Tutorial 1 Flashcards
Explain the difference between audit and review
AUDIT:
- statutory/mandatory
- performed by auditor
- high level of assurance (reasonable assurance)
- adds credibility to financial statements
REVIEW:
- optional for companies not legally required to audit
- moderate level of assurance
- involves less work than a full audit
Explain why an audit is necessary
- remoteness of information
- biases and motives of the provider
- voluminous data
- complex exchange transactions
- develops stewardship and accountability
- adds credibility to the financial statements produced by management
What does ‘a true and fair view’ mean?
- A sufficient level of judgement has been exercised by the directors in preparing financial statements and by the auditor in reaching their opinion
- overall the financial statements have been properly prepared in accordance with an appropriate financial reporting framework
- ‘true’ implies free from error, ‘fair’ implies that there is no undue bias in the financial statements and the way in which they’ve been presented
- note: the phrase ‘true and fair’ has no legal definition, it suggests to users that the information given can be relied upon
What’s the ISA definition of materiality?
‘Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.’
How does an auditor decide where to focus in the financial statements?
Auditors focus on areas that:
- have high value
- are at higher risk of misstatement
- are of particular interest to users (due to their nature)
Why do auditors assess materiality?
to identify and correct errors that would be significant to users, especially shareholders
What are some examples of a material error?
- size-based (e.g. £500,000 error in company with £1 million revenue)
- nature based (e.g. directors’ salaries, expected to be fully accurate by users)
Who defines the duties of an auditor?
they are defined by statute, not by the company’s directors
What is the main purpose of an audit?
to independently examine and express an opinion on whether the financial statements are properly prepared in accordance with the financial reporting framework
What standards must an audit comply with?
Approved auditing standards, such as the International Standards on Auditing (ISA)
Can directors limit the auditor’s duties or indemnify them against legal actions?
No, they cant limit the audit scope or indemnify the auditor for non-performance of duties
What should the relationship between the auditor and directors be like?
- independent and free from director influence
- the auditor has no personal relationship with the directors
What are the respective responsibilities of the directors and auditor?
Directors: prepare financial statements
Auditor: form and express an opinion on the statements for the members
What are the rights of the auditor?
- to receive notice of and attend shareholder meetings
- access all books and accounting records
- be informed of proposals to dismiss them
- Obtain all necessary information for the audit
Who has the authority to dismiss an auditor?
only the shareholders, by a simple majority at a shareholders’ meeting
What must happen before accepting an audit appointment?
- ensure audit scope is limited only by statute
- discuss audit requirements with directors to avoid misunderstandings
- agree on a latter of engagement outlining the auditor’s duties and rights
What should happen when a company wants to replace its current auditor who is unwilling to resign?
- the directors must notify the current auditor of the intention to appoint a new auditor
- with permission, the proposed new auditor must contact the current auditor to ask if there are any professional reasons why the appointment shouldn’t be accepted
- the current auditor responds to the company
- if no professional objections are raised, the new auditor can accept the invitation
- shareholders must vote at a general meeting (simple majority required)
- the current auditor may attend the meeting or submit written repersentations
- if the resolution passes, the current auditor is removed and the new auditor is appointed
What rights does the current auditor have if they’re being replaced?
- to receive notice of the general meeting
- to attend the meeting and make oral statements
- to submit written statements to be circulated to shareholders in advance
What must the outgoing auditor do if they’re willing to resign?
- tender their resignation to the company
- provide a statement of circumstances if there are relevant matters for shareholders or creditors
- If there are no such matters, they must state that none exist
what power does a resigning auditor have regarding shareholder meetings?
They may request the company’s directors to call a shareholders’ meeting to explain the circumstances of their resignation
