Regulatory Framework and Audit Quality Flashcards
(23 cards)
Overview of regulatory framework and its purpose - Setting the scene at the outset, ISA 210 - 1
What must auditors consider when agreeing to the terms of audit engagements (ISA210)? (4)
What should the audit engagement letter include? (4)
What other matters might be included in the audit engagement letter? (6)
What must auditors consider when agreeing to the terms of audit engagements (ISA210)?
- Agreeing terms in writing is required.
- Establish preconditions necessary for an audit.
- Confirm a common understanding between management and auditor.
- An audit should only be accepted when relevant ethical requirements are satisfied.
What should the audit engagement letter include?
The letter should cover:
- Objective and scope of the audit of financial statements.
- Auditor and management’s respective responsibilities.
- Identification of the applicable financial reporting framework.
- Form and content of reports and communications.
What other matters might be included in the audit engagement letter?
- Scope, relevant legislation, and reporting expectations.
- Unavoidable risk of not detecting material misstatements.
- Audit planning, performance, and audit team arrangements.
- Expectation of written representation letter from management.
- Commitment from management to provide required information.
- Basis of audit fees.
Overview of regulatory framework and its purpose - Setting the scene at the outset, ISA 210 - 3
What is the existing auditor’s responsibility regarding communication with the new auditor? (5)
What should the proposed accountant do if unable communicate with the existing auditor? (2)
What is the existing auditor’s responsibility regarding communication with the new auditor?
- Written client permission is required to contact the new auditor; otherwise, confidentiality may be breached.
- Once permission is granted, the existing auditor must provide information honestly and unambiguously, such as regarding:
- Unlawful acts by the client.
- Unpaid fees.
- Differences of opinion between the auditor and client.
What should the proposed accountant do if unable communicate with the existing auditor?
- Attempt to gather information about potential threats through other means, such as inquiries to third parties or background checks on senior management.
- Consider carefully whether to accept the appointment if the existing auditor does not respond or the client does not grant permission.
Overview of regulatory framework and its purpose - Setting the scene at the outset, ISA 210 - 4
What steps should a proposed accountant follow before accepting an appointment previously handled by another auditor? (4)
What steps should a proposed accountant follow before accepting an appointment previously handled by another auditor?
- Request written client permission to contact the former auditor directly.
- Contact the existing auditor before accepting the appointment.
- If no response is received, follow up in writing. No further response implies no adverse comments.
- Once the proposed accountant decides to act for the client, they should inform the client that clearance has been given.
Overview of regulatory framework and its purpose - Audit Quality – five key drivers
What is the dynamic concept of Audit Quality?
What are the five key drivers of Audit Quality (AQ)?
What do ISQM 1 and 2 refer to?
Why is a holistic regulatory framework important in auditing?
What is the dynamic concept of Audit Quality?
- Audit Quality is defined as the probability that an auditor will both identify a breach in the client’s accounting system and report the breach.
What are the five key drivers of Audit Quality (AQ)?
- The culture within the audit firm.
- The skills and personal qualities of partners and staff.
- The effectiveness of the audit process.
- The reliability and usefulness of audit reporting.
- Factors outside the control of auditors.
What do ISQM 1 and 2 refer to?
- ISQM 1 and ISQM 2 are additional standards designed to enhance Audit Quality by introducing robust quality management systems within audit firms
Why is a holistic regulatory framework important in auditing?
- A holistic regulatory framework ensures comprehensive oversight and quality control throughout the audit process, supporting integrity and reliability in audits.
Overview of regulatory framework and its purpose - Audit Quality – The regulation and actors
What are the key elements of legislation and regulation for regulators? (3)
What are the expectations of the auditing profession? (5)
What are the responsibilities of the auditee (directors/client)?
What are the responsibilities of the principal (investors/providers of capital)?
What are the key elements of the pre-audit process? (2)
What are the key elements of the post-audit and throughout-audit process? (2)
What are the key elements of legislation and regulation for regulators?
- Professional standards covering ethics, practice, and training.
- Legal duties, responsibilities, and penalties.
- Rigorous regulation, which is constantly under review and development.
What are the expectations of the auditing profession?
- Educational, training, and experience requirements, as well as continuous professional development (CPD).
- Monitoring and disciplinary procedures by professional or regulatory bodies.
- Leadership and a “tone at the top,” ensuring operation for the public interest.
- Policies for quality control related to engagement, planning, supervision, review procedures, reporting, and inspections.
- Audit firm governance reporting.
What are the responsibilities of the auditee (directors/client)?
Corporate governance and societal expectations.
What are the responsibilities of the principal (investors/providers of capital)?
Stewardship code compliance and societal expectations for responsible investors.
What are the key elements of the pre-audit process?
- Client acceptance and drafting an engagement letter.
- Contacting previous auditors.
What are the key elements of the post-audit and throughout-audit process?
- Communication with those charged with governance.
- Issuing the management letter.
The regulation and actors - Essential actors in enhancing AQ
Who are the essential actors in enhancing Audit Quality (AQ)? (2)
What are the responsibilities of directors in enhancing Audit Quality? (6)
What roles do auditors and audit firms play in enhancing Audit Quality? (5)
Who are the essential actors in enhancing Audit Quality (AQ)?
- Directors and those charged with governance.
- Auditors and audit firms.
What are the responsibilities of directors in enhancing Audit Quality?
- Those charged with governance include the board of directors.
- Public Sector: Senior civil servants and government ministers.
- Third Sector: Trustees/Directors.
- Directors are responsible for running the company and reporting truthfully.
- Their responsible behavior is essential for high-quality reporting and reliable corporate governance.
- Directors must be accountable for their actions and the impact of the company’s operations on stakeholders.
What roles do auditors and audit firms play in enhancing Audit Quality?
- Provide independent professional scrutiny of directors’ reporting and the business’s financial position.
- Act as a continuous incentive for directors to:
- Improve internal processes.
- Enhance standards of internal assurance.
- Ensure truthful reporting of the business’s state.
The regulation and actors - Essential players in enhancing AQ
Who are the main contributors to enhancing Audit Quality? (2)
What are the responsibilities of directors in improving Audit Quality? (3)
What roles do auditors and audit firms play in supporting Audit Quality? (3)
Who are the main contributors to enhancing Audit Quality?
- Directors and those charged with governance.
- Auditors and audit firms.
What are the responsibilities of directors in improving Audit Quality?
- Directors must ensure responsible management and truthful reporting of the company’s financial state.
- Their actions contribute to high-quality reporting and reliable corporate governance.
- Accountability is necessary for their impact on stakeholders and the community.
What roles do auditors and audit firms play in supporting Audit Quality?
- Provide independent scrutiny of the company’s financial reporting and position.
- Encourage directors to improve internal processes and assurance standards.
- Act as a mechanism to ensure truthful and accurate reporting.
The regulation and actors - How does an auditor meet their role?
Complying with the regulatory framework: (1+3)
Process: (1+2)
How does an auditor meet their role?
-
Complying with the regulatory framework:
- Starting point: Complying with the Companies Act 2006 (Part 16).
- Provides a broad and detailed statutory framework.
- Delegates authority to other bodies for detailed standards and guidance.
- Determines who can become an auditor and delegates operationalization to other bodies.
- Starting point: Complying with the Companies Act 2006 (Part 16).
-
Process:
-
Standards of behaviour, practice, and education.
- Compliance: Ensuring adherence to the established rules and requirements.
- Oversight: Monitoring and supervising the standards followed.
-
Standards of behaviour, practice, and education.
The regulation and actors - Who are the regulators
Who are the regulators involved in audit regulation? (5/2,1,1,1,1)
What is the role of the listed regulators in audit regulation
Who are the regulators involved in audit regulation?
- The Government:
- Maintains the legislative framework for audit regulation (e.g., CA 2006 and subsequent amendments).
- Provides detailed requirements for Recognised Supervisory Bodies (RSBs) and Recognised Qualifying Bodies (RQBs).
- The Financial Reporting Council (FRC):
- Most responsibilities and powers for audit regulation are delegated to the FRC by the Government.
- Recognised Supervisory Bodies (RSBs) and Recognised Qualifying Bodies (RQBs):
- They hold primary direct regulatory responsibility for supervising their members, which includes qualification, registration, monitoring, and disciplining auditors.
- Standard Setters (including the FRC):
- Establish standards that must be adhered to.
- Sector-Specific Regulators:
- Oversee compliance in particular sectors.
What is the role of the listed regulators in audit regulation?
All regulators are responsible for:
- Setting standards.
- Ensuring compliance with those standards.
- Overseeing compliance efforts.
The regulation and actors - Overview of types of regulation
What legislation is relevant to auditing in the UK?
What authority does the Financial Reporting Council (FRC) hold?
What types of standards apply to auditors?
What standards/practices are delegated to other regulators?
What voluntary reporting and other information may auditors consider?
What other considerations are relevant for auditors?
What legislation is relevant to auditing in the UK?
- UK law (CA 2006) and sector-specific legislation.
What authority does the Financial Reporting Council (FRC) hold?
- Delegated authority as the Competent Authority for audit in the UK.
- Responsibilities include setting auditing and ethical standards, monitoring audit quality, and enforcing compliance.
What types of standards apply to auditors?
- National Standards: Examples include ISA (UK), FRS 101-105, UK Corporate Governance Code, and FRC Ethical Standard.
- International Standards: Examples include ISAs, IFRS/IAS, and the IFAC Code of Ethics.
What standards/practices are delegated to other regulators?
- Sector-specific standards in areas like public sector, for-profit sector, not-for-profit sector (both nationally and internationally).
- Financial Conduct Authority listing rules.
What voluntary reporting and other information may auditors consider?
- Voluntary reporting standards and information.
- Early adoption and evolving reporting frameworks.
What other considerations are relevant for auditors?
- Standards from organizations like the International Integrated Reporting Council, Sustainable Development Goals (SDGs), OECD, and sector-specific regulators (e.g., banks, utilities, stock exchange regulations).
The regulation and actors - Regulation delegated to FRC
The FRC is the UK’s audit regulator, responsible for: (5)
What changes are expected in the FRC’s structure and name
What is the role of the Financial Reporting Council (FRC) in the UK?
The FRC is the UK’s audit regulator, responsible for:
- Setting standards of practice and behavior.
- Authorizing accountants/professional bodies to conduct audits and issue recognized audit qualifications.
- Reviewing the performance of Recognised Supervisory Bodies (RSBs) and Recognised Qualifying Bodies (RQBs).
- Overseeing Audit Quality (AQ) through thought leadership reports, investigations, and monitoring the work of audit firms for Public Interest Entities (PIEs).
- Delegating the monitoring of non-PIE Audit Quality to the RSBs.
What changes are expected in the FRC’s structure and name?
- The FRC’s structure is undergoing changes due to criticism of its oversight. It will transition into a new regulator called the Auditing, Reporting and Governance Authority (ARGA).
Legal duties and responsibilities - The Audit Requirement (CA2006)
What is the statutory requirement for audits according to CA 2006?
What does CA 2006 require regarding audits? (5)
What do Schedules 10 and 11 of CA 2006 specify? (2)
What is the statutory requirement for audits according to CA 2006?
Audit is a statutory requirement for the majority of companies as legislated by the Companies Act 2006 (CA 2006).
What does CA 2006 require regarding audits?
- Limited companies must be audited.
- Small companies may qualify for exemptions.
- Duties, rights, and responsibilities of auditors are outlined.
- Eligibility criteria for auditors are specified.
- Directors’ responsibilities are detailed.
What do Schedules 10 and 11 of CA 2006 specify?
- They define who can be an auditor.
- Auditors must be part of a Recognised Qualifying Body (RQB) or Recognised Supervisory Body (RSB).
Legal duties and responsibilities - Auditor Appointment and Remuneration (CA 2006, Part 16, Chapter 1)
Who appoints auditors under the Companies Act 2006 (CA 2006), Part 16, Chapter 1?
When can directors appoint auditors instead of shareholders? (2)
Who determines the remuneration of auditors?
Where is the amount of auditors’ remuneration disclosed?
What guidance is referenced for agreeing the terms of an audit engagement?
Who appoints auditors under the Companies Act 2006 (CA 2006), Part 16, Chapter 1?
- Auditors are appointed by shareholders.
When can directors appoint auditors instead of shareholders?
Directors can appoint auditors in the following scenarios:
- For the first audit.
- To fill a casual vacancy or where no auditor was previously appointed due to an exemption.
Who determines the remuneration of auditors?
- The remuneration is set by whoever appoints the auditor.
Where is the amount of auditors’ remuneration disclosed?
- It is disclosed in the audited entity’s financial statements.
What guidance is referenced for agreeing the terms of an audit engagement?
- ISA 210 – Agreeing the Terms of an Audit Engagement.
Legal duties and responsbilities - CA2006: Functions of the auditor - Reporting Responsibilities (s495-7)
What is the primary responsibility of an auditor according to the Companies Act 2006?
What must the auditor’s report include? (5)
What additional reporting requirements apply to auditors of listed companies? (2)
What is the primary responsibility of an auditor according to the Companies Act 2006 (CA 2006)?
The auditor’s primary responsibility is to form an independent audit opinion on whether the annual accounts give a true and fair view.
What must the auditor’s report include?
- The identity of the company being audited.
- Description of annual accounts, the audit’s scope, and the financial reporting framework.
- Confirmation of whether financial statements are prepared in accordance with the relevant financial reporting framework and CA 2006.
- Verification that the information in the directors’ report is consistent with the financial statements.
- An audit opinion (details in the audit report).
What additional reporting requirements apply to auditors of listed companies?
Listed company auditors have more extensive reporting obligations, including:
- Extending the audit scope (e.g., sector regulatory or corporate governance requirements).
- Confirming whether the directors’ remuneration report has been properly prepared.
Legal duties and reponsibilities - CA2006: Functions of the auditor - Duties of auditors (s498)
What are the duties of auditors according to CA2006 (s498)? (5)
What does silence in the audit report imply regarding these investigations
What are the duties of auditors according to CA2006 (s498)?
Auditors must carry out investigations to determine whether:
- Proper accounting records have been maintained.
- Accounts agree with the accounting records.
- Disclosure of directors’ benefits complies with CA2006 requirements.
- Necessary information and explanations have been received.
- Returns from branches not visited have been obtained.
What does silence in the audit report imply regarding these investigations?
Silence in the audit report implies that all matters are satisfactory, adhering to the principle of reporting by exception.
Legal duties and reponsibilities - CA2006: Functions of the auditor, cont
What does the Auditor’s report encompass under CA2006?
What rights do auditors have to access information? (2)
What are auditors’ rights concerning resolutions and meetings? (3)
What does the Auditor’s report encompass under CA2006?
- The Auditor’s report covers the annual accounts, strategic report, directors’ report, directors’ remuneration report, and corporate governance statement.
What rights do auditors have to access information?
Auditors have the right to:
- Access all information required to perform an audit.
- Obtain information and explanations from company officers.
What are auditors’ rights concerning resolutions and meetings?
Auditors have the right to:
- Receive notice of general meetings.
- Attend general meetings.
- Be heard on matters relating to the audit during these meetings.
Legal duties and reponsibilities - Auditor Removal or Resignation
How can an auditor be removed according to CA2006 (s510-26)?
What are the duties of an auditor when resigning? (3,2)
What rights does an auditor have upon resignation?
How can an auditor be removed according to CA2006 (s510-26)?
- An auditor can be removed by resolution at a company meeting.
- General provisions against unwarranted removal include:
- Communicating the resolution to remove the auditor to every member of the company.
- Allowing the auditor to make written statements.
- Granting the auditor the right to attend the general meeting.
What are the duties of an auditor when resigning?
- Send a resignation letter to the company.
- Provide a statement of circumstances (for PIEs), which can either:
- Confirm there are no circumstances, or
- Detail specific circumstances.
- Notify the audit authority about the resignation.
What rights does an auditor have upon resignation?
- The auditor has the right to request to be heard at the general meeting to discuss the circumstances of their resignation.
Legal duties and responsibilties - Who can be an auditor?: RSB and RQB
What does CA 2006 Legislation define regarding audit eligibility? (3)
What are the eligibility criteria to become an auditor? (6)
Who can be an auditor?
What does CA 2006 Legislation define regarding audit eligibility?
- Delegates authority to the Financial Reporting Council (FRC) and professional bodies.
- Recognised Supervisory Bodies (RSBs) oversee supervision and compliance.
- Recognised Qualifying Bodies (RQBs) handle qualifications for auditors.
What are the eligibility criteria to become an auditor?
- Be a member of an RSB and comply with its rules.
- Be qualified with an RQB.
- Obtain an audit practice certificate.
- Meet practical experience requirements set by certain professional bodies.
- Ethical Standards outline threats to auditor independence.
- Must not be ineligible based on older legislation (e.g., an “officer or servant” of a company).
Who can be an auditor?
Only individuals who are appropriately qualified, properly supervised, and have been awarded registered auditor status.
Legal duties and responsibilties - RSB and RQB
What does RSB stand for, and what are its requirements? (7)
What does RQB stand for, and what are its requirements? (4)
What is the main difference between RSB and RQB? (2)
What does RSB stand for, and what are its requirements?
- RSB: Recognised Supervisory Body. There are four RSBs (ICAS, ICAEW, CAI, ACCA).
Requirements for RSBs: - Systems to register audit firms.
- Monitor the work of audit firms.
- Establish rules regarding eligibility to be an auditor.
- Handle complaints effectively.
- Ensure procedures to maintain competence.
- Implement disciplinary procedures.
What does RQB stand for, and what are its requirements?
- RQB: Recognised Qualifying Body. There are five RQBs (ICAS, ICAEW, CAI, ACCA, CIPFA, AIA).
Requirements for RQBs:
- Must have suitable standards for entrance.
- Enforce practical experience requirements.
- Maintain a formalized examination structure.
What is the main difference between RSB and RQB?
- RSB Role: Supervise members, register audit firms, monitor their work, and handle complaints.
- RQB Role: Issue professional accounting qualifications with appropriate standards for entrance, practical experience, and exams.
Current developments in the aftermath of crisis - Meeting the public interest, tensions in audit market
What do FRC and professional bodies claim to do in the public interest?
How has trust in statutory audits been impacted recently?
What has the audit regulator revealed about audits from the seven largest audit firms?
What concerns exist about the statutory audit market?
What do FRC and professional bodies claim to do in the public interest?
They claim to be “Acting in the public interest to increase market confidence.”
How has trust in statutory audits been impacted recently?
Trust among stakeholders and the wider public has diminished due to corporate collapses like BHS (2016) and Carillion (2018), which caused significant economic and social damage.
What has the audit regulator revealed about audits from the seven largest audit firms?
Up to a third of these audits have been found to require improvement or significant improvement.
What concerns exist about the statutory audit market?
There are concerns about limited competition, lack of resilience for auditing large companies, and a perceived failure to meet the growing expectations of audit users.
Reference: (BEIS, Restoring trust in audit and corporate governance, March 2021, p14)
Current developments in the aftermath of crisis - Responding to tensions in audit market, proposals:
What did the Kingman review (Dec 2018) criticize about the Financial Reporting Council (FRC)?
What proposal did the Kingman review suggest?
What was the focus of the CMA review (Dec 2018)?
What proposals were made by the CMA review? (3)
What did the Brydon review (2019) investigate?
What were the proposals made by the Brydon review? (4)
What did the Kingman review (Dec 2018) criticize about the Financial Reporting Council (FRC)?
The FRC was criticized for being “toothless,” closely tied to the profession, underfunded, and under-resourced.
What proposal did the Kingman review suggest?
The review proposed replacing the FRC with a new organization called the Auditing, Reporting and Governance Authority, with updated leadership, mission, powers, and funding.
What was the focus of the CMA review (Dec 2018)?
The CMA review focused on improving competition in the audit sector.
What proposals were made by the CMA review?
- A split between audit and non-audit services.
- Regulatory scrutiny of auditor appointment and management.
- Encouraging more choices in the market.
What did the Brydon review (2019) investigate?
The Brydon review examined the quality and effectiveness of audits.
What were the proposals made by the Brydon review?
- A clearer definition of audit and its necessity.
- Creation of a new audit profession.
- Clarification of wording in audit reports.
- Introduction of new duties for directors and auditors related to corporate fraud.
Current developments in the aftermath of crisis - White paper, March 2021
What is the purpose of the white paper released in March 2021?
What did the Kingman review recommend?
What were the findings of the Brydon Review?
What did the CMA Market Study reveal about the audit sector?
What are the government’s views on these findings?
How many recommendations emerged from the three reviews?
What is the purpose of the white paper released in March 2021?
The white paper, titled “Restoring Trust in Audit and Corporate Governance,” addresses issues identified by three independent reviews of audit and corporate governance, focusing on reforms to rebuild trust in how large companies are run and scrutinized.
What did the Kingman review recommend?
The Kingman review proposed replacing the current regulator due to its lack of sufficient powers and clarity of purpose, aiming to hold auditors and directors more accountable.
What were the findings of the Brydon Review?
The Brydon Review emphasized the need for statutory audits to become more informative and called for higher expectations from both directors and auditors to provide useful information for report users.
What did the CMA Market Study reveal about the audit sector?
The CMA Market Study highlighted the unhealthy dominance of a few firms in the audit market for large companies, recommending measures to improve audit quality, competition, and resilience.
What are the government’s views on these findings?
The government agrees with the reviews and supports fundamental reforms to rebuild trust in corporate governance and auditing practices.
How many recommendations emerged from the three reviews?
Over 150 recommendations were made, which have been consolidated into key targets for reform.
When does the consultation period for the white paper close?
The consultation started in March 2021 and is scheduled to close in July 2021.
Current developments in the aftermath of crisis - BEIS May 2022 - Restoring trust in audit and corporate governance
Regulator:
What powers does the new regulator possess?
Directors/Clients
What responsibilities do directors and clients have? (3)
Audit and the Profession
What reforms are suggested for the audit profession? (3)
Investors
What role should investors play in ensuring better corporate governance? (3)
Regulator:
What powers does the new regulator possess?
The new regulator will have investigative and enforcement powers.
Directors/Clients:
What responsibilities do directors and clients have?
- Recognize the public interest in the reporting of large private companies.
- Implement changes to reporting requirements.
- Supervise corporate reporting.
Audit and the Profession:
What reforms are suggested for the audit profession?
- Improve the informativeness and quality of audits.
- Enhance resilience, competition, and choice within the audit market.
- Strengthen audit quality monitoring.
Investors:
What role should investors play in ensuring better corporate governance?
- Pressure boardrooms with weak internal controls or inadequate directors’ statements.
- Emphasize the industry’s role, investor involvement, and stewardship in promoting sustainable practices.
- Engage actively in matters related to audit quality and revise the stewardship code.
