External audit Flashcards
Which companies must have their annual accounts audited?
Name 4 of the auditor’s rights under ss.499-502 CA2006 in relation to access to documents.
What will the auditor generally request?
What is the consequence for an officer to make a statement that they know contains misleading, false, or deceptive information?
S.475 CA2006 = all companies unless company qualifies as exempt = micro/small, subsidiary, or dormant
The right of:
1. Access at all times to books, accounts, and records
2. Requiring necessary information and explanations from directors/officers/employees
3. Receiving all notices and communications relating to GMs
4. Attending and speaking on audit matters at GMs
= Copies of the minutes of meetings (board, committee, & members)
S.501 CA2006 = offence punishable by fine and/or imprisonment
How does CA2006 protect an auditor’s independence? (3) (who cannot be an auditor)
If once the audit has commenced the auditor becomes prohibited, what must they do?
S.1214 requires a person cannot be appointed as an auditor if they are:
1. An officer or employee of company
2. an officer/employee of an associated undertaking of company
3. any person or firm that has a business relationship with the company
If once the audit has commenced auditor becomes prohibited by virtue of S.1214, they must immediately resign
How does the 2014 pan-European Statutory Audit Directive protect an auditor’s independence? (2)
The Statutory Audit Directive was implemented in the UK through the introduction of what?
A. Article 5 = auditor of a PIE is prohibited from undertaking certain specified non-audit services for their audit clients:
1. Tax services e.g. payroll tax
2. Legal services e.g. general counsel
3. Bookkeeping
4. Any part in management or decision-making services
5. Internal audit services
B. Article 4 = restricts the amount of non-audit work that audit firms can undertake from PIE clients to no more than 70% of the average fees from audit work over the previous 3 years
DTR 7.1
APPOINTMENT OF AUDITOR - PRIVATE CO. NOT A PIE
Must all private companies appoint an auditor?
What is the period for appointing auditors?
When can the directors appoint an auditor? (3)
Do members get a say on who the auditor will be?
If a private company, which is not exempt, fails to appoint an auditor in accordance with CA2006 s. 485, who can appoint one?
S.485 CA2006 = An auditor of a private company must be appointed for each financial year unless the directors reasonably resolve otherwise on the ground that audited accounts are unlikely to be required
For subsequent years = auditor must be appointed/re-appointed within 28 days commencing on
1. the deadline for sending accounts to members or
2. the date the accounts were actually sent to members (if earlier)
A. when it is the first auditor
B. following a period where the company was exempt from audit
C. to fill a casual vacancy caused by resignation or death of previous auditor
Directors usually make initial appointment which is then confirmed annually either by members voting in GM or (if no GM held) showing no objection to the appointment automatically continuing (= deemed re-appointment = s.487 CA2006)
= Secretary of State
APPOINTMENT OF AUDITOR - PRIVATE CO. NOT A PIE
Where no auditor has been appointed by the end of the next period allowed for appointing auditors, the auditor in office immediately before that time is deemed to have been reappointed unless what? (5)
How can members stop a deemed reappointment?
How can a new auditor be appointed when the term of office of the current auditor expires?
S.487 CA2006 = deemed re-appointed unless:
1. their appointment was made by directors
2. Articles require actual reappointment
3. Deemed reappointment is prevented by members under s.488 CA2006
4. resolution to reappoint auditors is lost; or
5. directors have resolved that no auditor should be appointed
S.488 CA2006 = members holding at least 5% TVR between them give written notice to company before end of the accounting reference period immediately prior to the time when the auditor would otherwise be deemed to be reappointed
CA2006 = private company can pass a WR to appoint a new auditor when term of office expires
APPOINTMENT OF AUDITOR - PUBLIC CO. NOT A PIE
Must all public companies appoint an auditor?
What is the period for appointing auditors?
When can the directors appoint an auditor? (3)
If a public company, which is not exempt (i.e. dormant), fails to appoint an auditor in accordance with CA2006 s. 489, who can appoint one?
Are auditors deemed to be reappointed?
S.489 CA2006 = An auditor of a public company must be appointed for each financial year unless the directors reasonably resolve otherwise on the ground that audited accounts are unlikely to be required
*1st financial year = auditors must be appointed before the meeting at which accounts are laid before the members
*Subsequent years = appointed/reappointed at the conclusion of the meeting at which the accounts for the previous financial year are laid before the members
A. when it is the first auditor
B. following a period where the company was exempt from audit
C. to fill a casual vacancy caused by resignation or death of previous auditor
= Secretary of State
No, appointment does not automatically renew = appointment ceases at conclusion of the meeting at which the account are laid before members (unless reappointed)
APPOINTMENT OF AUDITOR - PIE
What is a PIE?
What process must be followed for the auditor appointment?
Who must the opportunity be extended to?
Who makes the ultimate decision?
Which companies are exempt from these provisions?
A company that is an issuer with securities admitted to trading on a regulated market
Audit committee or directors must carry out a tender process - directors decide how it is done
Opportunity to tender must be extended to at least 2 audit firms either of which has a reasonable chance of being appointed
At end of tender process, AC make its 2 recommendations to board = board as a whole decide which of the 2 auditors to appoint (If directors disagree with AC’s preferred candidate, they must provide reasons)
Small and medium-sized PIEs
AUDITOR ROTATION
What is the maximum term of office for the audit firm of a PIE?
Can this be extended?
How long does an audit firm have to wait to apply for reappointment of a PIE once they reach the maximum period?
What is the maximum term of office for an audit partner of a PIE?
What does the Accounting Practices Board recommend in relation to audit partner rotations for PIEs?
What does the FRC Guidance on Audit Committees recommend in relation to audit partner rotations of listed companies?
What do these requirements guard against?
Do all companies need to change their audit firm regularly?
Statutory Audit Directive = mandatory audit firm rotation = cannot be reappointed without a tender at least once every 10 years and cannot be reappointed if continuously held office for 20 years
Yes, by the FCA for a further 2 years in exceptional circumstances (can never be more than 22 years)
CA2006 = have to wait 4 years since holding maximum engagement period before can be reappointed
Statutory Audit Directive = mandatory audit partner rotation = no audit partner should be responsible for same PIE for more than 7 years and cannot be reappointed for a further 3 years
APB = no audit partner should be responsible for same PIE for more than 5 years and shouldn’t be reappointed for a further 5 years
Normal rotation period is 5 years, but AC can decided it’s necessary to safeguard quality of audit without compromising auditor’s independence to extend 2 years
Threat to auditor objectivity and independence
No, only PIEs
AUDITOR REMUNERATION
Who decides how the auditors are to be paid?
In practice, what usually happens?
Does the auditor’s remuneration have to be disclosed?
Are there any companies exempt from disclosure?
Depends who appointed them:
*If appointed by directors = remuneration must be fixed by the directors
*If members appointed/reappointed = remuneration must be fixed by members or in another manner the members may decide
Members authorise directors to determine remuneration via a resolution
Yes, remuneration for audit services and amounts paid for non-audit services (if any) must be disclosed in the accounts (ss.493 and 494 CA2006)
Small companies don’t have to disclose auditor’s remuneration and parent companies qualifying as medium-sized don’t have to disclose non-audit remuneration
AUDITOR LIABILITY
What is the general rule on auditor liability?
What are the 2 exceptions?
Regarding the 2nd exception, what is the disclosure requirement?
S.532 CA2006 = companies cannot provide any form of liability limitation or other protection to their auditor
- a company may indemnify their auditor against any liability incurred;
A. when successfully defended proceedings; or
B. in connection with an application under s.1157 CA2006 (= relief granted to auditor by court) - a company may enter into a liability limitation agreement with auditor to limit liability owed to company by auditor in respect of any negligence, default, breach of duty, or breach of trust provided the agreement:
A. relates to only 1 financial year; and
B. is authorised by ordinary resolution of members (plc only = ltd can waive requirement)
Financial accounts must disclosure the principle terms of the liability limitation agreement and date of resolution approving it
What are the 4 ways the appointment of an auditor may be terminated?
- By resignation of the auditor (s.516 CA2006)
- By removal by the members (s.510 CA2006)
- On application to the court
- By not being re-appointed by members (put a resolution at AGM to re-appoint retiring auditor which members vote against / put a resolution at AGM proposing for new auditor to be appointed)
AUDITOR RESIGNATION
How can an auditor resign of a company that is not a PIE?
What are 4 exempt reasons when a statement does not have to be made?
When does the resignation take effect?
How can an auditor resign of a company that is a PIE?
What can the auditor of a PIE make the directors do?
When should this be carried out?
If an auditor resigns before the next AGM, what can the directors do?
Notwithstanding an auditor’s resignation, what will the auditor still be entitled to do?
S.516 and 519 CA2006 = give notice to the company and send a statement to RO setting out the reasons for their resignation (if reasons are not exempt reasons) (auditors of listed companies must always give reasons)
- If auditor is resigning at end of a period for appointing auditors (ltd) or at the end of an accounts meeting (plc)
- Auditor is ceasing to carry out statutory audit work within the meaning of CA2006
- Company is or is to become exempt from audit
- Company is being wound up
On date notice is given or such later date as notice may specify
Give notice, but notice has no effect unless accompanied with a statement setting out reasons why auditor is resigning, and any matters connected with their resignation that they wish to bring to members’ or creditors’ attention (if any)
A resigning auditor of a PIE who makes a statement that they consider should be brought to members/creditors’ attention can lodge a requisition calling the directors to convene a GM
CA2006 = Directors must convene a GM within 21 days of auditors lodging a requisition, to be held within 28 days of the meeting notice
Appoint a new auditor by way of filling a casual vacancy
S.518 CA2006 = receive notice of and attend and speak at a meeting convened at their requisition or at any GM at which their term of office otherwise would have expired, or at which it is proposed to fill the casual vacancy caused by their resignation
AUDITOR REMOVAL
How can an auditor be removed before their term of office expires?
How can an auditor be removed at the end of their term of office expires?
What are the 6 requirements that must be adhered to when a resolution is to be proposed for removing an auditor before the expiration of their term of office, or for appointing a person other than a retiring auditor? (CA2006 provisions)
S.510 CA2006 = Members may remove an auditor from office at any time by passing an ordinary resolution at a meeting (WR cannot be used)
By members voting against their re-appointment at the AGM (plc) or stopping their deemed re-appointment (ltd) = auditors retire at end of each financial year
S.514-516 CA2006:
1. Members must give the company 28 days’ special notice of intention to put forward a resolution to remove current auditor or to appoint any auditor other than the retiring auditor
- Copies of the special notice must be sent as soon as practical to the auditor proposed to be removed/not re-appointed, and the proposed new auditor, as appropriate
- Auditor proposed to be removed/not reappointed may make written representations to the company and ask that this be circulated to shareholders
- Company must comply = send at same time as notice of meeting or sent separately to all shareholders entitled to receive notice of meeting
- If too late to circulate representation, or it is not sent out, auditor may require the representation be read out at the GM
- Auditor proposed to be removed/not reappointed is entitled to receive notice of, and to attend and speak at, the GM
A company receiving a statement from an auditor ceasing to hold office, which contains reasons or matters that the auditor wishes to bring to the attention of the members or creditors, must do what? (2)
If an application is made, what must the company do following the judgment and what are the 2 outcomes?
What happens if no application is made?
Within 14 days of receipt of the statement either:
* send a copy of the statement to every person entitled to receive a copy of the audited accounts; or
* apply to the court for an order that it need not do so (If application is made to the court, the company must notify the auditor of the application)
S.520 CA2006 = Within 14 days of judgment = company must send a statement of the court’s decision to those persons entitled to receive copies of the audited accounts:
A. if application accepted = company need not bring statement to members’/creditors’ attention
B. if application rejected = company must issue the statement to those persons entitled to receive copies of the accounts within 14 days of court’s decision and auditor must send copy of their statement to Registrar within 7 days of being notified of court’s decision
If the auditor is not notified within 21 days that an application is to be made to the court, the auditor must send a copy of their statement to the Registrar within the next 7 days
When is a company required to notify the relevant audit authority that their auditor has ceased to hold office as auditor? (4)
- Does the company believe the only reasons for cessation are exempt?
Yes = no action required
No = … - Did the cessation take effect at end of accounts meeting?
Yes = no action required
No = … - Is company public or private?
Private = notify auditor’s Recognised Supervisory Body (RSB) of outgoing auditor
Public = … - Is company a PIE?
No = notify RSB of outgoing auditor
Yes = notify Financial Reporting Council (FRC)
