Chapter 9 - External Audit

Question 1

What is the role of External Audit (4) and what do they not do (1)?

Answer 1

Independent review and opinion on whether financials
1) comply with laws and accounting standards
2) give true & fair view of financial position of company.
3) comply with Code (listed co’s only)
4) can be relied upon by shareholders and stakeholders

NOT responsible for detecting fraud / errors in statements (this is for the Board)

Question 2

Explain an unmodified and modified opinion of the external auditor?

Answer 2

UNMODIFIED
Auditor confirm financial give true and fair view of financial position of company

MODIFIED
Concern over financials. Implies Auditor/Board couldn’t agree on application of accounting policy.

Three types of modified opinions

1. QALIFIED - OK except auditor hasn’t been able to check it all.
2. ADVERSE - material mis-statement.
3. DISCLAIMER - missing some info.

Question 3

Threats to Auditor independence (5)

Answer 3

Must be independent so as not to influence company.

1. Self interest (protect income)
2. Self review (non audit work)
3. Advocacy threat (take sides)
4. Familiarity threat (long relationship may build misguided trust)
5. Intimidation threat (bully by company)

Question 4

Measures to protect Auditor independence (5)

Answer 4

1. Appointment / remuneration by shareholders (CA2006)
2. Restrict / prohibit non audit work
3. Assess independence of audit firm employees (family, investment, etc)
4. Rotate audit partner (5 years - csn be 7 is required)
5. Request auditor make public statement on behalf of company and ensure they aren’t carrying out advocacy role)
6. AC and Auditor meet annually ex. Management to ensure auditors aren’t being intimidated b management

Question 5

Non Audit services measures that can be taken (2)

Answer 5

RESTRICT
To no more than 70% of average audit work over the last 3 years.

BAN
Certain non audit work (I.e. tax advice / bookkeeping)

Blanket ban isn’t always necessary and can be inefficient.

Question 6

Guidance on rotation of audit Partner and firm

Answer 6

AUDIT PARTNER (FRC)
Rotate every 5 years
May extend by 2 (total 7) if AC need to safeguard quality of audit (must share reason with shareholders)

AUDIT FIRM (EU Audit Directive regs adopted by UK)
Listed firms MUST tender at 10 years and change auditor at 20 years.

Question 7

Accounting standard

Answer 7

Common global accounting language issued by IFRS and IASB.

Question 8

What is the company secretaries’ involvement in the External Auditor (5)

Answer 8

1. APPOINTMENT / REMUNERATION of External Auditor (work with CFO and Board/AGM timings)
2. INDEPENDENCE ASSESSMENT advice on amount/type of non Audit work.
3. ENSURE Auditor attend the AGM
4. ADVISE Board/AC on rotation/tender
5. SUPPORT development of action plan to address recommendations in Auditor Management letter.

Question 9

UKCGC

Answer 9

M. Board estsblish P&Ps to ensure independence and effectiveness of internal/external audit and satisfy itself on integrity of financials and narrative statements

N. Board should present fair, balanced, and understandable assessment of company’s position and prospects.

27. Directors explain in AR&A their responsibility for their preparation and state, taken as a whole, they are fair, balanced, and understandable. & provide info needed to for shareholders to assess the company’s position, performance. Business model and strategy
28. Board should state if it think it’s appropriate to adopt the going concern basis of accounting and identify any material uncertainties over at least 12 months from date of AR&A approval.