Week 2 Statutory Audit

1
Week 2 Statutory Audit Regulation

• Week 2 Statutory Audits
• Describe the
• Regulatory framework in which statutory audits
  take place.
• Development and status of International Standards
  on Auditing (ISAs) and their relationship with
  national standards.
• Reasons for, and mechanisms for, the regulation
  of auditors by governments and other regulatory
  agencies.
• Types of opinion provided in statutory audit
  assignments.
• Explain the objectives and principal
  characteristics of statutory audit and discuss
  its value (e.g. assisting management to reduce
  risk and improve performance).
• Limitations of statutory audits.

2
Week 2 Statutory Audit Regulation

• The statutory audit requirement
• Audit regulation
• Rights and duties of auditors
• Auditing standards
• International auditing standards
• Types of opinion
• Value added
• Limitations

3
Rights, Responsibilities and Duties

• Defined by 4 separate types of institution
• Parliament (in statute law)
• Courts (in common/case law)
• Profession
• National level (APB for UK and Ireland)
• European Level (EC member states RSBs)
• International level (IFAC and IAASB)
• Other Regulators whose role is derived from
  Statute e.g. FSA.

4
Statutory Audit Requirement

• Most audit work involves companies incorporated
  under the Companies Act 1985 (NI Order 1986)
• Section 384 of the Act requires every company
  incorporated to appoint an auditor.
• Casual vacancy can be appointed by the directors.
  
• Section 236 the auditor shall make a report to
  the members.
• Rules now relaxed for small companies see
  last weeks handout.

5
Statutory Audit Requirement

• CA 1985 requires that
• The Directors of all companies must prepare and
  provide to all share and debenture holders and to
  the Registrar of Companies a balance sheet and
  profit and loss account for each financial year.
• These Financial statements must comply with the
  form and content set out in Schedule 4 of CA1985
  and present a True and Fair view of
• State of affairs
• Profit or Loss AND
• Cashflow (where applicable).

6
Statutory Audit Requirement

• NOTE
• The meaning of True and Fair is not defined in
  legislation or by the courts but it is generally
  accepted that to be True and Fair they must
  comply with FRSs and SSAPs issued by the
  Accounting Standards Board (ASB).

7
Statutory Audit Requirement

• CA1985 also sets out
• Who may be an auditor.
• Who is responsible for appointing and
  remunerating auditors.
• How auditors may resign or be removed.
• Basic rights and duties of auditors.

8
Statutory Audit Requirement

• S 236 states
• The auditors report shall state whether in the
  auditors opinion the balance sheet and profit
  and loss account (and the group accounts for a
  holding company) have been properly prepared in
  accordance with this Act, and in particular
  whether a true and fair view is given-
• In the balance sheet re the state of the
  companys affairs at the end of the year
• In the profit and loss account of the profit or
  loss for the financial year.
• What about cashflow statement???

9
Statutory Audit Requirement

• S 237 states that it is the auditors duty, in
  preparing their report, to carry out such
  investigations as will enable them to form an
  opinion on whether
• Proper accounting records are kept.
• Financial statements are in agreement with
  underlying accounting records.
• In addition the auditor has
• Right of access at all times to the companys
  books, accounts.and entitled to require from the
  companys officers such information and
  explanations he thinks necessary.
• to report if they fail to obtain information.
• to report if Directors emoluments, employee
  information and loans to Directors are not
  disclosed in accordance with Sch. 5 Parts V and
  VI and Sch. 6 Parts I to III.
• To check that the information in directors report
  is consistent with financial statements.

10
Statutory Audit Requirement

• Independence of Auditors S.27 1989 Act
• The following persons may not be an auditor
• (a)  an officer or employee of the company, or
• (b)  a partner or employee of such a person, or
• (c) a partnership of which such a person is a
  partner.
• Watch any kind of association!

11
Statutory Audit Requirement

• Who may be an auditor S. 389 (CA 1985)
• Member of a body of accountants established in UK
  and recognised by Secretary of State.
• Authorised by Secretary of State with similar
  qualifications.
• Cannot be
• An officer or servant of the company.
• A person who is a partner or employee of above.
• A body corporate.

12
Statutory Audit Requirement

• Who may be an auditor S. 25-27 (CA 1989)
• As 1985 Act.
• Introduced a regime for regulating auditors in
  line with EU 8th Directive. To ensure that
• only people who are properly supervised and
  appropriately qualified are appointed as company
  auditors, and that audits are carried out
  properly, with integrity and with the proper
  degree of independence
• Need to qualify with one of the RQBs
• Need to register with one of the RSBs.

13
Members of the RSB

• UK Ireland
• Key Bodies allowed to conduct audit
• ACCA
• ICAEW
• ICAS
• ICAI
• AAPA (Association of Authorised Public
  Accountants)

14
Rules of RSB

• Following persons only are eligible for
  appointment
• Individuals who hold appropriate qualifications
• Firms controlled by qualified persons
• 51 of firm must be controlled by a qualified
  person

15
Statutory Audit Requirement

• Audit remuneration S 385
• Shareholders have the power to appoint hence also
  to fix the remuneration in general meeting.
• however this power is normally delegated by the
  members to the directors in general meeting.
• Note To allow transparency audit and non audit
  fees are disclosed in the notes to the financial
  statements.

16
Statutory Audit Requirement

• Removal of an auditor s.390
• Ordinary resolution required.
• Special notice given 28 days before meeting.
• Existing auditor has right to make
  representations.
• Concerning the facts which they consider should
  be brought to the members attention.
• Representations may be read out at the meeting.

17
Statutory Audit Requirement

• Resignation of the auditor.
• Resign at any time.
• By depositing a written notice of resignation.
• Notice must contain
• Either a statement that there are no
  circumstances connected with the resignation
  which the auditor considers should be brought to
  the members attention.
• A statement of any such circumstances.

18
Statutory Audit Requirement

• Auditors right to an EGM s391 1985.
• The auditor may require the directors to
• Convene an EGM for the purpose of receiving and
  considering their statement of circumstances.

19
Auditors Statutory Rights

• Right of access at all times to accounting and
  other records.
• Right to require directors and employees to
  provide information and explanations necessary
  for performance of duties.
• Right to attend any AGM.

20
Auditors duty under common law

• Duties of Auditors
• Key legal court decisions
• Re London general Bank 1895
• Kingston Cotton Mill 1896
• Expectation of reasonable skill and care
• Lord Justice Lindley in the Cotton Mill case
• An auditor is a watch dog not a bloodhound
• Pacific Acceptance Corporation Ltd v Forsyth
  (Aus) 1970 J Moffit
• Underlies the Auditing Standards of today.

21
Auditors duty under common law

• Pacific Acceptance Corporation Ltd v Forsyth
  (Aus) 1970.
• Need to conduct such examination as is necessary
  to form their opinion and to take due skill
  care in doing so.
• Duties not confined to an examination of books
  and records.
• Pay due regard to the possibility of fraud.
• Make prompt and frank disclosure to appropriate
  level of management of material matters
  discovered during the course of the audit.
• Report at general meeting.
• Paramount duty to check for him/herself material
  matters, reliance on others is an aid but not a
  substitute.
• Negligence is not established by use of
  inexperienced staff etc., but may be seen as
  evidence of negligence.

22
Auditors duties under professional standards

• APB Re-established 2002 replacing the one
  established in 1991.
• Part of FRC.
• Committed to leading the development of auditing
  practice in UK and Ireland by
• Establishing high standards.
• Meeting developing needs of users of financial
  information.
• Ensuring public confidence.

23
Publications of the APB

• Standards produced serve 2 purposes
• Inform auditors about standard of work required.
• Help to protect the reputation of the profession
  as a whole.
• Three categories of publications in UK and
  Ireland
• Statements of Auditing Standards SASs (Now
  aligned with ISAs)
• Practice Notes (PNs)
• Bulletins
• Also Ethical Standards.

24
Financial Reporting Council

• Unified independent regulator responsible for
• Setting accounting and auditing standards
• Enforcing and monitoring these standards
• Overseeing the self regulatory professional
  bodies.

25
Structure Regulation of the UK Auditing
Accounting Profession
The Financial Reporting Council
26
Statements of Auditing Standards (ISAs)

• Basic principles and essential procedures
• Auditors are expected to comply with these
• Bold sections are essential procedures and must
  be followed non bold sections are for guidance.
• Follow the format of International Standards on
  Auditing (ISAs)

27
Practice Notes (PNs)

• Give guidance to assist auditors
• Application of standards
• Particularly in specific industries or
  circumstances.
• Persuasive rather than prescriptive offer best
  practice advice.

28
Bulletins

• Provide timely guidance
• New or emerging issues.
• They are persuasive rather than prescriptive
• Indication of good practice
• Issued without consultation

29
Regulation, monitoring and supervision

• Professional regulators have the following in
  common
• Education and work experience guidance
• Eligibility rules re auditors in addition to
  membership of an appropriate body.
• Supervision and monitoring
• Includes inspection which will check
• Properly structured audit approach
• Quality control procedures.
• Commitment to ethical guidelines
• Technical expertise
• fit and proper personnel
• Peer reviews
• Appropriateness of fees.

30
Auditing Standards

• See handout and pages 41 and 42 of the BPP text.
• See Alan Lewins article on ISAs and SASs
  Student Accountant March 2006.

31
Auditors Report

• The final stage of the audit process is a
  communication by an auditor to those persons who
  have a legitimate interest..
• David Flint Philosophy and Principles of Auditing
  An introduction p.161

32
Auditors Report

• The audit report is the means by which the
  auditors express their opinion on the truth and
  fairness of a companys financial statements for
  the benefit of the members of the company.
• ISA 700 The auditors report on financial
  statements.

33
Basic Elements of the Auditors Report

• Title
• Addressee
• Opening / introductory paragraph
• Identification of financial statements audited.
• Statement on the responsibility of the entitys
  management and the responsibility of the auditor.
• Scope
• Description of the audit work performed.
• Opinion paragraph
• Reference to the financial reporting framework
  used to prepare the financial statements, and
• An expression of opinion.
• Report on other legal and regulatory requirements
  (if applicable)
• Auditors signature
• Date
• Auditors address

34
The Qualified Audit Report

• A qualified audit report arises
• when the auditors do not believe that they can
  state without reservation that the accounts give
  a true and fair view.

35
The Qualified Audit Report
36
Avoidance of qualification

• Review impact - materiality.
• Summary of differences.
• Meeting held with directors.
• Directors often reconsider their policy decision.
• Auditor must engage effectively with directors.

37
Limitations of audit

• Inherent limitations in audit report.
• Timing of audit report.
• Audit evidence includes estimates, judgements and
  intentions.
• Limitations in accounting and control systems.
• Sampling.
• Auditor has to rely on their judgement.
• Expression of opinion reasonable but not
  absolute assurance!
• See BPP page 11.

38
Week 2 Statutory Audit Regulation

• Week 2 Statutory Audits
• Describe the
• Regulatory framework in which statutory audits
  take place.
• Development and status of International Standards
  on Auditing (ISAs) and their relationship with
  national standards.
• Reasons for, and mechanisms for, the regulation
  of auditors by governments and other regulatory
  agencies.
• Types of opinion provided in statutory audit
  assignments.
• Explain the objectives and principal
  characteristics of statutory audit and discuss
  its value (e.g. assisting management to reduce
  risk and improve performance).
• Limitations of statutory audits.