ACCA AA

Chapter 2
Rules and regulation

External audit is a statutory exercise thereby its governed by laws and regulations. There are
different types of regulations which exist globally which govern and monitor the conduct of
external audit

In order to achieve this, practitioners have to follow regulatory guidance:

➢ National law (e.g. The Companies Act 2006 in the UK )

➢ International regulations
➢ Guidance of professional bodies

National Law - Legal requirements for audits and auditors

Who needs an audit and why?

In most countries, companies are required by law to have an audit.

Small or owner-managed companies are often exempt. This is because there is less value in an
audit for these companies. Exemptions often do not apply to companies in financial services or
listed on a stock exchange.

Who may act as auditor

To be eligible to act as auditor, a person must be:

➢ A member of a Recognised Supervisory Body (RSB), e.g. ACCA, and allowed by the rules
of that body to be an auditor or
➢ Someone directly authorised by the state.

Being "appropriately qualified" means not only having passed examinations of a recognised body
but also:

❖ obtaining a minimum number of years of practical and post-qualified relevant

audit experience;
❖ continuous application of ethical criteria;
❖ continuous professional education.

Who may not act as auditor?

Excluded by law: The law in most countries excludes those who manage or work for the
company, and those who have business or personal connections with them from auditing that
company.
Excluded by the Code of Ethics: auditor have issues such as independence, competence or issues
regarding confidentiality.

Lecture notes by Kevin Binoy

 ACCA AA

Who appoints the auditor?

✓ Members (shareholders) – of the company appoint the auditor by voting them in.

✓ Directors – can appoint the first auditor or to fill a ‘casual vacancy'.

✓ Secretary of State – if no auditor is appointed by the members or directors.

Auditors of public companies are appointed from one AGM to the next one. Auditors of private
companies are appointed until they are removed.

Removing the auditor

Arrangements for removing the auditor have to be structured in such a way that

• The auditor has enough job security to work independently without fear of dismissal (by
way of fixed term appointment, clear dismissal procedure etc.)
• While also allowing for their removal if they are not performing their duties effectively
(are not competent)

This balance protects both the auditor's independence and the company's need for a competent
audit.

Removal of the auditor can usually be achieved by a simple majority at a general meeting of
the company.

There are some safeguards, such as a specified notice period, to prevent the resolution to
remove the auditor being suggested at short notice in order to influence the outcome of the vote.

The auditor can circulate representations stating why they should not be removed if applicable.

A statement of circumstances must be sent to the company and the regulatory authority
(authority who regulates auditing profession in each countries, FRA in UK) to set out issues
surrounding the cessation of office. prepared by the auditor

Resigning as auditor

In practice, if the auditor and management find it difficult to work together, the auditor will
usually resign.

On resignation, the auditor issues written notice of the resignation and a statement of
circumstances to the members and regulatory authority.

Notifying ACCA

If an auditor resigns or is removed from office before the end of their term of office, they must
notify the ACCA.

Lecture notes by Kevin Binoy

 ACCA AA

The auditor's rights

During appointment as auditor

✓ Access to the company’s books and records.

✓ To receive information and explanations necessary for the audit.
✓ To receive notice of and attend any general meeting
✓ Speak at such meetings on matters of concern to the auditor.
✓ To receive copies of any written resolutions (decisions) of the company.

On resignation

✓ To request a General Meeting of the company to explain the circumstances of the

resignation.
✓ To require the company to circulate the notice of circumstances relating to the
resignation.

The auditor's duties

The external auditor's primary duty is to audit the financial statements and provide an opinion
on whether the financial statements give a true and fair view.

They may have additional reporting responsibilities required by local national law, such as
confirming that the financial statements are properly prepared in accordance with those laws.

International regulation

The International Federation of Accountants (IFAC) is the global organisation for the
accountancy profession.

They are responsible for producing / publishing the IAS / IFRS/ ISA. IFAC being a global body of
accountant, have representation of all global professional bodies from every country of the world.
Members of IFAC, discussed the need to develop new standards, or modify the existing standards
or delete a standard which is totally outdated

IFAC has four standard-setting boards:

➢ IAASB
➢ IESBA
➢ IAESB
➢ IPSASB

❖ International Auditing and Assurance Standards Board (IAASB)

One of the subsidiary boards of IFAC is the International Audit and Assurance Standards Board
(IAASB). It is the IAASB’s responsibility to develop and promote International Standards on
Auditing (ISAs).

Lecture notes by Kevin Binoy

 ACCA AA

Development of ISAs

1. Research- analyzing the need of a new standard? Or is there a need for modifying an
existing standard?. If there research conclude there is a need then in the next step there
will be a transparent debate

2. Transparent debate- about the new standard/ modification of existing standard / its
content/ its scope/ its purpose – all need to be discussed among the members of IAASB
an exposure draft will be created as an outcome of the debate among all member

3. Exposure draft - Public comments on exposure draft- the summary / draft of the debate
will be emailed to all professional bodies, so that all professional bodies can study the
draft, and if they want to give any input on the draft they are more than welcome to do it.
Even the exposure draft is put on the website of IAASB for the professional bodies to
comment but there is a deadline to comment.

4. Affirmative approval- IAASB will study all the comments received over exposure draft
and will finalize the comments, agreeing to some or disagreeing to some, and finally
coming out with a final version of an approved ISA.

The relationship between international and national standards and regulation

IFAC is simply a grouping of accountancy bodies, therefore it has no legal standing in individual
countries. Countries therefore need to have their own arrangements in place for:

• Regulating the audit profession

• Implementing auditing standards.

National standard setters

• May develop their own auditing standards and ethical standards

• May adopt and implement ISAs, possibly after modifying them to suit national needs.

In the event of a conflict between the two sets of guidance, local regulations will apply.

❖ International Ethics Standards Board for Accountants (IESBA)

International Ethics Standards Board for Accountants (IESBA) is an independent standard-setting

body that serves the public interest by setting robust ethics standards for professional
accountants worldwide, including auditor independence requirements.

❖ International Accounting Education Standards Board (IAESB)

The objective of the International Accounting Education Standards Board (IAESB) is to develop
guidance, conduct research and facilitate the exchange of information to ensure that accountants
are adequately trained to meet their responsibilities.

Lecture notes by Kevin Binoy

 ACCA AA

❖ International Public Sector Accounting Standards Board (IPSASB)

The International Public Sector Accounting Standards Board (IPSASB) works to improve public
sector financial reporting worldwide by developing international accrual-based accounting
standards for use by governments and other public sector entities.

The role of professional bodies

Professional bodies (such as the ACCA and ICAEW) promote quality within the profession
through provision of:

✓ Rigorous qualifications to acquire the knowledge and skills needed to provide a

competent service
✓ Support to members to demonstrate high professional and ethical values
✓ Technical expertise to governments on accounting and business matters. This input may
help shape the introduction of new laws and regulations affecting the profession.

To obtain membership to a professional body, a person must:

✓ Pass the body's exams.

✓ Demonstrate appropriate practical experience (usually a minimum of three years)
✓ Complete an ethical assessment.

To maintain membership, members must:

✓ Engage in continuous professional development (CPD).

✓ Adhere to a strict code of ethics and conduct

Lecture notes by Kevin Binoy