Financial Reporting to Shareholders

Question 1

What is the primary purpose of financial reporting for investors?

Answer 1

To assist in their decision to hold, buy or sell

Question 2

List the stakeholders interested in financial reporting.

Answer 2

• Investors
• Creditors
• Suppliers
• Employees
• Customers
• Governments
• Regulators
• Public

Question 3

What does the Companies Act 2006 require from companies regarding accounting records?

Answer 3

• Show and explain the company’s transactions
• Disclose the financial position of the company
• Enable directors to ensure compliance with CA2006 and IAS

Question 4

What is a ‘viability statement’ in financial reporting?

Answer 4

A statement on the appropriateness of adopting the ‘going concern’ basis of accounting and on the directors’ assessment of the company’s prospects

Question 5

What is the role of the board in financial reporting according to the UKCG Code?

Answer 5

• Establish formal policies for audit functions
• Present a fair, balanced assessment of the company’s position

Question 6

What should the directors explain in the annual report according to Provision 27?

Answer 6

Their responsibility for preparing the annual report and accounts, stating it is fair, balanced, and understandable

Question 7

What does the board need to identify in the annual financial statements according to Provision 30?

Answer 7

Any material uncertainties regarding the company’s ability to continue for at least twelve months

Question 8

What are the key roles of the audit committee?

Answer 8

• Monitoring the integrity of financial statements
• Reviewing internal financial controls
• Conducting the tender process for external auditors

Question 9

What is the minimum membership requirement for the audit committee?

Answer 9

Three independent non-executive directors, or two for smaller companies

Question 10

What is the audit committee responsible for in relation to the external auditor?

Answer 10

Reviewing the effectiveness of the external audit process and monitoring the auditor’s independence

Question 11

What should the audit committee report to the board?

Answer 11

• Significant issues related to financial statements
• Effectiveness of the external audit process
• Feedback on internal audits

Question 12

How should the audit committee communicate with shareholders?

Answer 12

By ensuring clarity in reporting and including a separate report in the annual report

Question 13

What does the external auditor provide an opinion on?

Answer 13

• Whether financial statements give a true and fair view
• Compliance with relevant laws

Question 14

What is the difference between unmodified and modified audit reports?

Answer 14

• Unmodified: Financial statements present a true and fair view
• Modified: Potential concerns about financial statements

Question 15

What are the types of modified audit opinions?

Answer 15

• Qualified opinion
• Adverse opinion
• Disclaimer of opinion

Question 16

What threats to auditor independence are recognized?

Answer 16

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

Question 17

What measures can protect auditor independence?

Answer 17

• Appointment by shareholders
• Restricting non-audit services
• Auditor rotation

Question 18

What is the recommended rotation period for audit engagement partners?

Answer 18

Five years

Question 19

What should the audit committee consider regarding non-audit services?

Answer 19

• Independence threats
• Nature of services
• Fees relative to audit fee

Question 20

What role does the company secretary play in relation to the audit committee?

Answer 20

• Advising on composition
• Conducting inductions
• Organizing performance evaluations

Question 21

Fill in the blank: The external auditor’s report provides an opinion on compliance with the law and accounting standards and whether the accounts present a _______.

Answer 21

[true and fair view]

Question 22

True or False: The external auditor is responsible for detecting fraud in the financial statements.

Answer 22

False

Question 23

What should the audit committee’s separate report include?

Answer 23

• Summary of role and work
• Composition requirements
• Number of meetings
• Effectiveness assessment of external audit

Question 24

What is the significance of the Carillion case study?

Answer 24

It illustrates misconduct by auditors related to creating false documentation during audits

Question 25

What is required for the appointment of a new auditor?

Answer 25

Consideration of independence and a proper selection process

Question 26

What steps should the audit committee of a listed company take to review and monitor the independence of a company’s auditors?

Answer 26

1. Assess the auditor's relationship with the company 2. Review the auditor's fees and services 3. Evaluate the auditor's performance 4. Ensure compliance with relevant regulations 5. Communicate findings to the board ## Footnote Consider the importance of auditor independence in maintaining the integrity of financial reporting.

Question 27

What process is involved in the selection and appointment of a new auditor?

Answer 27

1. Identify candidates 2. Evaluate qualifications 3. Conduct interviews 4. Assess independence 5. Make a recommendation to the board 6. Obtain shareholder approval ## Footnote Independence is crucial when choosing a new auditor to avoid conflicts of interest.

Question 28

What issues need to be considered when choosing a new auditor?

Answer 28

1. Auditor independence 2. Experience and expertise 3. Fees and costs 4. Reputation and references 5. Compliance with regulations ## Footnote These issues ensure that the selected auditor can perform their duties effectively and impartially.

Question 29

What steps should the Audit Committee take regarding concerns about the treatment of income in draft accounts?

Answer 29

1. Investigate the concerns raised 2. Review accounting policies 3. Consult with auditors 4. Ensure proper disclosures are made 5. Report findings in the Audit Committee report ## Footnote Following the UK Corporate Governance Code is essential for maintaining transparency.

Question 30

What disclosures should be made in the Audit Committee report?

Answer 30

1. The committee's responsibilities 2. The approach to auditor selection 3. Any significant issues encountered 4. Recommendations made to the board 5. Assessment of auditor independence ## Footnote Clear disclosures help stakeholders understand the Audit Committee's oversight role.

Question 31

What responsibility does the Board have regarding the annual report and accounts?

Answer 31

The Board is responsible for approving the annual report and accounts before publication. ## Footnote This includes ensuring that the reports are accurate and comply with relevant accounting standards.

Question 32

What are three stakeholders who may be interested in a company’s financials?

Answer 32

* Investors * Creditors * Regulators ## Footnote Each stakeholder has different interests, such as returns on investment, repayment of loans, or compliance with laws.

Question 33

What are three ways a company may misreport their financial numbers?

Answer 33

* Recognizing revenue prematurely * Understating liabilities * Overstating assets ## Footnote Misreporting can lead to significant legal and financial repercussions.

Question 34

What are five functions of the Audit Committee?

Answer 34

* Overseeing financial reporting * Monitoring internal controls * Reviewing audit processes * Engaging with external auditors * Ensuring compliance with regulations ## Footnote The Audit Committee plays a critical role in maintaining the integrity of financial reporting.

Question 35

What are five ways the company secretary can support the Audit Committee?

Answer 35

* Organizing meetings * Preparing agendas * Maintaining records * Facilitating communication * Providing regulatory updates ## Footnote Effective support helps the Audit Committee fulfill its responsibilities efficiently.

Question 36

What is the role of the external auditor?

Answer 36

To provide an independent opinion on the financial statements of a company. ## Footnote This opinion helps stakeholders assess the reliability of financial information.

Question 37

What are the three types of modified audit opinion?

Answer 37

* Qualified opinion * Adverse opinion * Disclaimer of opinion ## Footnote These opinions indicate varying degrees of issues identified in the financial statements.

Question 38

What are five threats to auditor independence?

Answer 38

* Self-interest threat * Self-review threat * Advocacy threat * Familiarity threat * Intimidation threat ## Footnote Understanding these threats is essential for maintaining auditor objectivity.

Question 39

List three measures to protect auditor independence.

Answer 39

* Rotation of audit firms * Limiting non-audit services * Establishing clear policies on auditor relationships ## Footnote These measures help mitigate conflicts of interest that may arise.

Question 40

What are two measures a company can take regarding non-audit work to protect auditor independence?

Answer 40

* Ensure separate teams for audit and non-audit services * Obtain prior approval from the Audit Committee for non-audit engagements ## Footnote These measures help maintain the integrity of the audit process.

Question 41

What is the role of the company secretary in relation to the external audit?

Answer 41

To facilitate communication between the Audit Committee and external auditors. ## Footnote This role is crucial for ensuring that all relevant information is shared effectively.