The Role Of Auditors

Front 1

Why are auditors needed?

Back 1

Shareholders and investors need to be able to rely on accuracy of published accounts

Front 2

What do external auditors provide?

Back 2

Indispensible checks and balances to monitor activites

Increased transparency

Front 3

Failure to appoint an auditor

Back 3

Can make company liable to a fine

Front 4

What are the duties of an Auditor?

Back 4

1. Report on accuracy of accounts.

2. Report on assets and liabilities.

3. If proper accounts not kept/ do not reflect true position auditor must say and can resign

4. " the auditor is a watchdog not a blood hound " RE Kingston Cotton Mill

Front 5

What are the rights of auditors?

Back 5

- access to books/ accounts at all times.

- demand relevant information from officers.

- receive same notices as members

- attend and speak on relevant matters at general meetings

Front 6

What are the liabilities of auditors?

Back 6

- act honestly with reasonable care and skill

- auditors liable for loss resulting from negligence in performance in duties

- auditor owes duty to company alone and not individual shareholders

Front 7

What is the purpose of an auditor report?

Back 7

- Give independent/ expert opinion on whether statements are accurate

- provide reassurance that information is accurate

- state whether fair view given of balance sheet/ profit and loss account

Front 8

Audit report in the UK

Back 8

Audit report must say whether company complies with UK corp gov code and provide evidence

Front 9

2 types of audit opinion

Back 9

Modified

Unmodified

Front 10

3 types of unmodified audit opinion

Back 10

Qualified: financial statements would be true other than particular matter

Adverse: material misstatements in accounts

Disclaimer of opinion: auditor unable to obtain information required to provide opinion

Front 11

Who is responsible for detecting error and fraud?

Back 11

BOD via internal controls. BOD responsible for monitoring effectiveness of internal control and are accountable to Shareholders

Front 12

Auditors and criminal liability

Back 12

Criminal offence to knowlingly/ recklessly cause an audit repoet to be misleading or false

Front 13

Audit opinion and independence

Back 13

Audit opinion should not be influenced by relationship with company (arthur anderson who shredded documents for enron)

Front 14

5 threats to auditor independence

Back 14

1. Self interest threat: auditor earning too much income. Judgement effected by trying to protect income

2. Self review threat: auditor does non audit work for comp - may not be as critical or challenge colleague work

3. Advocacy threat: audit firm asked to give formal support to company via public statements - acting as advocate -no longer independent

4. familiarity threat: auditor becomes too familiar with comp/ directors too willing to believe what is said without investigating

5. Intimidation threat: auditor feels threatened by management

Front 15

FRC review of audit service

Back 15

-wants to ensure auditors better serve public interest

Report will

- test effectiveness of independence rules and consider whether non audit work to be banned outright

- strengthen requirments for considering whether company id going concern

- review whether auditors do enough to conclude accounts not materially misstated

Front 16

SOX on non audit work for client

Back 16

Restricts certain types of non audit work i.e accounting records and financial statements, design of financial systems, internal audit systens

Front 17

Directorship of former auditors

Back 17

- ICAEW = acceptance of key management position is unacceptable threat unless 2 years has elapsed since conclusion of audit

UK Code: independence called into question when Director has been partner/ senior employee in any entity with material business relationship with company

Front 18

Rotation of audit partner

Back 18

In UK: Auditing practice board says that lead audit partner should be rotated every 5 years.

argument against: partner rotation would not have prevented enron or worldcom

Front 19

Audit firm rotation

Back 19

Changing audit firm after number of years enhances independence. Work of outgoing auditors is subject to so little to gain in doing a poor job

Disadvantage: incoming firm needs a few years to get to know the Company and may be unable to conduct audit to same standard as predecessor