Audit Firm: Regulation of Audit Firms in UK

The Companies Act 2006 of United Kingdom provides powers to bodies known as Recognised Supervisory Bodies (RSBs) to register and supervise auditors. The RSBs are:

• The Institute of Chartered Accountants of Scotland
• Chartered Accountants Ireland
• The Institute of Chartered Accountants in England and Wales
• The Association of Chartered Certified Accountants
• The Association of Authorised Public Accountants

The regulatory system of RSBs involves the following:

• Registration processes
• Monitoring
• Investigation and discipline

The RSBs are also subject to independent oversight.  The Financial Reporting Council (FRC) has statutory powers delegated to it by Government for the recognition, supervision and de-recognition of the RSBs.  The FRC conducts regular inspection visits to the RSBs to ensure that their responsibilities are being discharged appropriately.  The FRC also has the power to sanction RSBs. In addition to the quality assurance and monitoring undertaken by the RSBs, the Audit Quality Review (AQR) team of the FRC has the responsibility for the monitoring of the audits of all listed and other major public entities. 

The FRC operates an independent disciplinary scheme for accountants and accountancy in the UK. The Accountancy Scheme operates independently of the professional bodies. The FRC deals with cases of potential misconduct which raise or appear to raise important issues affecting the public interest in the UK. All other cases of potential misconduct continue to be dealt with by the professional bodies above.  The FRC Conduct Committee has oversight over the operation of the disciplinary arrangements. The Conduct Committee’s responsibilities in this regard include:

• Operating independent disciplinary Schemes for the investigation of cases which raise or appear to raise important issues affecting the public interest in the UK; and
• Where appropriate, bringing disciplinary proceedings against those whose conduct appears to have fallen short of the standard reasonably to be expected of members or member firms of the relevant professional body.
• Keeping under review the working of the Schemes and the supporting Regulations to ensure that they are operating effectively; and
• Regular publicity for the FRC’s disciplinary activities and achievements as appropriate.

Additional Thoughts

Compliance with local laws and regulations is a matter of utmost care for the audit firms. The audit firms should abide by all the laws and regulations in order to gain the trust of the authorities and the general public.

Reference:      http://goo.gl/1XOfUS

http://goo.gl/7wWT0q

Audit News Briefing: 12 November 2015

Audit-is-cool is pleased to accumulate and provide its readers with the news on audit and related topics:

November 11, 2015

Accountancy Age

ICAEW granted local audit regulatory powers

The Financial Reporting Council's (FRC) granted to the Institute of Chartered Accountants in England and Wales (ICAEW) a Recognized Supervisory Body (RSB) status for local audit.

ICAEW Executive Director Vernon Soare said: "There is more scrutiny than ever on how public money is spent. Local audits promote confidence in the financial management of local bodies which provide vital services to their communities. The firms on the public audit register will have gone through a rigorous and thorough process to make sure they provide a high quality audit service."

Please follow link for details: http://www.accountancyage.com/aa/news/2434257/icaew-granted-local-audit-regulatory-powers

November 11, 2015

Accountancy Live

BIS offers sensible approach to complex EU Audit Directive

Auditor Regulation Consultation – coverage: mandatory audit firm rotation regime; and new restrictions on provision of non-audit services by auditors of PIEs.

The Department for Business, Innovation and Skills (BIS) confirms: The Financial Reporting Council (FRC) will be appointed as the single competent authority for regulation of UK audit; ‘10+10’ approach to maximum duration of an audit appointment; and proposed three-year grace period in applying the cap on non-audit services.

The consultation closes on 9 December 2015.

Please follow link for details: https://www.accountancylive.com/bis-offers-sensible-approach-complex-eu-audit-directive

November 10, 2015

Wall Street Journal

U.K.’s Serious Fraud Office Drops Case Against Olympus Corp., Gyrus Group

High-profile accounting scandal began from an expose in 2011by then ousted Olympus CEO Michael Woodford. Now, Britain’s Serious Fraud Office (SFO) has dropped its two-year case against Japan’s Olympus Corporation and U.K. subsidiary Gyrus Group Ltd., which it had charged with making misleading statements to auditors.

Please follow link for details: http://www.wsj.com/articles/u-k-s-serious-fraud-office-drops-case-against-olympus-corp-gyrus-group-1447163983

November 9, 2015

Accounting Today

IOSCO Backs Transparency Reports for Audit Firms

The Report: Transparency of Firms that Audit Public Companies.

Firm governance and elements of their system of quality control – these are the audit firm practices to be transparent about, as recommended by IOSCO. The worldwide association of national securities regulatory commissions noted that transparency reporting can foster internal introspection and discipline within audit firms and may encourage audit firms to sharpen their focus on audit quality, which would be of benefit to investors and other stakeholders.

Please follow link for details: http://www.accountingtoday.com/news/audit-accounting/iosco-backs-transparency-reports-for-audit-firms-76360-1.html

Audit Firm: Governance Code

The market for large audits in the UK is dominated by four firms and the risk of the withdrawal of a major firm is a matter of continuing concern to the UK Financial Reporting Council (FRC) and many others. In January 2010 the FRC and Institute of Chartered Accountants in England and Wales (ICAEW) published the Audit Firm Governance Code.

It is applicable to those firms that audit more than 20 listed companies and it is applicable from financial years beginning on or after 1 June 2010. The Code currently applies to seven audit firms that together audit about 95% of the companies listed on the Main Market of the London Stock Exchange. For these firms, the code sets a benchmark for good governance which other audit firms may wish to voluntarily adopt in full or in part. It also codifies much existing good practice and links to matters that audit firms must comply with as regulated professional partnerships.

The seven firms to which the code currently applies are:

• Baker Tilly LLP
• BDO LLP
• Deloitte LLP
• Ernst & Young LLP
• Grant Thornton LLP
• KPMG LLP
• PricewaterhouseCoopers LLP

The Code is designed to play four major roles:

• enhance the stature of firms as highly visible exemplars of best practice governance;
• enrich firms’ transparency reports;
• encourage changes in governance which improve the way that firms are run; and
• strengthen the regulatory regime by achieving transparent and effective governance without disproportionate regulation.

The FRC monitors the extent to which these firms comply with the Code. Regular reviews are conducted by FRC to check compliance by firms with all the provisions of the code.

Additional Thoughts

High quality corporate governance is mandatory to foster investment in the economy. Audit firms play the role of watchdogs in the economy and it is essential for them to implement sound governance practices within their own organizations. The Code in this regard will help the audit firms by more sharply defining the public interest, particularly by explicitly recognizing the importance of audit quality.

Audit Exam Ultimate Pass Key

Last summer I successfully passed ACCA exam, P7 “Advanced Audit & Assurance”. While preparing for the exam, I designed succinct and universal “question tackling plan”, which helped to structure my ideas on auditing. In this post I would like to share my knowledge just before coming ACCA examination session.  

I believe it would be useful for all exams related with financial audit. So the candidates for qualifications like CPA or ICAEW are welcomed to utilize it as well. J

The logic is simple: the plan consists of common subjects/questions and points suggested to be addressed.

Question Tackling Plan

1.      Ethics area question

1.1.   Technical competence;

1.2.Objectivity/Independence (possible threats: self-review, familiarity, intimidation, self-interest, advocacy)

1.3.   Professional behavior;

1.4.   Integrity;

1.5.   Confidentiality.

Mnemonic: TOPIC

2.      Professional (audit business) area question

2.1.   Competence;

2.2.   Resources/costs;

2.3.   Reputation;

2.4.   Staff quality;

2.5.   Quality control: Acceptance; Directorship; Supervision; Review; Consulting; Disputes.

3.      Audit Opinion related question

3.1.   Clarity;

3.2.   Details (standards, amounts, scope);

3.3.   Structure (is heading on the right place?) of opinion and its Consistency (starts like “except for” and finishes like adverse opinion);

3.4.   Types of appropriate opinions. This depends on evidences (sufficient, mistake material and pervasive?);

3.5.   Prior year opinion.

4.      Audit Matters (audit evidence/process) question

4.1.   Materiality;

4.2.   Standard breached (IFRS, recognition, valuation criteria etc.);

4.3.   Risks of misstatement;

4.4.   Impact on Audit Opinion;

4.5.   Reliability (source of evidence).

5.      Audit Evidence question

Mnemonics:

Sources of evidence -  DADA3: Document Asset Director (interview/representations) Accounting record 3rd Party

Procedures AE IOU: Analytical (plausibility/predictability)   Enquiry & Confirm (written/verbal)     Inspection (documents/assets)       Observation (assets, process) RecalcUlation (opening balance check)

Elements of evidence:

5.1.   General: budgets/plans, accounting policy;

5.2.   Calculations: rates, models, risks, probabilities, impairment reviews, useful lives, assumptions reasonableness explanation;

5.3.   Disclosure: draft notes;

5.4.   Documents types:

5.4.1.      Bank statements, invoice, bill, dispatch/delivery note;

5.4.2.      Contract, agreement, insurance policy, title deed;

5.4.3.      Claim litigation copy, insurance claim;

5.4.4.      Log books, time-sheets;

5.4.5.      Minutes, orders, policies;

5.4.6.      Correspondence, letters;

5.4.7.      Tax returns;

5.5.   Reconciliations (with tax authority, debtor), confirmations;

5.6.   Record of discussion, interview, talk with employees;

5.7.   Valuation reports, surveys;

5.8.   Breakdowns (check for misclassification), samples.

Golden Rule:

Your answer should be always close to the question scenario: (1) the answer should be relevant; (2) the question text contains hint for answer.

You are welcomed to share your tips for audit exams. Good Luck! J

          Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".