OVERVIEW
Objective
¾
To describe the regulatory framework in which statutory audits take place.INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC)
STATUTORY AUDIT
STANDARDS ISSUED BY THE
IAASB
ETHICAL CODE
¾ Organization & Membership
¾ Mission
¾ IFAC Council
¾ Structure
¾ Session 4
¾ IAASB
¾ Codification
¾ Structure overview
¾ Audit requirement
¾ Audit exemption
¾ Eligibility
¾ RSBs
¾ Rights and duties
¾ Appointment
1
INTRODUCTION
¾
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.¾
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.¾
In many instances, the audit regulatory requirements required by a jurisdiction’s laws were delegated to the appropriate professional body to enact.¾
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 auniform 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”).
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Following the formation of the International Accounting Standards Committee (now the International Accounting Standards Board – IASB) in 1973, The Council of theInternational Federation of Accountants (IFAC) was established in 1977. Under the IFAC, the International Auditing Practices Committee (IAPC) was formed in 1979.
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Between 1980 and 1991 the IAPC issued International Auditing Guidelines (IAG), andaddendums 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.
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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).2
INTERNATIONAL FEDERATION OF ACCOUNTANTS
(IFAC)
2.1
Organisation and membership
¾
A non-profit, non-governmental, non-political international organisation of 155 member accountancy organisations (with 2.5m professional accountants) from 118 countries.¾
IFAC membership (full or as an associate) is open to national accountancy organisations¾
Through cooperation with member bodies and other accountancy organizations, IFAC initiates, coordinates and guides efforts to achieve international pronouncements for the accountancy profession.¾
Members (and associates) are required to participate in the IFAC Member BodyCompliance 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
¾
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.
¾
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
¾
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.
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Facilitating collaboration and cooperation among member bodies – to ensure thecompetence and integrity of accountants worldwide and to support accountants in their efforts to provide high quality services.
¾
Speaking out on behalf of the international profession – IFAC is the primary2.3
Structure
IFA C C ouncil
IFA C B oard
International A uditing and A ssurance Standards B oard
Forum of
Firm s O versight B oard Public Interest (PIO B )
International Public Sector A ccounting Standards B oard International Ethics
Standards B oard for A ccountants
International A ccounting Education
Standards B oard
C om pliance
A dvisory Panel Sm all and M edium Practices C om m ittee
D eveloping N ations C om m ittee
Professional A ccountants in
B usiness C om m ittee T ransnational
A uditors C om m ittee
2.3.1
IFAC Council
¾
Initial governance of IFAC rests with the IFAC Council.¾
This comprises one representative from each member body.¾
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
¾
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
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To develop guidance on professional ethics and promote its understanding and acceptance by member bodies.¾
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
2.3.5
Transnational Auditors Committee
¾
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”¾
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
¾
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.¾
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)
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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.¾
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.¾
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).¾
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.¾
The establishment of the PIOB was the result of a collaborative effort by theinternational 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.
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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.3
STANDARDS ISSUED BY THE IAASB
3.1
International Auditing and Assurance Standards Board (IAASB)
3.1.1
Objective
3.1.2
Operating procedures
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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.¾
The Consultancy Advisory Group gives representatives of the business community and international organisations the opportunity to contribute to the development ofinternational auditing guidance. Members of the Group represent organisations that have an interest in international auditing.
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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
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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.
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 re-issued if substantive changes made
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.
¾
ISAs, ISREs, ISAEs and ISRSs are collectively referred to as the IAASB’s Engagement Standards.¾
International Standards on Quality Control (ISQCs) are to be applied for all services falling under the IAASB’s Engagement Standards.¾
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.¾
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.¾
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.¾
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.¾
By their very nature, ISAs require auditors to use their professional judgement when applying them.¾
Practice Statements have the same authority as Standards and should be applied appropriately.¾
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.¾
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
Assurance Engagements other than Audits or Reviews of Historical Financial Information
Related Services
ISAs 100+ International Standards on
Auditing
ISREs 2000+ International Standards on
Review Engagements
ISAEs 3000+ International Standard on
Assurance Engagements
ISRSs 4000+ International Standards on Related Sevices
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Related services include: agreed-upon procedures (eg where the practitioner reports on the factual findings
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).
¾
Related services do 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.¾
Note that related services and assurance engagements other than audits and reviews (ISA 3000+) are outside the scope of the examination syllabus.4
STATUTORY AUDIT AND AUDITOR REQUIREMENTS
¾
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
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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.¾
Public services (e.g. providing Health, Education, etc) may also require an audit under related legislation.¾
Charities, Friendly Societies and Trusts may require audits under their charters, constitution or relevant legislation (and many charities are also companies).¾
Within some jurisdictions, exemptions to a statutory audit requirement are permitted, e.g.: dormant (non-trading) companies; and
4.2
Audit exemption
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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 costsinvolved.
4.2.1
Criteria
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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?).
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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)
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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
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Shareholders not involved in management need the assurance provided by an audit. The 10% rule provides reasonable protection for minority shareholders.
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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
¾
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.
¾
Trade creditors need audited financial statements to assess the entity’s ability to pay. Financial statements will be 6 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.
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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
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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.
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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.¾
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.
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In most jurisdictions, officers (i.e. directors) and employees of an entity (or any associated undertaking) are usually ineligible to become statutory auditors.¾
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).¾
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.¾
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
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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).¾
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.¾
Note that the ACCA is also a RQB (Recognised Qualifying Body) in that it is allowed to examine and award relevant professional qualifications.¾
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
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
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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.¾
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.¾
The monitoring of other auditors (ie those that do not have listed or public interestclients) is carried out by the member bodies (eg ACCA) who report directly to the POBA on their findings.
¾
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).¾
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.
¾
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.4.5
Rights and duties of auditors
4.5.1
Duties
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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).¾
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)
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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.
¾
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.¾
In other jurisdictions, such matters are expressly referred to in a “long-form” opinion.4.5.2
Rights
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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
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).
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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
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In many jurisdictions auditors are appointed by the members (share holders) to whom they report. This procedure may be delegated to directors, or under corporategovernance to a supervisory or audit committee, and then approved by members.
¾
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).¾
Yet in other jurisdiction, all appointments may be made by a government body.¾
In general, the appointment is for a period of one year. The auditors will then offerthemselves for re-appointment, eg at the annual general meeting of the entity, to be voted upon by the members. Re-appointment is not automatic.
¾
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 3 ‘Regulatory environment – corporate governance).See Session 5 for specific details of the audit appointment process.
4.7
Removal of auditors
4.7.1
Removal by directors
¾
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.¾
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.¾
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
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.
¾
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
¾
If, for whatever reason, the auditor no longer wishes to act for a client after the end of their current appointment, they simply do not offer themselves for re-election after completing their annual audit.¾
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.¾
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 theirreplacement to be proposed for appointment at the annual general meeting of the entity.
4.7.3
Resignation
¾
Whilst relatively rare, there are reasons why an auditor would resign from an engagement, eg significant limitations placed on the work of the auditor bymanagement, loss of trust/working relationship with management (eg significant doubt over management’s integrity), regulatory requirements (eg discovery of significant fraud).
¾
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)
The auditors may have the right to require the directors to call a special meeting of
members to discuss the circumstances of their resignation.
¾
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.¾
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 suchcircumstances 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:
¾
explain the development and status of International Standards on Auditing;¾
explain the relationship between International Standards on Auditing and national standards;¾
describe the regulatory environment within which statutory audits take place;¾
discuss the reasons and mechanisms for the regulation of auditors;¾
explain the statutory regulations governing the appointment, removal and resignation of auditors;¾
state the objectives and principle activities of statutory audit and assess its value (e.g. in assisting management to reduce risk and improve performance);