If a conflict of interest arises and the firm continues to act for two clients, what are the safeguards?
If a conflict of interest arises then the firm should notify the clients of the situation and seek the consent to continue to act.
If the firm continues to act for two clients whose interests are in conflict then appropriate safeguards include:
- Separate teams
- Information barriers
- Confidentiality agreements signed by employees and partners
- Review of the application of safeguards by an independent partner
What are the key benefits of social media?
- Sharing of experiences
- Creating engagement in debates
- Raising awareness/profiles
What are the issues of social media?
- Confidentiality breaches
- Criticism (always avoid)
- Lack of integrity/professional behaviour
- Offensive posts (and sometimes language)
- Illegal acts
What are the consequences of poor quality control (ICAEW)?
- Fines
- Disciplinary action
- Withdrawal of the firm’s authorisation to carry out audits
What are the ‘‘other’’ consequences of poor quality control?
- Claims for negligence
- Payments of damages
- Impact on reputation
- Companies Act 2006 offence of recklessly causing audit report to be misleading or false
What are the components of a system of quality control? (ISQC 1/ISA 220)
- Leadership responsibilities for quality within the firm
- Ethical requirements
- Acceptance and continuance of client relationships and specific engagements
- Human resources
- Engagement performance
- Monitoring
- Documentation
What is an engagement quality control review?
Also referred to as: ‘Hot review’ or ‘pre-issuance review’
Purpose: Independent evaluation of the significant judgements the team has made and conclusions it reached in forming the opinion
Aim: To prevent an inappropriate opinion being issued
When: Before the opinion is issued
Which clients: Listed/high-risk clients
What is monitoring?
Also referred to as: ‘Cold review’ or ‘post-issuance review’
Purpose: Ensures compliance with the firm’s procedures and ISAs, ethical standards and other regulation
Aim: Identify areas for improvement
When: Ongoing basis
Which clients: Sample of audit files
What does the UK Corporate Governance Code require audit committees of listed companies to do?
The UK Corporate Governance Code requires audit committees of listed companies to review and monitor the independence, objectivity and effectiveness of the external auditor
How do you limit liability?
- Professional indemnity insurance
- Limited liability partnerships
- Liability caps (require shareholder approval and only cover 1 year)
How do you set a fee?
The ICAEW Code of ethics states that fees should be determined with reference to personnel, time, risk, complexity and expenses
In practice, ethical policies and procedures would need to be considered as a part of quality control
What are the considerations before accepting appointment as auditor?
Risk analysis:
- Identify clients that are too high risk to take on
- Determine fee
- Develop initial understanding of risk areas
Ethical barriers:
- ICAEW Code of ethics section 320 changes in professional appointment
Practical issues:
- Resources, competence
Legal issues:
- Whether appointment (and removal of previous auditors, if relevant) was carried out in accordance with Companies Act 2006
Who appoints auditors?
Directors: to fill a casual vacancy e.g. auditor retired during the year; or first appointment of auditors
Members (shareholders):
- By passing an ordinary resolution at a general meeting (>50% of votes)
- Appointment must be made within 28 days after the latest date for the filing of the financial statements (or existing auditor is deemed to be reappointed)
Secretary of State: In the rare circumstances where no auditor has been appointed by the relevant time
How are auditors removed? What are their rights and duties? (sacked)
Process: Ordinary resolution passed at a general meeting
Duty of an outgoing auditor: Prepare and submit a statement of circumstances to the company’s registered office (a statement of matters to be brought to the attention of shareholders or creditors, or a statement that there are no such circumstances)
Auditors of listed companies cannot state there are no circumstances
Rights:
- Prepare written representations to be circulated to the members
- Receive notice of, attend and speak at the meeting where appointment is considered
What is the process, duties and rights if an auditor resigns?
Process: Submit written notice to the company’s registered office
Duty: Prepare and submit a statement of circumstances to the company’s registered office (a statement of matters to be brought to the attention of shareholders or creditors, or a statement that there are no such circumstances)
Right:
- Prepare written representations to be circulated to the members
- Right to request, attend and speak at an extraordinary general meeting (EGM)- this can be called at short notice (maximum of 4 weeks after it is called)
What should the engagement letter cover?
Agreeing the terms of the audit engagement: ISA 210
Terms of engagement should be set out in writing:
- the objective and scope of the audit of the FS
- Management’s responsibilities
- Auditor’s responsibilities
- Form and content of reports and communications of the audit
- The auditor’s right to access records, documents and information required for the audit
- The expectation that management will provide written representations
It may also cover other matters e.g. fees, practicalities and timetable for the audit
On recurring audits, what is the requirement for the engagement letter?
On recurring audits, there is not a standard requirement that the engagement letter is sent each year. Instead, the auditor should consider whether a new engagement letter is required e.g.:
- Because the terms of engagement need to be revised
- If the client needs to be reminded e.g. a change in client management
The engagement letter can assist in narrowing the expectation gap
How do you determine terms of engagement for other assurance work?
Terms of engagement should be set out in writing;
- Work that will be carried out
- Form and content of any report
What are the reasons for planning an audit?
Adequate planning helps the auditor:
- Devote attention to important areas of the audit
- Identify and resolve potential problems on a timely basis
- Organise the audit to ensure it is performed in an effective and efficient way
- Select staff with the appropriate level of competence
- Direct, supervise and review audit work (elements of a system of quality control)
- Coordinate work done by auditors of components or experts
When is an item material?
When its omission or misstatement could influence the economic decisions of the users taken on the basis of the financial statements
When are items material by size (thresholds)?
- 5% of profit before tax
- 0.5%-1% of gross profit
- 0.5%-1% of revenue
- 1%-2% of total assets
- 2-5% of net assets
- 5-10% of profit after tax
When are items material by nature?
- Matters relating to directors or related party transactions
- Small amounts that impact on critical points e.g. change a profit into a loss; net assets to net liabilities; or affect thresholds such as whether the company is small or medium sized under the Companies Act
- Descriptions e.g. of accounting policies which are misleading
What are the analytical procedures associated with planning, evidence and overall review?
Planning: Must be carried out to help identify risk areas
Evidence: Can be used as a form of substantive procedure
Overall review: Must be used to assist in forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity
What are the limitations of analytical procedures?
- They require a sound knowledge/experience of entity which may be limited in the first year
- High-level procedure - requires staff of appropriate level
- Depends upon reliability of source data
- Overview approach may ‘hide’ inconsistencies - requires division of data
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Chapter 7: Responsibilities38
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Chapter 8: Professional Standards26
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Chapter 9: Professional Ethics10
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Chapter 10: Audit Completion13
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Chapter 13: Reporting on an audit engagement (basics)16
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Chapter 14: Reporting on an audit engagement (development)24
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Chapter 15: Reporting on assurance engagements - prospective financial information4
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Chapter 16: Reporting on assurance engagements - review engagements8
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Chapter 17: Audits of different types of entity14
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Practice Questions- SF Legal and Other Professional Regulations39
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Practice Questions: SF Planning and Performing Engagements42
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Summary Notes52
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Summary Notes 238
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Summary Notes 355
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PQ: Reporting on an Engagement0
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SF Questions: Concluding and Reporting on Engagements32
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Ideas for the procedures question25
