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5.

(A)

International Standards on Auditing

Dear Garnett, I have put together information regarding your concerns about the regulatory framework that applies to the auditors. Due process of the IAASB involved in producing an ISA. International Standards on Auditing (ISA) are produced by the International Auditing and Assurance Standards Board (IAASB), a technical committee of International Federation of Accountants IFAC. ISAs are developed in consultation with interested parties and are developed with due regard for national standards on auditing. Subjects for studies are selected by a subcommittee established for that purpose. The IAASB delegates to the subcommittee the initial responsibility for the preparation and drafting of auditing standards and statements. An exposure draft is prepared for consideration, if approved, the draft is distributed for comments by member body of IFAC and other interested parties. Comments received in response to the exposure draft are then considered and it may be revised as a result. If this is approved, it is issued as a definitive ISA or as an International Auditing Practice Statement IAPS. Overall authority of ISAs and how they are applied in individual countries ISAs are to be applied in the audit of historical financial information. ISA do not override the local regulations governing the audit of financial or other information in a particular country. To the extent that ISA conform with local regulations on a particular subject, the audit of financial or other information in that country in accordance with local regulations will automatically comply with the ISA regarding that subject In the event that the local regulations differ from, or conflict with, ISAs on a particular subject, member bodies should comply with the obligations of members set forth in the IFAC Constitution as regards these ISAs, that is encourage changes in local regulations to comply with ISAs. The extent to which an auditor must follow ISA. There is a need for auditors to be regulated so that auditors follow the same standards. Auditors have to follow rules issued by a variety of bodies, some obligations are imposed by governments in law, or statute. Some obligations are imposed by the professional bodies to which auditors are required to belong, such as the ACCA.

The extent to which ISAs apply to small entities. ISAs apply to the audit of financial information of any entity regardless of its size, small businesses possess a combination of characteristics which make it necessary for the auditors to adapt their approach to the circumstances surrounding the small business engagement.

10. Confidentiality and independence (A) Confidentiality requires members to refrain from disclosing information acquired in the course of professional work except where: Consent has been obtained from the client, employer or other proper source There is a public duty to disclose There is a legal or professional right or duty to disclose

There are two types of disclosures, voluntary disclosure and obligatory disclosure Voluntary disclosure Voluntary disclosure is necessary in the following situations where it is the need to protect the members interest (example to enable him to sue for fees or defend an action such as negligence) . disclosure is compelled by the process of law, (example where in an action a member is required to give evidence) There is a public duty to disclose (example where an offence has been committed which is contrary to the public interest) Disclosure to non-governmental bodies which have the statutory powers to compel disclosure

Obligatory disclosure If a member knows or suspects his client to have committed money-laundering, treason, drug-trafficing or terrorist offences, he is obliged to disclose all the information at his disposal to a competent authority. Under ISA 250 auditors should consider whether non-compliance with laws and regulations affect the accounts. Auditors may have to include in their audit report a statement that non-compliace

has lead to significant uncertainties or non-compliance means that the auditor disagrees with the way certain items have been treated in the accounts.

(B) Threat Familiarity threat Mr. Grace has been audit partner for eight years. The long association with Ancients may be a threat to independence. Taxation fee remains unpaid for work done over six months before. This can be seen as an interest free loan to Ancients. This is a threat to independence. Suggestion Mr. Grace should be rotated and is not to return to Ancient (if necessary) until a five year period has passed. Mckay should discuss this with the directors of Ancients find the reason for not paying the fee. If this is not resolved then no more work should be done by Mckay or the assurance firm may resign. The firm, Mckay will have to remove Mr. Grace from this account so as to alleviate the threats that exists.

Self interest threat

Self interest threat

Allyson Grace has been appointed as financial director of Ancients. This is a serious threat to independence and objectivity. There is a close family relationship as Allison is the daughter of Mr. Grace. He as the audit partner will have to give an opinion on the financial statements that is his daughter holds a direct influence over. Hospitality meal to audit staff. This also a threat to independence

Self- interest threat

This should not be accepted by the audit staff.

11. (A)

NorthCee

Threat to independence Audit partner remained unchanged

Explanation

How to manage threat

The long association with the client may be a threat to independence. This can be a familiarity threat An audit partner is to be rotated after five years.

The audit partner is to be rotated as he has reached the five year limit

Preparation of the financial statements

The audit manager has been asked to continue to prepare the companys financial statements as in previous years, this is a self-review threat.

The audit manager can either refuse the request or make sure to use separate teams, one for preparing the financial statements and the other to perform the audit. This invitation should decline.

Invitation to evening reception

The audit manager and audit partner has been invited to an evening reception; this will lead to familiarity threat. The audit manager has inherited a 5% share capital in NorthCee, a member of the assurance firm should not have a financial interest in a client as this gives rise to self-interest threat Taxation fee remains unpaid for work done over six months before. This can be seen as an interest free loan to Ancients. This is a threat to independence.

Inheritance of share capital

The audit manager should either declare his inheritance and dispose of them or he could be transferred to another client

Outstanding fee for taxation service

Dark & Co. should discuss this with the directors of NorthCee to find the reason for not paying the fee. If this is not resolved then no more work should be done by Dark & Co. or the assurance firm may resign.

(B) Requirements to meet corporate governance Every company should be headed by an effective board which is collectively responsible for the success of the company. There should be a clear division of responsibility at the head of the company between the running of the board and the executive responsibility for the running of the companys business. No individual should have unfettered powers of decision The board should include a balance executive and non-executive directors such that no group can dominate the boards decision There should be a formal rigorous and transparent procedure for the appointment of new directors of the board The company should have an internal audit department which can set up and review the internal controls of the organization The company should set up procedures and policies to establish a sound internal control system There should be a remuneration committee which should have at least three non-executive directors.

(C) Communication with audit committee The audit committee can help to improve the quality of the financial reporting, by reviewing the financial statements on behalf of the board The committee can strengthen the position of the external auditor, by providing a channel of communication and forum for issues of concern The committee can provide a framework within which the external auditor can assert his independence in the event of a dispute with management.

12 (A)

Stark

Threat Familiarity

Explanation Mr. Son has been the engagement partner for the last nine years. This is a familiarity threat due to the long period he has worked with the same client The firm provides taxation service for Starks, this is a self-review threat as the staff may be reviewing their own work Zoe who is Mr. Sons daughter is to join the audit team; this is another familiarity threat as her father is the engagement partner. Ali and Co is expected to represent Stark in a dispute concerning taxation; this will lead to advocacy threat.

How to manage threat Mr. Son should be rotated to another team as this is past five years which is the limit.

Self-review

The firm should use separate teams to provide the taxation services and to perform the audit Either Mr. Son or Zoe should be removed from the audit team, as there is a close family relationship.

Familiarity

Advocacy

The firm should decline the request to represent Starks.

(B) Benefits of establishing an internal audit department Having an internal audit department will present a positive image to the companys shareholders. The external auditors can use the work of the internal auditors; this will help to reduce the cost of audit The internal audit department can be effective in the assistance of accounting standards in the company and to implementing new standards. The internal control system is limited; having an internal audit department can implement and maintain good internal control policies and procedures.

16.

MonteHodge Co.

(A) Advantages The advantages of outsourcing internal audits o o o o o Staff do not need to be recruited, as the service provider has the expert knowledge and can provide skilled staff Cost saving in terms of employee salaries, training and recruitment expenses Immediate provision of internal audit department The service contract can be for the appropriate time scale such as a two week or one month project With the time scales being flexible, a team of staff can be provided if required

Disadvantages The advantages of outsourcing internal audits o o o Cost may be high enough to force entity to choose not to have an internal audit department at all. Frequent staff changes resulting in poor quality service being provided due to the lack of understanding of clients systems and operations. Independence and objectivity issues if internal audit department is provided by the same firm

(B) Reasons for having an internal audit department The internal control system is limited; having an internal audit department can implement and maintain good internal control policies and procedures Having an internal audit department can be helpful in statutory audits, the internal auditor can liaise with the external auditors, particularly where the external auditors can use the work of the internal auditor, also the internal auditor can check to ensure that the external auditor are reporting back to the board all that they required to under the auditing standards. The internal audit department can be effective in the assistance of accounting standards in the company and to implementing new standards. The internal auditors can provide support for the financial accountant in the areas as needed

As a large company with 15 different locations, an internal audit department can assist management in achieving corporate objectives.

Reasons against having an internal audit department Implementing an internal audit department can be expensive such as recruitment cost, salaries. The company shareholders are all family, therefore an internal audit department may not be needed as in a public company. As the company is not listed, it may not be necessary to have an internal audit department.