Answer 30

5 years
Can be extended up to 7 years but this should be disclosed with explanation to shareholders

Question 31

Rules on PIEs max length for audit firm

Answer 31

• Should change every 10 years
• Mandatory rotation every 20 years, as long rule of tender once a decade is complied with

Question 32

5 arguments against audit rotation

Answer 32

• Decreased audit quality due to lack of knowledge
• Increased costs to auditor due to learning curve of new firm
• Increased costs to client due to above
• Lack of choice in choosing new audit firm with relevant experience and expertise in industry
• Difficulty for audit committee in choosing firms for non-audit purposes

Question 33

Role of CoSec in relation to Audit Commitee (6)

Answer 33

• Developing terms of reference
• Advising on composition
• Conducing induction for new members
• Developing annual calendar of activities
• Ensuring committee has sufficient resources to carry out its role
• Assisting members in understanding current and emerging issues

Question 34

Role of CoSec in relation to external auditors (4)

Answer 34

• Appointment and remuneration process
• Assessment of independence
• Ensuring external auditor attends AGM
• Advising board on any rotation requirements