1. The Need for Regulation
The auditing profession is highly regulated to ensure harmonisation of procedures, a focus on audit quality, and strict adherence to a professional Code of Ethics. These regulations are crucial for maintaining public trust, especially following high-profile audit failures.
The two main pillars of regulation for the auditing profession.
2. Legal Requirements for Audits and Auditors
National laws, such as the Companies Act 2006 in the UK, dictate the legal requirements for audits. While different countries have their own laws, the general principles are similar globally.
Who Needs an Audit?
In most countries, companies are legally required to have an audit. However, there are often exemptions for small or owner-managed companies because the cost and disruption of an audit are seen as too great compared to the benefits.
Who Can Act as an Auditor?
To be eligible, a person must be a member of a Recognised Supervisory Body (RSB), such as ACCA, or be directly authorized by the state. Firms must be controlled by members of an RSB or directly authorized by the state.
Auditor Appointment, Removal, and Rights
Auditors are typically appointed by the shareholders and serve from one annual general meeting (AGM) to the next. They can be removed by a simple majority vote at a general meeting, but certain legal safeguards exist. Upon resignation, an auditor must issue a written notice and a statement of circumstances.
Auditor's Rights During Appointment:
- Access to the company's books and records.
- To receive information and explanations necessary for the audit.
- To receive notice of and attend any general meeting.
- To be heard at such meetings on matters of concern to the auditor.
3. International Regulation
The International Federation of Accountants (IFAC) is a global organization that promotes the harmonisation and quality of the profession. Its subsidiary, the International Auditing and Assurance Standards Board (IAASB), develops and promotes International Standards on Auditing (ISAs).
Key Features of ISAs
ISAs are professional guidance that auditors must follow to ensure consistency and quality. They are not legal requirements; local law always takes precedence in case of a conflict. Auditors must apply ISAs in all but exceptional cases, and any departure must be justified.
International vs. National Standards
Since IFAC has no legal standing, individual countries must implement ISAs into their national frameworks. For example, in the UK, the Financial Reporting Council (FRC) modifies ISAs for local use and monitors audit quality through inspections. This ensures that while there's a global standard, it's enforced within a national regulatory framework.
4. The Role of Professional Bodies
Professional bodies, such as ACCA, are essential for promoting quality within the profession. They provide rigorous qualifications, offer technical expertise, and ensure members adhere to a professional Code of Ethics.
To maintain membership, an accountant must demonstrate continuing professional development (CPD). If a member fails to comply with the rules, disciplinary action, including fines or removal from the body, may be taken.
Test Your Understanding Questions and Solutions
Question: Explain THREE rights that enable auditors to carry out their duties.
Solution:
- Right of access: Auditors have the right to access the company's books and records at any reasonable time to collect evidence.
- Right to information and explanations: Auditors have the right to request information and explanations from the company's officers that they deem necessary for the audit.
- Right to attend general meetings: Auditors have the right to receive notices of, and attend, any general meeting of the company and to speak on any matter of concern to them.
Question 1: Which of the following statements is false?
- A. Auditing standards are laws which must be followed during all audits
- B. Auditing standards should be followed during all audits unless there are exceptional circumstances which would mean the audit objective would not be met
- C. Auditing standards are professional regulations
- D. Auditing standards may be different in different countries, even those using ISAs
Solution:
A. Auditing standards are professional guidance, not law.
Question 2: Which of the following are reasons for the audit profession issuing auditing standards?
- (i) To ensure consistency of audits across different firms.
- (ii) To provide bureaucracy for auditors.
- (iii) To ensure quality in the standard of audits performed.
- A. All of them
- B. (i) and (ii) only
- C. (i) and (iii) only
- D. (ii) and (iii) only
Solution:
C. (i) and (iii) only. By issuing standards, audits should be performed more consistently, which improves quality.
Question 3: Which of the following people may act as auditor for a company?
- A. The company's previous finance director who left the company five years ago to join the audit firm
- B. A director of the company being audited who holds a valid audit certificate
- C. An employee of the company being audited who holds a valid audit certificate
- D. The wife of the finance director who works for a reputable audit firm
Solution:
A. An auditor cannot be an employee or director of the company or someone with a close personal relationship with someone that could influence the audit. An ex-employee or director can be involved with the audit once a cooling-off period has passed.
Question 4: In most jurisdictions, the auditors of a company will be appointed by which party?
- A. Directors
- B. Audit committee
- C. Government
- D. Shareholders
Solution:
D. Shareholders.
Question 5: Which of the following statements is true?
- A. The shareholders of most companies will also be the directors
- B. The directors are the stewards of the company responsible for looking after the company on behalf of the owners
- C. Directors will always have a vested interest in the company doing well because they own shares in the company they work for
- D. Auditors are allowed to be business partners of the company directors
Solution:
B. Whilst directors may be shareholders, large public companies have a significant number of shareholders who are not involved in the operations. Auditors are not allowed to be business partners of the directors of a company they audit.
You have recently started a training contract at an accountancy firm, Nauru & Co, to become a chartered certified accountant. You will be working in the audit and assurance department where your mother is an audit engagement partner.
Nauru & Co has several audit clients, although not as many as in the past due to the audit threshold being increased significantly over the last 15 years. Current regulations require all public interest entities and companies with revenue of $10 million and at least 50 employees to be audited.
Nauru & Co has recently won the tender for the audit of Vanuatu Co. Your mother will be the engagement partner for this client. You have confirmed that you are independent of management and those charged with governance of Vanuatu Co.
Malta Co has approached your firm for advice on whether they require an audit. Malta Co has 75 employees and revenue of $8 million. Malta Co is a financial institution providing banking and insurance services. Malta Co has three shareholders who are all directors of the company.
Question 1: Which of the following must you complete to become a chartered certified accountant?
- (i) Three years of exams.
- (ii) Practical experience of a minimum of three years.
- (iii) An ethics assessment.
- A. All of them
- B. (i) and (ii) only
- C. (i) and (iii) only
- D. (ii) and (iii) only
Solution:
D. To become a chartered certified accountant, you must pass the required exams, demonstrate practical experience of a minimum of three years, and complete an ethical assessment. The exams do not need to take three years.
Question 2: Which of the following statements is TRUE in respect of the audit of Vanuatu Co?
- A. You will be able to be a member of the audit team as you are independent of the client
- B. You will be able to be a member of the audit team as you are a new employee of the firm and have not had time to build up any relationships which will impact your independence
- C. You will not be able to be a member of the audit team as your mother is the engagement partner
- D. You will not be able to be a member of the audit team as you have no audit experience and therefore are not competent to perform audit work
Solution:
C. You will not be able to be on the audit team as your mother is the engagement partner, which creates an ethical threat. Your mother may be more lenient when reviewing your work, which will impact the quality of the engagement.
Question 3: Which of the following statements is TRUE in respect of Malta Co?
- A. Malta Co requires an audit as the number of employees is over 50
- B. Malta Co requires an audit because it is a financial services company
- C. Malta Co does not require an audit as revenue is below $10 million
- D. Malta Co does not require an audit as all shareholders are directors
Solution:
B. Malta Co requires an audit because it is a financial services company and therefore a public interest entity. Malta Co would not require an audit if it was not a public interest entity, as the audit threshold requires a company to meet both conditions: revenue of at least $10 million AND more than 50 employees.
Question 4: Which TWO of the following will ensure the quality of work performed by accountancy firms such as Nauru & Co is at a high standard?
- A. The firm must establish its own quality control policies and procedures
- B. The firm will be subject to quality reviews by the courts
- C. The firm will be subject to quality reviews by the IAASB
- D. The threat of legal action by ACCA will encourage a high level of quality
- E. The firm will be subject to quality reviews by ACCA
Solution:
A and E. All professional accountancy firms must comply with professional regulations, including quality control standards. These standards require firms to implement quality control policies and procedures to ensure reports issued are appropriate. ACCA will periodically perform quality reviews of firms to ensure compliance with professional standards.
Question 5: Which of the following is NOT a right of the auditor during appointment?
- A. To speak at general meetings of the shareholders about audit matters
- B. To have access to the company's books and records
- C. To receive copies of the written resolutions of the company
- D. To receive notice of, and attend, board meetings of the directors
Solution:
D. The auditor only has a right to attend general meetings of the shareholders, not the meetings of the directors.