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5 Education, examinations and experience

5 Education, examinations and experience

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3.5.2 Examinations
Accountants should demonstrate that they have passed an examination of professional competence. This
examination must assess not only the necessary level of theoretical knowledge but also the ability to
apply that knowledge competently in a practical situation. Objective evaluation of professional
examinations is important.

3.5.3 Experience
It is crucial for any professional to not only have a sound theoretical knowledge, but also be able to apply
that knowledge competently in the work place.
Individuals should have completed an appropriate period of approved and properly supervised practical
experience primarily in the area of audit and accountancy and in a suitable professional environment.

3.6 Eligibility to act as auditor
Eligibility to act as an auditor is likely to arise from membership of some kind of regulatory body.
Bodies of this type will offer qualifications and set up rules to ensure compliance with any statutory
requirements related to auditors. In this way national governments will control who may act as an auditor
to limited liability companies, or to any other body requiring a statutory audit.
The regulatory body should have rules to ensure that those eligible for appointment as a company auditor
are either:



Individuals holding an appropriate qualification, or
Firms controlled by qualified persons

Regulatory bodies should also have procedures to maintain the competence of members. The regulatory
body's rules should ensure that only fit and proper persons are appointed as company auditors and that
company audit work is conducted properly and with professional integrity.
The regulatory body should include rules as to the technical standards to be followed when carrying out
company audit work (eg following International Standards on Auditing (ISAs)).
The regulatory body should also provide for adequate monitoring and enforcement of compliance with its
rules.
Membership of a regulatory body is the main prerequisite for eligibility as an auditor.
A person should be ineligible for appointment as a company auditor if they are:




An officer or employee of the company
A partner or employee of such a person
A partnership in which such a person is a partner

There may be further rules about connections between the company or its officers and the auditor,
depending on local statutory rules.

3.7 Supervisory and monitoring roles
Some kind of supervision and monitoring regime should be implemented by the regulatory body. This
should inspect auditors on a regular basis.
The frequency of inspection will depend on the number of partners, number of offices and number of
listed company audits (these factors may also be reflected in the size of annual registration fees payable
by approved audit firms).
The following features should be apparent in each practice visited by the monitoring regulatory body.
(a)

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A properly structured audit approach, suitable for the range of clients served and work undertaken
by the practice

2: Statutory audit and regulation ⏐ Part A Audit framework and regulation

(b)

Carefully instituted quality control procedures, revised and updated constantly, to which the
practice as a whole is committed

(c)

Commitment to ethical guidelines, with an emphasis on independence issues

(d)

An emphasis on technical excellence

(e)

Adherence to the 'fit and proper' criteria by checking personnel records and references

(f)

Use of internal and, if necessary, external peer reviews, consultations etc

(g)

Charging appropriate fee per audit assignment

4 International Standards on Auditing
FAST FORWARD

Dec 10

International Standards on Auditing are set by the International Auditing and Assurance Standards
Board.

4.1 Rules governing audits
We discussed in Chapter 1 the various stakeholders in a company, and the various people who might read
a company's financial statements. Consider also that some of these readers will not just be reading a
single company's financial statements, but will also be looking at those of a large number of companies,
and making comparisons between them.
Readers want assurance when making comparisons that the reliability of the financial statements does
not vary from company to company. This assurance will be obtained not just from knowing that each set
of financial statements has been audited, but also from knowing that this has been done to common
standards.
Hence there is a need for audits to be regulated so that auditors follow the same standards. As we see in
this chapter, 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.
ISAs are produced by the International Auditing and Assurance Standards Board (IAASB), a technical
standing committee of IFAC, which also issues standards relating to review engagements, other assurance
engagements, quality control and related services.
An explanation of the workings of the IAASB, the authority of ISAs and so on are laid out in the Preface to
the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services,
and we will look at this in the next section. The IAASB also provide a Glossary of Terms which provides
definitions for the key terms and criteria used throughout the ISAs.

4.2 Preface
The preface states that the IAASB's objective is the development of a set of international standards that are
accepted worldwide. The IAASB's pronouncements relate to audit, other assurance and related services
that are conducted in accordance with international standards.
Within each country, local laws and regulations govern, to a greater or lesser degree, the practices
followed in the auditing of financial or other information. Such regulations may be either of a statutory
nature or in the form of statements issued by the regulatory or professional bodies in the countries
concerned. For example, in the UK, the Financial Reporting Council Board sets ISAs, and the Companies
Act 2006 provides legislative regulations.

Part A Audit framework and regulation ⏐ 2: Statutory audit and regulation

29

4.2.1 The authority attached to ISAs and other pronouncements
The preface also lays out the authority attached to international standards issued by the IAASB:
IAASB Pronouncements
International Standards on Auditing
(ISAs)

To be applied in the audit of historical financial information

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

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 Standards on Quality Control
(ISQCs)

To be applied for all services falling under the IAASB's
engagement standards (ISAs, ISREs, ISAEs, ISRSs)

International Auditing Practice Notes
(IAPNs)

Provide practical assistance to auditors

Note that IAPNs are a new category of pronouncement for use in issuing non-authoritative material and at
the time of writing this Text there is only one IAPN in issue relating to the auditing of financial
instruments.
Any limitation of the applicability of a specific ISA is made very clear in the Preface.

4.2.2 Relationship between ISAs and national regulation
Exam focus
point

The relationship between ISAs and national regulation is not examinable under the current ACCA F8
syllabus. This section has been included for your reference only.
ISAs do not override the local regulations referred to above governing the audit of financial or other
information in a particular country.
(a)

To the extent that ISAs 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.

(b)

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 (ie encourage changes in local regulations to comply with ISAs).

The IAASB also publishes other papers, such as Discussion Papers, to promote discussion on auditing,
review, other assurance and related services and quality control issues affecting the accounting
profession, present findings, or describe matters of interest relating to these engagements.

4.2.3 Working procedures of the IAASB
A rigorous due process is followed by the IAASB to ensure that the views of all those affected by its
guidance are taken into account. The following diagram summarises the process followed in the
development of IAASB standards.

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2: Statutory audit and regulation ⏐ Part A Audit framework and regulation

Research and consultation
A project task force is established to develop a draft standard or practice statement.

Transparent debate
A proposed standard is discussed at a meeting, open to the public.

Exposure for public comment
Exposure drafts are put on the IAASB's website and widely distributed for comment
for a minimum of 120 days.

Consideration of comments
Any comments as a result of the exposure draft are considered at an open meeting
of the IAASB, and it is revised as necessary.

Affirmative approval
Approval is made by the affirmative vote of at least 2/3 of IAASB members.

4.3 Current ISAs and other standards
The following list sets out the clarified ISAs that this Study Text is based on and other documents
expected to be examinable for F8.
No

Title

200

Overall objectives of the independent auditor and the conduct of an audit in accordance
with International Standards on Auditing

210

Agreeing the terms of audit engagements

220

Quality control for an audit of financial statements

230

Audit documentation

240

The auditor's responsibilities relating to fraud in an audit of financial statements

250

Consideration of laws and regulations in an audit of financial statements

260 (Revised)

Communication with those charged with governance

265

Communicating deficiencies in internal control to those charged with governance and
management

300

Planning an audit of financial statements

315 (Revised)

Identifying and assessing the risks of material misstatement through understanding the
entity and its environment

320

Materiality in planning and performing an audit

330

The auditor's responses to assessed risks

402

Audit considerations relating to an entity using a service organisation

450

Evaluation of misstatements identified during the audit

500

Audit evidence

501

Audit evidence – specific considerations for selected items

505

External confirmations

Part A Audit framework and regulation ⏐ 2: Statutory audit and regulation

31

No

Title

510

Initial audit engagements – opening balances

520

Analytical procedures

530

Audit sampling

540

Auditing accounting estimates, including fair value accounting estimates, and related
disclosures

560

Subsequent events

570 (Revised)

Going concern

580

Written representations

610 (Revised)

Using the work of internal auditors

620

Using the work of an auditor's expert

700 (Revised)

Forming an opinion and reporting on financial statements

701

Communicating key audit matters in the independent auditor’s report

705 (Revised)

Modifications to the opinion in the independent auditor's report

706

Emphasis of matter paragraphs and other matter paragraphs in the independent
auditor's report

720 (Revised)

The auditor's responsibilities relating to other information
Addressing Disclosures in the Audit of Financial Statements – Revised ISAs and Related
Conforming Amendments

The preface, glossary of terms and International framework for assurance engagements are also
examinable, along with the following IAASB pronouncement:
International Standards on Assurance Engagements
ISAE 3000
(Revised)

Assurance engagements other than audits or reviews of historical financial information

Examinable documents other than the IAASB pronouncements are:
Other documents
ACCA's Code of Ethics and Conduct
FRC Guidance on Audit Committees (Revised September 2012) as an example of guidance on best
practice in relation to audit committees
The UK Corporate Governance Code (Revised September 2014) as an example of a code of best practice

Exam focus
point

ISAs are quoted throughout this Text and you must understand how they are applied in practice. You do
not therefore need to know ISA numbers, the names of the standards or the details off by heart – it's your
ability to apply them in the exam that will be tested.

4.4 Application of ISAs to small and medium-sized entities
4.4.1 Introduction
The IAASB is strongly of the view that an 'audit is an audit' and that users who receive audit reports
expressing an opinion have to have confidence in those opinions, whether they are in relation to large or
small entity financial statements. However, the IAASB have recognised the importance of those who audit
small and medium-sized entities (SMEs) and the ISAs include guidance where relevant on how certain
requirements can be met when auditing smaller entities.

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2: Statutory audit and regulation ⏐ Part A Audit framework and regulation

4.4.2 Qualitative characteristics of a smaller entity
These are identified by ISA 200 as follows:
(a)
(b)

Concentration of ownership and management in a small number of individuals; and
One or more of the following:
(i)
(ii)
(iii)
(iv)
(v)
(vi)

Straightforward or uncomplicated transactions
Simple record-keeping
Few lines of business and few products within business lines
Few internal controls
Few levels of management with responsibility for a broad range of controls; or
Few personnel, many having a wide range of duties

4.4.3 Considerations specific to SME entities
The structure of the ISAs means they are suitable for SMEs. Notably they include:




A separate section for requirements to help readability and clarification of conditional requirements
Requirements capable of being applied proportionately
Additional guidance specific to SME audits

4.4.4 IAASB guidance
In August 2009 the IAASB issued a Question and Answer documents Applying ISAs proportionately with
the size and complexity of an entity. This provides a good overview of the key messages in this area.
More detailed guidance can be found in the IAASB's Guide to using international standards on auditing in
the audits of small and medium-sized entities, the second edition of which was released in October 2010.
Both of these publications can be downloaded from the IAASB website.

Part A Audit framework and regulation ⏐ 2: Statutory audit and regulation

33

Chapter Roundup


Most companies are required to have an audit by law, but some small companies are exempt. The
outcome of the audit is the auditor’s report, which sets out the auditor's opinion on the financial
statements.



The law gives auditors both rights and duties. This allows auditors to have sufficient power to carry out an
independent and effective audit.



There are various legal and professional requirements on appointment, resignation and removal of
auditors which must be followed.



Requirements for the eligibility, registration and training of auditors are extremely important, as they are
designed to maintain standards in the auditing profession.



International Standards on Auditing are set by the International Auditing and Assurance Standards
Board.

Quick Quiz
1

What position would make a person ineligible for appointment as a company auditor?

2

A person does not have to satisfy membership criteria to become a member of an RSB.
True

3

Using the UK as an example, who can appoint an auditor?

4

The ACCA has its own monitoring unit which inspects registered auditors on a regular basis.
True

False

5

What is the function of IFAC?

6

Which of the following are not engagement standards issued by the IAASB?







34

False

International Standards on Auditing
International Standards on Quality Control
International Auditing Practice Notes
International Standards on Related Services
International Standards on Assurance Engagements
International Standards on Review Engagements

2: Statutory audit and regulation ⏐ Part A Audit framework and regulation

Answers to Quick Quiz
1

An officer or employee of the company
A partner or employee of such a person
A partnership in which such a person is a partner

2

False. All RSBs have stringent membership requirements.

3

Members can appoint the auditors (at each general meeting where accounts are laid).
Directors can appoint the auditors (before the first general meeting where accounts are laid or to fill a
casual vacancy).
The Secretary of State can appoint the auditors (if no auditors are appointed/reappointed at the general
meeting where accounts are laid).

4

True

5

The function of IFAC is to initiate, co-ordinate and guide efforts to achieve international technical, ethical
and educational pronouncements for the accountancy profession.

6

International Standards on Quality Control and International Auditing Practice Notes are not engagement
standards issued by the IAASB. The others are all classed as engagement standards.
Now try the questions below from the Practice Question Bank

Number

Level

Marks

Time

Q2

Examination

10

20 mins

Q3

Introductory

n/a

n/a

Part A Audit framework and regulation ⏐ 2: Statutory audit and regulation

35

36

2: Statutory audit and regulation ⏐ Part A Audit framework and regulation

Corporate
governance

Topic list

Syllabus reference

1 Codes of corporate governance

A3

2 Audit committees

A3

3 Internal control effectiveness

A3

4 Communication with those charged with governance

A3

Introduction
The concept of corporate governance was introduced in Chapter 1. In this
chapter we will look at the codes of practice that have been put in place to
ensure that companies are well managed and controlled. The UK Corporate
Governance Code is an internationally recognised code which we will use as an
example of a code of best practice. The audit carried out by the external
auditors is a very important part of corporate governance, as it is an
independent check on what the directors are reporting to the shareholders.
Auditors of all kinds have most contact with the audit committee, a subcommittee of the board of directors. External auditors liaise with the audit
committee over the audit, and internal auditors will report their findings about
internal control effectiveness to it. We shall look at audit committees in Section
2 and internal control effectiveness in Section 3.
We end this chapter with a consideration of the importance of auditors
communicating with those charged with governance in an entity. ISA 260
Communication with those charged with governance provides guidance for
auditors in this respect.

37

Study guide
Intellectual level
A3

Corporate governance

(a)

Discuss the objectives, relevance and importance of corporate governance.

2

(b)

Discuss the provisions of international codes of corporate governance (such
as OECD) that are most relevant to auditors.

2

(c)

Describe good corporate governance requirements relating to directors'
responsibilities (eg for risk management and internal control) and the
reporting responsibilities of auditors.

2

(d)

Evaluate corporate governance deficiencies and provide recommendations
to allow compliance with international codes of corporate governance.

2

(e)

Analyse the structure and roles of audit committees and discuss their
benefits and limitations.

2

(f)

Explain the importance of internal control and risk management.

1

(g)

Discuss the need for auditors to communicate with those charged with
governance.

2

Exam guide
Questions on corporate governance could be either knowledge-based or application-based and may be
part of a scenario question on ethics. This topic can also be examined in the form of OTQs in Section A of
the exam.

1 Codes of corporate governance
FAST FORWARD

Dec 11, June 14

Corporate governance is the system by which companies are directed and controlled. Good corporate
governance is important because the owners of a company and the people who manage the company are
not always the same.

1.1 The importance of corporate governance
Key term

Corporate governance is the system by which companies are directed and controlled.
There are various stakeholders in companies, as we discussed in Chapter 1. The Cadbury Report on
financial aspects of corporate governance commissioned by the UK Government identified the following.




Directors: responsible for corporate governance
Shareholders: linked to the directors by the financial statements
Other relevant parties: such as employees, customers and suppliers (stakeholders)

In some companies, the shareholders are fully informed about the management of the business because
they are directors themselves, whereas in other companies the shareholders only have an opportunity to
find out about the management of the company at the annual general meeting (AGM).
The day to day running of a company is the responsibility of the directors and other management staff
to whom they delegate and, although the company's results are submitted for shareholders' approval at
the AGM, there is often apathy and acquiescence to directors' recommendations.
AGMs are often very poorly attended. For these reasons, there is the potential for conflicts of interest
between management and shareholders.

38

3: Corporate governance ⏐ Part A Audit framework and regulation