Module 8 - The Requirement For Audit

Question 1

The CA 2006 permits audit exemption for what types of company?

Answer 1

Small companies (£10.2m turnover, £5.1m balance sheet, 50 employees)

Small charitable companies (differences between England and Wales and Scotland

Dormant companies

Question 2

Can shareholders veto audit exemptions?

Answer 2

Yes

Question 3

What % of shareholders are required to veto audit exceptions (or what % does one individual have to own of a company)

Answer 3

10%

Question 4

What does an external, or statutory auditor do?

Answer 4

Examine companies financial statements

Provide an opinion on whether the financial statements give a ‘true and fair’ view to the shareholders

Question 5

Does an auditor guarantee the accuracy of the financial statements?

Answer 5

No

It provides reasonable assurance that the financial statement give a ‘true and fair’ view

Question 6

What is the expectations gap?

Answer 6

The difference between the understanding that the public has about the auditors responsibilities and the actual responsibilities of the auditor

Question 7

What is the main way that the auditor can manage the expectations gap?

Answer 7

Through the audit report

Question 8

Auditor credibility is dependent on personal qualities such as:

Answer 8

Competence, integrity, ethics and independence

Question 9

What is the value of an auditor dependent on?

Answer 9

Whether shareholders can trust their work

Question 10

How does the CA control the eligibility to audit?

Answer 10

By formalising qualification, supervision and registration procedures

Question 11

To become a statutory auditor, what must happen in the qualification stage:

Answer 11

Meet minimum entry requirements

Three years’ practical experience

Pass formalised exams

(Do this with a Recognised Qualification Body (‘RQB’)

Question 12

To become a statutory auditor, what must happen in the Supervised Stage:

Answer 12

Must become a member of one of the four Recognised Supervisory Bodies (‘RSB’)

Question 13

To become a statutory auditor, what must happen in the Registered Stage:

Answer 13

Appropriately qualified

At least two years’ post-qualifying experience

Able to confirm compliance with the Continuing Professional Development

Have professional indemnity insurance

Be a member of a registered audit firm

Apply to Authorisation Committee of RSB

Question 14

When becoming a statutory auditor, in the registered stage, what is considered the practising certificate part

Answer 14

Two years’ post qualified experience

Able to confirm compliance with the Continuing Professional Development

Have professional indemnity insurance

Question 15

Are registered auditors monitored on a regular basis?

Answer 15

Yes

Question 16

Does the Authorisation Committee have the power to requisition monitoring visits?

Answer 16

Yes

Question 17

There are some exemptions to audit available relating to what type of companies?

Answer 17

Small companies

Dormant companies

Some charities

Question 18

For small company audit exemption

Companies are entitled to audit exemption if they meet two out of the three following criteria

Answer 18

Balance sheet total not more than £5.1m

Turnover (revenue) of not more than £10.2m

They have not more than 50 employees

Question 19

The rules on small company audit exemptions are subject to what rule?

Answer 19

A ‘two-year rule’

Question 20

With the two year rule,

The company will firstly qualify as ‘small’ and therefore exempt from audit if:

Answer 20

It is the company’s first accounting period and the usual small company audit exemptions conditions are met

If the company met the small company audit exemption conditions for the current and preceding year

Question 21

For companies that have previously been classified as small (and exempt from audit), will only cease to be classified as small if:

Answer 21

Conditions are not met for two consecutive years

Question 22

What companies can never be exempt from audit:

Answer 22

Public company (unless dormant)

Banking company

E-money issuer

Insurance company

MiFiD investment firm or an UCITS management company

A corporate body whose shares have been admitted to trading on a regulated market

A public sector entity

Question 23

How does it work with audit exemptions and subsidiary companies?

Answer 23

Most subsidiary’s are exempt as long as parent company guarantees their liabilities

Question 24

Why is there a more rigours audit programme for charities?

Answer 24

There is an enhanced public interest

Question 25

How is a more rigours programme achieved for charities with audit exemptions

Answer 25

Charity law Having a lower audit threshold

Question 26

Reporting regimes for charitable companies in England and Wales: (when is an audit required)

Answer 26

Gross income is over £1m OR Gross assets are over £3.26m and gross income over £250,000 OR An audit is required by the charity’s constitution or due to trustee or donor preference

Question 27

Difference between an independent examination and audit

Answer 27

It is a less onerous external review and provides limited rather than reasonable assurance

Question 28

When is an independent examination required for charities in England and Wales?

Answer 28

When audit has not been received unless it’s gross income is below £25,000

Question 29

When is audit required for charitable companies in Scotland?

Answer 29

Gross income is £500,000 or more OR Gross assets are over £3.26m OR An audit is required by the charity’s constitution or due to trustee or donor preference

Question 30

When is an independent examination required for charities in Scotland

Answer 30

Where an audit has not been received

Question 31

What constitutes a dormant company?

Answer 31

If it has had no significant accounting transactions during the period

Question 32

Directors using an audit exemption must include what in a balance sheet?

Answer 32

An additional narrative section

Question 33

When directors of a company use audit exemption, what must they include in their additional narrative section in the balance sheet?

Answer 33

Shareholders have not required an audit using the shareholder veto Company is entitled to audit exemption Acknowledgement of directors responsibilities to maintain proper accounting records and to prepare accounts which give a ‘true and fair’ view Statement saying accounts have been prepared following the special provisions of the CA 2006 for small companies

Question 34

What is the primary purpose of an auditor

Answer 34

To add credibility to financial statements

Question 35

What are the key responsibilities of the auditor as defined by the CA 2006

Answer 35

Auditor must express an opinion - whether financial statements are true and fair - the consistency of the strategic report and the directors report with the financial statements, and whether they have been prepared in accordance with acceptable legal standards This opinion must be expressed to the company’s shareholders

Question 36

Who must the auditor express their opinion of the financial accounts to?

Answer 36

The company’s shareholders

Question 37

What is the commonly accepted view of ‘true and fair’ in the UK?

Answer 37

Compliance with company law and applicable accounting standards

Question 38

How is an auditors opinion expressed? (Which document)

Answer 38

A document called an audit report

Question 39

When does an external auditor come in?

Answer 39

First directors prepare financial statements that they claim (truthfully or not) show a true and fair view of companies financial performance The external auditor must then come in and give their opinion on whether the financial statements do in fact present a true and fair view

Question 40

The main requirements relevant to UK auditors are contained where?

Answer 40

In the International Standards of Auditing (UK) (‘ISAs (UK)’)

Question 41

What is the expectations gap?

Answer 41

The difference between the understanding that the public has about the auditors responsibilities and the actual defined responsibilities of the auditor

Question 42

How can an auditor take steps to reduce the expectations gap?

Answer 42

Including an explanation of the auditors and directors responsibilities within the audit report The audit report also describes the scope of the audit

Question 43

What does integrity mean with an auditor?

Answer 43

The auditor should be straightforward and honest in all professional and business relationships

Question 44

Definition of ethics

Answer 44

A set of principles of proper conduct or a system of moral values

Question 45

What does independence mean with being an auditor

Answer 45

Must be completely free from situations which could make their job less objective

Question 46

What is a RQB?

Answer 46

Recognised Qualifying Body

Question 47

How many RQBs are there?

Answer 47

5

Question 48

What are the RQBs?

Answer 48

ACCA AIA ICAEW CAI ICAS

Question 49

The CA 2006 lays down three areas of requirement that must be achieved to gain ‘appropriately qualified’ status:

Answer 49

Entry requirements Practical experience Examinations

Question 50

Each RQB has a minimum entry requirement of:

Answer 50

A university entry level Seven years of practical experience in the fields on finance, law and accountancy

Question 51

Upon acceptance by the by the RQB what must a trainee complete?

Answer 51

Three years practical training at an authorised training firm

Question 52

What is an RSB?

Answer 52

Recognised Supervisory Body

Question 53

What are the RSBs?

Answer 53

ACCA ICAEW CAI ICAS

Question 54

Does a practice certificate have to be renewed each year? Does it have an annual fee?

Answer 54

Yes Yes

Question 55

What must have happened to be eligible for a practising certificate?

Answer 55

Members must apply to the relevant RSB and prove: Two years post-qualifying experience Confirm compliance with Continuing Professional Development laws Have professional indemnity insurance

Question 56

What must an individual have to be entitled to sign audit reports?

Answer 56

Statutory auditor status and be part of a registered audit firm

Question 57

Who is responsible for awarding statutory (or registered) auditor status?

Answer 57

The Authorisation Committee of the relevant RSB

Question 58

The Authorisation Committee only awards statutory auditor status to individuals who can demonstrate what?

Answer 58

Hold an audit qualification ‘Fit and proper persons’ Hold a practising certificate A member of a registered audit firm Have adequate professional indemnity insurance

Question 59

Who grants statutory auditor status to firms?

Answer 59

The Authorisation Committee

Question 60

For a firm to be granted registered auditor status, what must be present?

Answer 60

Each of the principals (partners or directors) must be a member of RSB, a statutory auditor, an audit affiliate of an RSB or equivalent Majority of principles must have appropriate qualification, be a statutory auditor or equivalent Firm has appointed an audit compliance principal Firm must be ‘fit and proper’ Firm must have adequate professional indemnity insurance

Question 61

What is the Audit Compliance Principle?

Answer 61

Someone who is responsible for monitoring the audit firm has complied and is likely to continue to comply with relevant regulations Their identity is notified in writing to the RSB and is the first point of contact with the relevant RSB in connection with regulations

Question 62

Does each RSB has an up-to-date list of auditors that are registered? If so, is the list available to the public?

Answer 62

Yes Yes

Question 63

Are registered auditors monitored on a regular basis?

Answer 63

Yes

Question 64

Each RSB must maintain and enforce rules to check on the relevant people of statutory audit status, what are the rules?

Answer 64

Registration and disclosure of auditors High standards of audit work Monitoring of quality Investigation and discipline Accountability