how is management responsible for ensuring the business’ objectives are achieved?
They should assess the risks posed and devise strategies to combat these risks
What does the companies act set out as the statutory duties of the directors?
They should act in a way the promotes the success of the business as a whole
More specifically they should: keep proper accounting records, prepare financial statements and deliver them to companies house, act in a way that promotes the success of the business as a whole and safeguard the companies assets
What are the three pillars of ESG and their focuses?
Environmental - reduce footprint, consider dependencies on natural resources and impact on climate change
Social - welbeing, positive work place and a healthy/ diverse work force
Governance - practices implemented from the top down, strong leadership, regulatory compliance and good working conditions
What are dependencies in relation to esg?
Dependencies are how esg impacts on organisation, for example employee health, access to natural resources etc + customer expectations, climate conditions, reputation
These can impact shareholders as esg disclosures can help understand how a business is managed and influence their decision making
This ties to financial materiality as it could influence whether a shareholder believes an issue is material enough
What are impacts in relation to esg?
Impacts are how an organisation impacts ESG. for example waste, human rights, greenhouse gas emissions etc, this can also have an impact on financial materiality as it can create reputation issues or highlight issues with reduced demand disclosure of impacts is useful for wider stakeholders i.e customers and the general public as their decisions are likely linked to how a business impacts society and the environment
How can stranded assets affect the going concern of a business?
A stranded asset is an asset that is subjected to an unexpected or premature writedown, it can imapct the going concern of a business if a large portion of the businesses assets become stranded assets, it may be difficult for the company to devise strategies and solutions t transition risks
What are the responsibilities of an auditor conducting a statutory audit set out in the companies act 2006?
Forming an opinion on the truth and fairness of the financial statements, determining whether the FS have been prepared in accordance with the companies act, and disclosing in the audit report whether the FS are consistent with the directors/ strategic report.
What are the types of biases an auditor should be aware of ?
Availability bias - relying on information/data/events that is readily available as opposed to info that is not
Anchoring bias - using existing information inappropriately to make judgements/ conclusions on Subsequent info Automation bias - blindly relying on computerised systems
Confirmation bias- favouring info that supports an existing belief as opposed to any that is new / contradictory
Groupthink - trusting the consensus of the group rather than making their own judgements/ considering alternative povs.
Overconfidence - wrongly assuming you can make accurate judgements/decisions on your own
What does ISA 240 cover in relation to fraud?
Identifies two types of misstatement in relation to fraud, fraudulent financial reporting i.e windowdressing and misappropriation of assets i.e - theft or misuse of the businesses assets
What are the respective responsibilities of mgmt and auditors in relation to fraud?
MGMT: Responsible for preventing and detecting fraud
Auditors: responsible for gaining reasonable assurance the the statements are free from misstatement whether caused by fraud or error, designing/undergoing the correct procedures to gain this assurance, responding appropriately to fraud or suspicion of fraud
What does isa 240 appendix one in relation to a fraud risk assessment cover?
It highlights risk factors and procedures to undertake to detect and or respond to fraud
Risk factors: incentives - may have a motive such as bonuses or pressures to meet a target, opportunities that may be available due to the nature of the business or deficiencies in controls, attitudes and rationalisations of the busienss/ mgmt
To respond auditors should
Exercise professional skepticism, i.e have a questioning mind and remain alert, critically assess information
Speak to the engagement team and highlight that audit may occur
Respond to the assessed level of fraud by: having the correct personnel in terms of experience , this could mitigate risk, look for instances of mgmt override - ie mgmt ignoring controls and introduce an element of unpredictability
Look for other areas that could be affected by this risk, i.e fraud could indicate poor management representations and this is unreliable
Consider if the audit requires specialist skills to perform the work
In the case of fraud, what should the auditor do?
Auditors are required to discuss any alleged or previous fraud within the business, in the case that MGMT is suspected, they should avoid tipping them off. They should also contact staff that are responsible for alleged fraud identified by employees as delineated in isa 240
How should an auditor report fraud?
Report to mgmt i.e tell the financial director, if mgmt are suspected they must communicate to those charged with governance i.e the audit committee. In the case that fraud has caused a material misstatement in the financial statements they must report to the shareholders, as well as regulatory third pirates whom they have a duty to disclose to.
What should the auditor consider before reporting any fraud to the manager?
If the fraud constitutes money laundering, the auditor should avoid tipping off management.
What are MGMT an the auditors responsibilities in regards to compliance with laws and regulations?
ISA 250 , Mgmt - comply with laws and regs, Auditor - gain sufficient appropriate evidence of compliance that is generally expected to have a direct effect on the FS.
What procedures should the auditor carry out in relation to non compliance?
Perform a risk assessment
Relevant laws and regs
On how mgmt ensures compliance
Obtain evidence
Correspond with regulatory bodies
Inquire with mgmt
Obtain written representation letters from mgmt to confirm disclosure of all instances of non compliance
In the case of suspected non compliance, how should the auditor report this?
To management, in the case mgmt is suspected of non compliance they can contact those charged with governance, if there is no one senior consider getting legal advice. Report to shareholders only if it creates a material misstatement in the financial statements. Third parties - if there is a duty to disclose i,e regulator. If the auditors suspect that money laundering is involved in the non compliance they should avoid tipping off mgmt.
ISA 260?
Communication with those charged with governance
