Lecture 9

Question 1

Competition Commission recommendations (5)

Answer 1

• Mandatory tendering/ audit firm rotation
• Audit quality review team > expand remit and frequency
• Extended reporting requirements
• Prohibit ‘Big 4 only’ bank loan covenants
• Increased accountability of external auditor

Question 2

Competition Commission remedies to be actioned (4)

Answer 2

• FTSE 350 must tender audits every 10 years
• AQR team should review FTSE 350 audit every 5 years
• Shareholder engagement via advisory note on audit committee report
• Prohibition loan agreements restricting auditor choice

Question 3

Competition Commission didn’t pursue (4)

Answer 3

• Mandatory rotation
• Further constraints to NAS
• Shareholders/ FRC appoint auditor
• Independently resourced audit committee

Question 4

EU (Barnier Report)

Answer 4

Overruled competition commission (for EU PIEs only)

Question 5

EU (Barnier Report) > (5)

Answer 5

• Clarified societal role for auditors (reduced expectation gap)
• Independence regime > mandatory rotation after 10 years, 14 if joint audit, extended by 10 years if tender carried out
• Cap provision NAS (70% fees generated - 3 year average)
• Harmonisation of ISAs
• More choice

Question 6

Modified opinion (4)

Answer 6

• Qualified > except for - disagreement > not pervasive to FSs
• Qualified > except for - limitation in scope > not pervasive to FSs
• Adverse opinion > don’t agree at all > pervasive
• Disclaimer of opinion > not full disagreement but cannot conclude - LiS > pervasive

Question 7

ISA 700 =

Answer 7

Basic elements of an audit report

Question 8

Basic elements of an audit report (4)

Answer 8

• Title
• Addressee
• Introduction
• Audit responsibilities/ scope of audit

Question 9

ISA 700 recent EU changes - must include (3)

Answer 9

• Overview of scope of audit
• Describe risks with greatest effect on audit strategy, allocation resources, team
• Explanation as to how applied concept materiality

Question 10

Bannerman Paragraph =

Answer 10

In all UK audit reports, limits Auditor’s duty of care (liability)

Question 11

Causes of modified opinions (2)

Answer 11

• Material misstatements

- Inability to obtain audit evidence

Question 12

Pervasive = (3)

Answer 12

• Not confined to specific elements/ accounts/ items in FSs
• If confined, represent substantial proportion FSs
• Fundamental effect on user’s understanding FSs

Question 13

Non-standard opinion documentation > emphasis of matter

Answer 13

Additional paragraph detailing issue

Question 14

Non-standard opinion documentation > qualified/ adverse/ disclaimer

Answer 14

Paragraph providing description of matter, opinion paragraph changed

Question 15

Subsequent Events ISA

Answer 15

ISA 560

Question 16

Subsequent Events > Between YE and accounts signed

Answer 16

Audit procedures needed

Question 17

Subsequent Events > accounts signed and accounts issued

Answer 17

No auditor responsibility, if aware, amend/ modify

Question 18

Subsequent Events > after accounts issued

Answer 18

No audit responsibility, if aware revise accounts and include emphasis of matter

Question 19

Adjusting event =

Answer 19

Conditions existed at balance sheet date

Question 20

Non-adjusting event =

Answer 20

Conditions arising after balance sheet date

Question 21

Financial Reporting audit programme (FRAP) =

Answer 21

Contains details of testing needed to do on a completion screen

Question 22

Summary of audit differences (SAD) =

Answer 22

List of misstatements. Aggregate of unadjusted differences must be below materiality. If above materiality, must be posted to FS, if no adjustment, cannot sign clean opinion

Question 23

Completion document

Answer 23

Internal document. Summary of good evidence documents, key audit conclusions eg materiality/ RoMM, audit differences

Question 24

Audit Highlights Memo (HLM) (+ includes - 4)

Answer 24

Communicated to management.
Includes:
- Summary of audit approach
- SAD
- Independence letter
- Summary control deficiencies

Question 25

Management Representation Letter (4)

Answer 25

- Prepared by client. - Acknowledgement of management responsibilities preparing FSs - Representations on material matters no other sufficient evidence - Auditor can add extra paragraphs to get extra evidence

Question 26

Management Representation Letter > Pros (3)

Answer 26

- Compulsory - Reduced expectation gap - Constitutes audit evidence

Question 27

Management Representation Letter > Cons (2)

Answer 27

- Can't rely on MR alone | - If conflict between MR and other evidence, auditors need to resolve

Question 28

Completion deadline

Answer 28

File must be completed max 60 days after opinion signed