Chapter 2

Question 1

Why are professional standards a matter of public interest?

Answer 1

They add to the quality of assurance services

Question 2

What does audit regulation promote?

Answer 2

Comparability of financial statements which are all audited to the same standards and therefore improved public confidence

Question 3

What aspects do all assurance engagements consider?

Answer 3

> ethics
risk assessment
terms of engagement
international standards on quality management (ISQMs)

Question 4

Uk audits are governed by

Answer 4

> companies act 2006
International standards on accounting

Question 5

What is the FRC?

Answer 5

The UK’s independent regulator for corporate governance, financial reporting, and audit, which sets standards and disciplines accountants and actuaries.

Question 6

The FRC has a structure focusing on three key purposes:

Answer 6

> the executive committee
the governance committees
the regulatory committee

Question 7

Purpose of the executive committee

Answer 7

handles the FRC’s
everyday operations
>such as
programmes,
policies and
resources.

Question 8

Purposes of the governance committees: the audit and risk committee

Answer 8

provides financial, IT, legal and regulatory
oversight.

Question 9

The purpose of the governance committees: the people committee

Answer 9

offers challenge and direction for recruitment, remuneration, talent management and
other staff welfare issues

Question 10

Purpose of the governance committees: the audit and risk committee

Answer 10

provides financial, IT, legal and regulatory
oversight.

Question 11

Purpose of the governance committees: the people committee

Answer 11

offers challenge and direction for recruitment, remuneration, talent management and
other staff welfare issues.

Question 12

Purpose of the regulatory committee: the conduct committee

Answer 12

oversees the enquiries, investigations and enforcement function,
considering cases of members’ professional conduct.

Question 13

What additional resources provide additional support to the FRC?

Answer 13

> advisory groups (consist of senior advisors and a stakeholder insight group)
panels and committees supporting the FRC’s enforcement procedures
(include a tribunal panel with a complaints focus, an appointment committee
who appoint members to the tribunal panel and an enforcement committee
panel for failures to comply with regulations).

Question 14

What different types of standards/guidance are issued by the FRC?

Answer 14

> international standards on auditing (uk)
international standards on review engagements (uk)
international standards on assurance engagements (uk) ISAE 3000

Question 15

What does the FRC do before issuing ISAs?

Answer 15

ensures they are consistent with the international standards issued by the International Audit and Assurance Standards Board (IAASB). The FRC adapts the ISAs for use in the UK, often adding specific requirements or guidance that reflect the UK’s distinct legal and regulatory context

Question 16

What are practice notes.

Answer 16

Practice Notes are intended to assist auditors in applying auditing standards of general application to particular circumstances and industries

Question 17

What are bulletins?

Answer 17

Bulletins are issued to provide auditors with timely guidance on new or emerging issues.

Practice Notes and Bulletins are persuasive rather than prescriptive.

Question 18

What are 13 current issues facing the auditing/accounting profession?

Answer 18

> the effect of sustainability and climate change on risk assessment, etc in a statutory audit
the need for assurance on sustainability disclosures
The need to audit increasingly complex technology and artificial intelligence (Al).
The need to adapt to use technology in auditing, such as data analytics software.
Replacement of FRC with oversight of the auditing profession by ARGA.
Lack of public trust due to audit quality issues and audit failures.
Split of accounting and audit professions.
Dominance of the ‘Big 4’ audit firms resulting in lack of competition.
Proposed introduction of mandatory joint audits.
Mandatory retendering after 10 years for listed companies.
Change of auditor at least every 20 years for listed companies.
Changes to and harmonisation of auditing standards.
Increasing expectation gap and expectations re detection of fraud.

Question 19

The FRC published a review of both company and auditor responses to climate
change in 2020. The findings were:

Answer 19

> little evidence of business models/company strategy being influenced by integrating climate considerations
users are requesting additional climate-related disclosures
climate change disclosures/financial statement considerations lag behind
narrative reporting
firms need to take action to ensure climate change is factored into its internal
quality monitoring processes
climate-related risks need to be further considered when planning/conducting audits

Question 20

IFRS S1 General requirements for disclosure of sustainability-related financial information

Answer 20

Entities must disclose significant sustainability-related risks and opportunities

Question 21

IFRS S2, Climate-related disclosures

Answer 21

Entities must disclose climate-related risks and opportunities

Question 22

Benefits of IFRS S1 and S2 for users?

Answer 22

> Useful to primary users (of general purpose financial reports) in making decisions regarding providing resources to the entity.
Both the above standards include risks and opportunities that could affect the entity’s
access to finance and/or cash flows over either the short, medium or long term.

Question 23

What is big data?

Answer 23

Big data refers to extremely large, complex datasets that are too large for traditional data processing software to handle efficiently. It is often defined by the “3 Vs”: volume, velocity (the speed at which data is generated and processed), and variety (the different types of data, such as structured, unstructured, and semi-structured).

Question 24

Advantages of big data in accounting

Answer 24

> More accurate auditing: Big data allows for the analysis of 100% of transactions, which is more accurate than audit sampling, and helps identify outliers and irregularities that may indicate fraud.
Improved decision-making: By analyzing large datasets, businesses can gain deeper insights, predict future outcomes, and optimize investments for greater profit maximization.
Enhanced risk management: Big data analytics can improve risk management by analyzing patterns in customer behavior, transaction data, and market trends to identify and mitigate risks like fraud or credit risk more effectively.
Greater efficiency and speed: Businesses can generate real-time reports, respond faster to changes in demand, and automate non-routine tasks, making accounting processes more efficient.
Better financial forecasting: Analyzing historical and real-time data helps improve the accuracy of financial forecasts and budgets.

Question 25

Disadvantages of big data in accounting

Answer 25

>High implementation cost: The initial investment in necessary hardware, software, and specialized staff can be very expensive, posing a challenge for smaller firms. >Data privacy and security risks: Storing and processing vast amounts of data increases the risk of data breaches and cyberattacks, which can lead to significant financial and reputational damage. >Potential for bias: Algorithms are only as good as the data they are trained on, so if historical data contains biases, the resulting analysis and predictions can perpetuate those inequalities. >Data quality issues: Inaccurate, incomplete, or outdated data can lead to incorrect conclusions, and it can be difficult to manage the sheer volume and variety of data. >Ethical and regulatory challenges: The use of big data raises ethical questions about data ownership and usage, and the need to comply with evolving regulations regarding data privacy.

Question 26

Name three reviews regarding the future of audit

Answer 26

>the Kingman review >the Competition and market authority (CMA) review > the Brydon report

Question 27

What was the Kingman review’s main recommendation?

Answer 27

To replace the FRC with a new statutory regulator, the Audit Reporting and Governance Authority ( ARGA)

Question 28

Objectives of ARGA

Answer 28

>regulate big firms >impose larger sanctions for corporate failure >require fast explanations from companies, and >issue report publications regarding conduct and management.

Question 29

Recommendations of the CMA

Answer 29

robust regulatory oversight of committees to ensure quality is prioritised  mandatory joint audit (see joint audits section later in this chapter)  an operational split between the Big four’s audit and non-audit businesses to ensure quality  a five-year progress review by the regulator.

Question 30

ARGA: increased accountability for directors

Answer 30

ARGA will have stronger powers to investigate and sanction directors for breaches of their corporate reporting duties. Previously, the FRC could only sanction directors who were members of a professional accountancy body. ARGA will be able to hold any director of a PIE accountable for serious failings. The regulations emphasize the collective responsibility of the board for financial reporting. Potential penalties for directors include fines, compulsory declarations, and temporary removal from a position.

Question 31

ARGA: audit market reform

Answer 31

The government aims to curb the market dominance of the "Big Four" audit firms (Deloitte, PwC, EY, and KPMG) by increasing competition. For FTSE350 companies, regulations will require a portion of the audit to be conducted by a "challenger firm" from outside the Big Four. ARGA will have powers to break up the audit and non-audit functions of major firms if competition does not improve.

Question 32

ARGA: improved corporate reporting

Answer 32

Regulations will require companies to be more transparent about their finances and fraud-prevention measures. Large PIEs must publish their distributable reserves and justify dividend payments. Enhanced reporting will be required for areas outside the financial statements, such as non-financial metrics, climate risk, and internal controls

Question 33

The CMA review: Increase choice and competition

Answer 33

Mandatory joint audits: This would require FTSE 350 companies to appoint at least two audit firms, with at least one coming from outside the "Big Four" (Deloitte, PwC, EY, and KPMG). The challenger firms would be jointly liable, allowing them to build capacity, experience, and market credibility

Question 34

The CMA review: operational separation between audit and non-audit functions

Answer 34

The CMA recommended an "operational split" of the Big Four's UK audit work from their consulting services. Key features would include separate management, accounts, and remuneration structures for the audit arm. The goal is to ensure auditors are focused purely on delivering robust and objective audits, uninfluenced by potentially conflicting consulting work.

Question 35

The CMA review:to enhance market resilience

Answer 35

Monitoring of Big Four health: The regulator should be equipped with powers to monitor the resilience of the Big Four firms to prevent market instability if one were to fail. The regulator would also have powers to intervene and minimize the movement of clients to the remaining Big Three

Question 36

The Brydon review: more informative audit reports

Answer 36

Change wording: The traditional "true and fair" opinion should be replaced with "present fairly, in all material respects" to better reflect the use of estimates and judgments in modern accounts. Graduated findings: Audit reports should include more "graduated findings" to provide greater transparency over areas of significant judgment and estimation, rather than just a binary "pass/fail" opinion.

Question 37

The Brydon review: a distinct auditing profession

Answer 37

Create a new corporate auditing profession separate from the accounting profession, with its own specific qualifications, principles, and standards. ARGA's role: The new regulator, ARGA, should facilitate the establishment of this new profession and act as its statutory supervisor.

Question 38

The Brydon review: enhanced reporting by directors

Answer 38

Annual resilience statement: Directors should publish a forward-looking "Resilience Statement" to replace the current going concern and viability statements, considering the short, medium, and long-term viability of the company. Audit and assurance policy: A three-year rolling policy detailing the company's approach to assurance and how it addresses risk should be presented to shareholders. Actions on fraud: Directors must report on the specific actions they have taken to prevent and detect material fraud.

Question 39

What is a joint audit?

Answer 39

The term ‘joint audit’ means that more than one audit firm will be responsible for the audit opinion. The audit will be performed on a joint basis and a joint audit report will be issued. In the event of litigation, firms will be jointly liable.

Question 40

Who may benefit from joint audits, implemented by the CMA ?

Answer 40

may benefit smaller firms in allowing them to perform or become involved in higher level audit services. One of the main criticisms of such a change, is that services may become more expensive for clients.

Question 41

What is harmonisation

Answer 41

Harmonisation is the process of aligning global standards so that companies are audited in a comparable way regardless of location. The process has been driven by a number of factors, including globalisation and the harmonisation of rules and regulations affecting business within the European Union. The UK has generally adopted ISAs but it is important to note that the FRC amends and reissues as ISAs (UK).

Question 42

EU Directive and Regulation audit provisions (April 2014)

Answer 42

Change of audit firm at least every 20 years Improving the quality of audit and reporting Ban on providing non-audit services (including tax advice) to PIEs Cap on fees for non-audit services Mandatory re-tendering after 10 years

Question 43

What is a retender?

Answer 43

the process where a company invites new bids or proposals from audit firms for the right to perform its statutory audit. A company that retenders an audit is reassessing its options and does not necessarily intend to replace the current auditor.