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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT OVERVIEW Objective To describe the regulatory framework in which statutory audits take place REGULATION INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC) STANDARDS ISSUED BY THE IAASB IAASB Codification Structure overview Organization & Membership Mission IFAC Council Structure STATUTORY AUDIT Audit requirement Audit exemption Eligibility RSBs Rights and duties Appointment Removal ETHICAL CODE Session 0201 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT INTRODUCTION As the concept of the independent external auditor developed in the late 1800s, individual countries established frameworks (eg through statutory requirements) to regulate the auditing profession, their relationship with the entities they could audit and the form of work they could conduct From their foundation (the ACCA was founded in 1904) the various professional bodies around the world also developed their own regulatory framework governing the way their members operated In many instances, the audit regulatory requirements required by a jurisdiction’s laws were delegated to the appropriate professional body to enact After several scandals caused by company collapses, many professional bodies began to issue formal auditing standards in the mid 1970s (eg 1976 in the UK) to ensure a uniform approach to all audits carried out by their members Before the issue of national standards, “best practice” was established by the leading firms (eg the “top 10”) Following the formation of the International Accounting Standards Committee (now the International Accounting Standards Board – IASB) in 1973, The Council of the International Federation of Accountants (IFAC) was established in 1977 Under the IFAC, the International Auditing Practices Committee (IAPC) was formed in 1979 Between 1980 and 1991 the IAPC issued International Auditing Guidelines (IAG), and addendums to these The first International Standard on Auditing (ISA) was issued in 1991 Many national jurisdictions and professional bodies are now adopting ISAs as their national auditing standards, mirroring the approach taken by many countries to IFRS Note the aim of the IFAC in ensuring a uniform, high standard of auditing and assurance practice across international borders As further company financial reporting scandals have occurred (the most “notorious” being Enron Corp 2000/2001 and WorldCom 2001/2002) the statutory and other regulations on auditors have been revised, expanded and tightened (eg issue of Corporate Governance codes, Sarbanes Oxley in the USA, removal of self-regulation from member bodies) INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC) 2.1 Organisation and membership A non-profit, non-governmental, non-political international organisation of 155 member accountancy organisations (with 2.5m professional accountants) from 118 countries IFAC membership (full or as an associate) is open to national accountancy organisations and international organisations that have an interest in the international accountancy profession 0202 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT Through cooperation with member bodies and other accountancy organizations, IFAC initiates, coordinates and guides efforts to achieve international pronouncements for the accountancy profession Members (and associates) are required to participate in the IFAC Member Body Compliance Program Through the application of a series of Statements of Membership Obligations, the program is designed to support the adoption and implementation of high quality auditing, accounting, ethical and educational standards as well as quality assurance and enforcement mechanisms (across international boundaries) 2.2 Mission and primary activities 2.2.1 Mission To serve the public interest through strengthening the worldwide accountancy profession and contribute to the development of strong international economies by: establishing and promoting adherence to high-quality professional standards; furthering the international convergence of such standards; and speaking out on public interest issues where the profession's expertise is most relevant In carrying out this mission, IFAC: supports the work of the International Accounting Standards Board (IASB); and acts as an advisor and coordinator for its members 2.2.2 Primary activities Serving the public interest through the development of standards in the areas of auditing, education, ethics, and public sector financial reporting; by advocating transparency and convergence in financial reporting; by providing best practice guidance for professional accountants employed in business; and by implementing a membership compliance program Facilitating collaboration and cooperation among member bodies – to ensure the competence and integrity of accountants worldwide and to support accountants in their efforts to provide high quality services Speaking out on behalf of the international profession – IFAC is the primary spokesperson for the international profession and speaks out on a wide range of public policy issues 0203 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT 2.3 Structure IF A C C o u n cil IF A C B o ard In tern atio n al A u d itin g an d A ssurance S tan d ard s B o ard T ran snatio n al A u d itors C o m m ittee F o ru m o f F irm s 2.3.1 Intern ation al E thics S tan d ard s B o ard for A cco u n tan ts C o m p lian ce A d viso ry P anel Intern ation al A cco u n tin g E d u catio n S tan d ard s B o ard S m all an d M ed iu m P ractices C o m m ittee In tern atio n al P u blic S ector A ccou n tin g S tand ard s B o ard D evelo p in g N atio ns C o m m ittee P ro fessio nal A cco un tan ts in B u sin ess C o m m ittee P u blic In terest O versight B o ard (P IO B ) IFAC Council Initial governance of IFAC rests with the IFAC Council This comprises one representative from each member body The Council meets once a year and is responsible for deciding constitutional questions and electing the Board 2.3.2 International Auditing and Assurance Standards Board (IAASB) objective To improve the uniformity of auditing practices and related services throughout the world by issuing pronouncements (e.g ISAs) on audit and assurance functions and promoting their acceptance worldwide 2.3.3 International Ethics Standards Board objective To develop guidance on professional ethics and promote its understanding and acceptance by member bodies To continually monitor and stimulate debate on a wide range of ethical issues to ensure that the IFAC ethical guidance is responsive to the expectations and challenges of individuals, businesses, financial institutions and others relying on accountants’ work 2.3.4 International Accounting Education Standards Board objective To develop guidance, conduct research, and facilitate the exchange of information to ensure that accountants are adequately trained to meet their responsibilities 0204 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT 2.3.5 Transnational Auditors Committee Transnational audits are “those audits of financial statements which are or may be used across national borders; this will include all companies with listed equity or debt and other major public interest entities such as banks and other financial institutions” The terms of reference for the committee are to: Encourage member firms to meet high standards in the international practice of auditing Identify audit practice issues to be considered by the appropriate IFAC committees Provide a forum to discuss “best practices” in audit and assurance procedures Act as a formal conduit for interaction among transnational firms and international regulators and financial institutions 2.3.6 The Forum of Firms The Forum of Firms brings together firms which perform transnational audits in order to involve them more closely in IFAC’s activities thus enhancing its effectiveness and ability to achieve its (IFAC’s) mission The objectives of the Forum include: Promoting high quality standards of auditing and financial reporting Encouraging the use of ISAs and IFRSs as a step towards the global harmonization of accounting and auditing standards Participating in IFAC’s standard setting activities in the areas of Auditing, Assurance and Related Services, Ethics and Education Participating in IFAC’s standard setting activities through the PIOB Developing an enhanced dialogue between the firms and international regulators and other financial institutions Encouraging convergence of national systems of regulation Implementation of the Forum’s Quality Standard 2.3.7 The Public Interest Oversight Board (PIOB) Following a series of US financial reporting scandals in the late 1990s and early 2000 (many of which had far reaching international consequences, eg Enron and World Com) the IFAC noted that the public trust in auditors had been seriously impaired They recognised that whilst the IFAC standard setting and quality control processes were well established and of a high quality, this did not appear to be the case in the eyes of the entity stakeholders and the general public To regain public trust, the IFAC decided that a high quality, transparent standardsetting processes with public and regulatory input, together with regulatory monitoring and public interest oversight, was necessary to enhance the quality of external audits of entities 0205 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT The PIOB was formally established in February 2005 to oversee IFAC's auditing and assurance, ethics, and education standard-setting activities as well as its compliance programme (designed to encourage member bodies to adopt international standards and to implement quality assurance, investigation and discipline programs) The objective of the Public Interest Oversight Board (PIOB) is to increase the confidence of investors and others that the public interest activities of the IFAC are properly responsive to the public interest This is achieved by ensuring that auditing and assurance, ethics and educational standards for the accounting profession are set in a transparent manner that reflects the public interest The establishment of the PIOB was the result of a collaborative effort by the international financial regulatory community (eg the International Organisation of Securities Commissions, the Basal Committee, the World Bank and the European Commission amongst others) working with IFAC The PIOB also maintains active liaison with independent audit regulators/monitors around the world, many of which were also established in response to Enron et al Note that before Enron, the regulation of auditors was primarily undertaken by a member body (eg ACCA) Post Enron, many jurisdictions required that the monitoring of (at least) listed and public interest company auditors be carried out by an independent body STANDARDS ISSUED BY THE IAASB 3.1 International Auditing and Assurance Standards Board (IAASB) 3.1.1 Objective To improve the uniformity of auditing practices and related services throughout the world by issuing pronouncements (e.g ISAs) on audit and assurance functions and promoting their acceptance worldwide 0206 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT 3.1.2 Operating procedures Project is proposed and input sought If approved, project assigned to a Task Force Research carried out and Exposure Draft prepared ED placed on IFAC website and widely distributed for comment to member bodies, interested parties and general public Comments received are considered, ED revised and reissued if substantive changes made Revised ED approved and issued as a Standard Projects are identified by the members of the IAASB, the Consultancy Advisory Group, the Forum of Firms, national auditing standard setting bodies and IFAC members The Consultancy Advisory Group gives representatives of the business community and international organisations the opportunity to contribute to the development of international auditing guidance Members of the Group represent organisations that have an interest in international auditing The Task Force carries out the basic research and development of an Exposure Draft (ED) This may be done as a joint project with a national auditing standard setting body 3.1.3 Scope and authority of documents issued Documents issued by the IAASB include: International Standards on Auditing (ISA) to be applied in the audit of financial statements International Standards on Review Engagements (ISREs) to be applied in the review of historical financial information International Standards on Assurance Engagements (ISAEs) to be applied in assurance engagements dealing with subject matters other than historical financial information 0207 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT International Standards on Related Services (ISRSs) to be applied to compilation engagements, engagements to apply agreed upon procedures to information and other related services engagements as specified by the IAASB International Auditing Practice Statements (IAPSs) to provide interpretive guidance and practical assistance in implementing ISAs and to promote good practice International Review Engagement Practice Statements (IREPSs), International Assurance Engagement Practice Statements (IAEPSs) and International Related Services Practice Statements (IRSPSs) are issued to serve the same purpose for implementation of ISREs, ISAEs and ISRSs respectively ISAs, ISREs, ISAEs and ISRSs are collectively referred to as the IAASB’s Engagement Standards International Standards on Quality Control (ISQCs) are to be applied for all services falling under the IAASB’s Engagement Standards ISAs, taken together, provide the necessary standards for the auditor’s work to enable them to express an opinion on the financial statements being audited All Standards that are relevant to the audit process for a particular assignment must be followed If the auditor is unable to obtain reasonable assurance as to whether the financial statements are free from material misstatement, ISAs require that they modify their opinion or withdraw from the engagement Each Standard contains objectives and requirements (“shall”) with related guidance (introductory, explanatory, application, definitions and other material, including appendices) The entire text of a Standard must be understood in order to apply the requirements of that Standard Each of the objectives within a Standard must be considered within the context of the overall objective of the audit as a whole If an objective cannot be achieved, the auditor must use their judgement to evaluate the impact on their ability to achieve the overall audit objective By their very nature, ISAs require auditors to use their professional judgement when applying them Practice Statements have the same authority as Standards and should be applied appropriately In exceptional circumstances, a professional accountant may judge it necessary to depart from a basic principle or essential procedure of a Standard (and Practice Statement) to achieve more effectively the objective of the engagement When such a situation arises, the professional accountant should be prepared to justify the departure The requirements of the Standards not override local regulations governing audit and assurance in a particular country If local regulations have been followed and ISAs (and Practice Statements) that are applicable to the engagement have not been applied in their entirety, then compliance with ISAs cannot be stated as fact 0208 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT The effective date of a Standard is stated within that standard Unless specifically stated otherwise, the auditor can apply the requirements of that standard as soon as it has been issued 3.2 Codification The codification of the Standards by subject matter is as follows (the 100 to 800 series are for International Standards on Auditing (ISA)): 100 series Introductory Matters 200 series General Principles and Responsibilities 300 series Risk Assessment and Response to Assessed Risks 400 series (continuation of 300 series) 500 series Audit Evidence 600 series Using the Work of Others 700 series Audit Conclusions and Reporting 800 series Specialized Areas 1000 series International Auditing Practice Statements(IAPS) 2000 series International Standards on Review Engagements (ISRE) 3000 series International Standards on Assurance Engagements (ISAE) 4000 series International Standards on Related Services (ISRS) 3.3 Structure overview IFAC Code of Ethics for Professional Accountants Services coved by IAASB Pronouncements ISQCs International Standards on Quality Control International Framework for Assurance Engagements Audit and Reviews of Historical Financial Information ISAs 100+ International Standards on Auditing Assurance Engagements other than Audits or Reviews of Historical Financial Information ISREs 2000+ International Standards on Review Engagements ISAEs 3000+ International Standard on Assurance Engagements Related Services ISRSs 4000+ International Standards on Related Sevices Related services include: agreed-upon procedures (eg where the practitioner reports on the factual findings of their procedures as agreed with the client – no conclusion is given); and 0209 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT compilation of financial statements (eg where the practitioner prepares a set of financial statements from the books and records of the entity for the directors, but does not audit or provide any form of assurance on them) Related services not provide any form of assurance and no opinion (positive or negative basis) is given Any report or comments made by the practitioner are limited to the facts as found by the practitioner Note that related services and assurance engagements other than audits and reviews (ISA 3000+) are outside the scope of the examination syllabus STATUTORY AUDIT AND AUDITOR REQUIREMENTS Because of the importance of the company auditor and their relationship between directors and shareholders, the role of audit and duties of the auditor are often specifically laid down in statute Statutory regulations cover, for example: Requirement for audited accounts and audit exemption Eligibility and requirements to become and remain statutory auditors Appointment, removal or resignation of auditors Auditors’ report, duties and rights Monitoring of auditors Rights of shareholders to raise audit concerns at the company’s annual general meeting Liability of auditors Specific reports required, eg standard annual audit; report on interim financial statements for listed companies; reports on private companies becoming listed; reports on accounts of small companies; redemption and buy back of share capital 4.1 Requirement for audit In many jurisdictions the requirements for entities to be audited are set out in statute For example, companies acts (e.g for private and public companies limited by shares) within the UK, which in turn enact the requirements of European Directives on audits and auditors Public services (e.g providing Health, Education, etc) may also require an audit under related legislation Charities, Friendly Societies and Trusts may require audits under their charters, constitution or relevant legislation (and many charities are also companies) Within some jurisdictions, exemptions to a statutory audit requirement are permitted, e.g.: dormant (non-trading) companies; and “small” companies (meeting relevant size criteria) 0210 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT 4.2 Audit exemption It is a standard requirement in nearly all jurisdictions that companies must be audited However, in some jurisdictions it is recognised that for a certain level of company, the benefit of having an audit is relatively limited and/or may not justify the costs involved 4.2.1 Criteria Will vary from jurisdiction to jurisdiction, but a general understanding of a “small company” revolves around: Concentration of ownership and management in a small number of individuals, eg owner managers Few sources of income Uncomplicated management structures and accounting functions Usually limited control functions Greater involvement by management in overseeing/applying controls (thus greater potential for management override?) In the UK size limits are applied as follows (both must be met): Turnover less than £5.8m (GBP) Statement of financial position total less than £2.8m (GBP) In addition: If the company is listed, involved in financial services or a parent company, it cannot be exempt from audit If members holding more than 10% of an eligible company’s issued share capital require an audit, an audit must be carried out 4.2.2 Arguments for and against Shareholders not involved in management need the assurance provided by an audit The 10% rule provides reasonable protection for minority shareholders Audited financial statements are essential for valuation of shares in an unlisted company A separate valuation exercise can be carried out at any time Shareholders expecting to dispose of their shares after the next year end and who hold more than 10% can request an audit at the next year end There are other critical factors to valuing a share holding outside of the scope of an audit 0211 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT Banks rely on audited financial statements when making loans and reviewing the value of security The bank can require an audit to be carried out as a condition of the loan Valuations of security (ie land and buildings) are relatively easy to obtain Reviews can be carried out of management accounts, budgets and cash flows Trade creditors need audited financial statements to assess the entity’s ability to pay Financial statements will be to 18 months out of date, depending on when the credit is taken Trade and credit references will be taken before any substantial credit is granted Management guarantees can also be given/taken Management need an audit as an independent check An audit can still be carried out if management decide to have one Other assurance services and reviews can be provided to management to cover the specific benefits management believe were obtained from an audit 4.3 Eligibility to become an auditor Most jurisdictions require that to be a statutory auditor (only recognised statutory auditors may carry out statutory audits, eg of companies) a person or firm (usually a partnership, but may be a company) must be appropriately qualified For example: a member of a recognised professional body (e.g in the UK a member of ACCA); or holding an approved overseas qualification Note that, for example, within the UK (and the EU) it is essential that an ACCA member has studied and passed the Advanced Auditing and Assurance paper (P7) Without this paper they would not be able to act as a statutory auditor (referred to as a registered auditor within the UK) and sign off audit reports Being “appropriately qualified” not only means having passed examinations of a recognised body, but also: obtaining a minimum number of years of practical and post-qualified relevant audit experience (to obtain a practicing certificate and statutory auditor status); continuous application of ethical criteria; continuous relevant practical experience; and continuous professional education Many countries now have “mutual recognition” arrangements by which, for example, after passing country specific examinations, eg law and taxation (in the language of that country) a statutory auditor of one country may become a statutory auditor of another 0212 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT In most jurisdictions, officers (i.e directors) and employees of an entity (or any associated undertaking) are usually ineligible to become statutory auditors Although statute is often not prescriptive in barring others (e.g family and friends) from being a company’s auditor, this is addressed by the IFAC ethical codes (see Session 4) In addition to educational and experience requirements, in most jurisdictions, there are many other statutory requirements that auditors must comply with in order to remain a statutory auditor By following the requirements of the IFAC’s Code of Professional Ethics, International Standards on Quality Control and Statements of Membership Obligations, most (if not all) of these statutory requirements would be meet If a jurisdiction’s statutory requirements are less than those of the IFAC regulations, the IFAC regulations prevail In the unlikely event that applying an IFAC requirement would be illegal in a jurisdiction, the statutory provision overrides that of the IFAC The IFAC’s members in that jurisdiction are then expected to lobby for the appropriate change in statute to bring the conflicting regulation into line with the IFAC 4.4 Recognised Supervisory Bodies (RSBs) 4.4.1 Basic concept As an example of the application of the statutory environment, within the UK whilst the regulation of auditors is a statutory matter (eg the Companies Act 2006) it is managed through the use of Recognised Supervisory Bodies (RSBs) An RSB is a professional body (eg ACCA) whose rules, regulations and procedures have been reviewed (and approved by government) and whose members are recognised by statute as being eligible (after having met appropriate criteria) to sign audit reports on companies and public interest entities That is, whilst statute lays down the “day to day management” requirements, the RSB implements them Note that the ACCA is also a RQB (Recognised Qualifying Body) in that it is allowed to examine and award relevant professional qualifications RSBs must have rules to ensure that: A person is not eligible unless “appropriately qualified”, eg ACCA including the higher level auditing paper Only “fit and proper” persons are appointed as company auditors, eg have meet all appropriate criteria Company audit work is conducted “properly and with integrity”, eg following ISAs including ethical requirements Technical standards are applied to company audit work, eg quality control procedures and ISAs 0213 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT Competence of company auditors is maintained, eg continuing professional development Compliance with rules is effectively monitored and enforced, eg quality control procedures and reviews Admission and expulsion of members is “fair and reasonable” Investigation of complaints against members promptly and thoroughly conducted Company auditors take steps to ensure that they can meet monetary claims against them for penalties and damages (e.g they carry appropriate level insurance – Professional Indemnity Insurance (PII)) 4.4.2 Monitoring of RSBs and auditors Continuing the UK example, the monitoring and oversight of the RSBs is carried out by an independent body, the Professional Oversight Board for Accountancy (POBA) which is part of the Financial Reporting Council (FRC) The FRC is a unified, independent regulator Part of the POBA’s role is to monitor all listed and public interest audits This function is carried out by the Audit Inspection Unit (AIU – see www.frc.org.uk/pob ) through visiting and reviewing the audit procedures of all firms that carry out such audits The monitoring of other auditors (ie those that not have listed or public interest clients) is carried out by the member bodies (eg ACCA) who report directly to the POBA on their findings Prior to Enron, the member bodies monitored all auditors However, as part of the UK profession’s review of the impact and lessons to be learnt from Enron, the monitoring of auditors who audited “high risk” entities (ie listed and public interest) was transferred to an independent body (the POBA) The basic functions of monitoring (AIU and ACCA) are: to ensure that the RSB and firms are in compliance with the statutory (and IFAC) audit requirements; and to assist in the raising of standards within the profession Similar processes exist in other jurisdictions, eg the USA with the Sarbanes-Oxley Act being the prime driver for the independent regulation of public interest audits An interesting “duplication” currently arises in that any auditor of a company (or a subsidiary) that is listed in the USA, must be monitored by the US regime This means, for example, that a UK auditor of a UK subsidiary of a US listed company must be monitored (and visited) by two sets of regulators – the US and UK 0214 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT 4.5 Rights and duties of auditors 4.5.1 Duties The primary duty of a statutory auditor is (usually) to report to the company’s members on financial statements (i.e statement of financial position, statement of comprehensive income, statement of cash flows, accompanying notes etc) prepared to an accounting reference period (usually for a year) The audit report must usually state explicitly: the financial statements audited; the financial framework used in preparing them; the separate duties of directors and auditors; the scope of the audit (identifying the audit standards used); an opinion (e.g in true and fair terms – see Session 1); and compliance (e.g in accordance with the relevant legislation and if non-compliance, details as such must be given) In some jurisdictions a “short-form” opinion is required which refers to other matters only by exception (Note that such matters would be referred to as part of the auditors’ responsibilities within the report.) For example, in the UK a “clean” audit opinion assumes that: proper accounting records have been kept; the accounts are in agreement with the records and returns; all necessary information and explanations have been received by the auditors; proper returns, adequate for audit purposes, have been received from any branches not visited by the auditor; information, as required by law to be disclosed, on directors’ remuneration and other transactions has been disclosed Within the UK, it is a criminal offence for auditors not to refer to any of these matters in their report if they have not been applied In other jurisdictions, such matters are expressly referred to in a “long-form” opinion 4.5.2 Rights An auditor cannot fulfil statutory duties without commensurate rights (which must also be legislated) For example: To have access at all times to the books, accounts and vouchers of the reporting entity To require from officers of the company any information and explanations considered necessary for the purposes of the audit 0215 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT To receive notice of, attend and be heard at general meeting of the company on business which concerns them as auditor (e.g a resolution to remove them from office) Also, the auditor may have rights associated with their vacation of office (e.g by resignation or removal) to bring matters to the attention of members and creditors (e.g if the auditor is removed because he gives a qualified audit opinion, or if he resigns because he is not given access to necessary information) 4.6 Appointment of auditors In many jurisdictions auditors are appointed by the members (share holders) to whom they report This procedure may be delegated to directors, or under corporate governance to a supervisory or audit committee, and then approved by members Directors may have “emergency powers” and be allowed to make appointments in limited circumstances (e.g upon the death of a sole practitioner auditor; for the first set of accounts of a new company to be audited) Yet in other jurisdiction, all appointments may be made by a government body In general, the appointment is for a period of one year The auditors will then offer themselves for re-appointment, eg at the annual general meeting of the entity, to be voted upon by the members Re-appointment is not automatic The auditor’s remuneration is generally fixed by those who appoint them In practice, members usually delegate the negotiation of this to the directors, or under corporate governance procedures to be recommended by the audit committee (see Session ‘Regulatory environment – corporate governance) See Session for specific details of the audit appointment process 4.7 Removal of auditors 4.7.1 Removal by directors In most jurisdictions, it is more difficult to remove auditors than it is to appoint them This is for the simple reason that auditors should not be removed just on the whim of directors, eg because the auditor wants to qualify their opinion and the directors disagree As a general rule, as the members of an entity usually appoint the auditor, it will only be the members who are able to remove them Whilst the exact requirements may differ from legal jurisdiction to jurisdiction, the following procedures are usually required: The directors must inform the auditor in writing of their intention to remove them as auditor of the entity 0216 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT A special meeting of members must be held to discuss/vote upon the directors’ resolution to remove the auditor It is not uncommon for the timing of the removal of auditors to coincide with the annual general meeting of the entity The auditor should be informed of the meeting and be able to make representations at the meeting as to why they should stay in office (if they so wish) They may also require the directors to include such representations within the notice to members of the meeting If the auditors are removed, the directors must inform the statutory regulatory authorities and statutory audit authorities (eg the RSB and POBA) The auditors must produce a ‘statement of circumstances’ concerning their removal which must be given to the entity and also to the authorities If there are no matters the auditors wish to bring to the attention of the members, a statement to this effect should be given to members and the authorities Note that in all circumstances of auditors no longer acting for an entity, a ‘statement of circumstances’ or ‘of no circumstances’ must be made by the auditors and the entity must seek replacement auditors 4.7.2 At point of re-election If, for whatever reason, the auditor no longer wishes to act for a client after the end of their current appointment, they simply not offer themselves for re-election after completing their annual audit In most jurisdictions the auditor will be required to provide a statement to members (and appropriate regulatory and audit authorities) that there are no circumstances that need to be brought to the attention of members As a matter of professional courtesy, the auditor will usually have discussed with management their decision not to seek re-appointment in good time to allow their replacement to be proposed for appointment at the annual general meeting of the entity 4.7.3 Resignation Whilst relatively rare, there are reasons why an auditor would resign from an engagement, eg significant limitations placed on the work of the auditor by management, loss of trust/working relationship with management (eg significant doubt over management’s integrity), regulatory requirements (eg discovery of significant fraud) In most jurisdictions the following procedures may apply: Upon resignation, the auditors must give written notice to the client This would then be sent to the appropriate regulatory and audit authorities A ‘statement of circumstances’ (or a statement that there are no circumstances) must also be sent to the authorities and the members/shareholders of the entity (and others who are entitled to receive a copy of the financial statements) 0217 SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT The auditors may have the right to require the directors to call a special meeting of members to discuss the circumstances of their resignation In all resignation circumstances the auditor must consider their professional duty to complete their engagement (eg they should not resign to avoid giving a qualified audit opinion) and the legal ramifications of resignation In some situations, eg fraud, suspicion of money laundering, resignation may result in the auditor being charged with a criminal offence (see Session 11) In such circumstances the auditor should seek ethical and legal advice before taking any action (eg from the ACCA and solicitors) FOCUS You should now be able to: explain the development and status of International Standards on Auditing; explain the relationship between International Standards on Auditing and national standards; describe the regulatory environment within which statutory audits take place; discuss the reasons and mechanisms for the regulation of auditors; explain the statutory regulations governing the appointment, removal and resignation of auditors; state the objectives and principle activities of statutory audit and assess its value (e.g in assisting management to reduce risk and improve performance); describe the limitations of statutory audits 0218 ... professional bodies began to issue formal auditing standards in the mid 1970s (eg 1976 in the UK) to ensure a uniform approach to all audits carried out by their members Before the issue of national... and is responsible for deciding constitutional questions and electing the Board 2.3.2 International Auditing and Assurance Standards Board (IAASB) objective To improve the uniformity of auditing... considered by the appropriate IFAC committees Provide a forum to discuss “best practices” in audit and assurance procedures Act as a formal conduit for interaction among transnational firms and international
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