Chapter 2 • Objective of statutory audits and the audit

opinion
Statutory audit and
• Appointment, removal and resignation of
regulation auditors
• Regulation of auditors
• International Standards on Auditing

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Review on chapter 1- ASSURANCE

Assurance Type Level Opinion/ Subject matter Example

Conclusion
Audit Reasonable High Positive A set of Audit of
Financial Financial
Statements Statements for
a year ended
on 31 Dec 20x8
Other Limited Moderate Negative Sustainability - Review of a
reports half year
financial
statements
- Review of the
effectiveness of
internal controls

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Review chapter 1: Audit of Financial Statements

Definition: According to IAS 200 The Overall Objectives of Independent Auditor and the

Conduct an Audit in Accordance with International Standards on Auditing:

- To obtain reasonable assurance about whether the financial statements as a whole are

free from material misstatement, thereby enabling the auditor express an opinion on

whether the financial statements are prepared, in all material respects, in according with an

applicable financial reporting framework, and

- To report on the financial statement and to communicate to management.

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 Chronology of an audit

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 Syllabus learning outcomes

1. Describe the regulatory environment within which external audits

take place.
2. Discuss the reasons and mechanisms for the regulation of auditors.
3. Explain the statutory regulations governing the appointment, rights,
removal and resignation of auditors.
4. Explain the development and status of International Standards on
Auditing.
5. Explain the relationship between International Standards on Auditing
and national standards.

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 Overview

Statutory audit and regulation

The regulatory environment

Mechanisms for
Statutory Development and
regulation of
regulations status of ISAs
auditors

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 Objective of statutory audits and the audit opinion 1

• Remember the external audit is an assurance engagement which

provides reasonable assurance over the truth and fairness of the
financial statements.
• Most companies have to have an external audit by law; ie a
statutory audit.
• Not all companies need one eg small companies.
• Some people think that all companies should have an external
audit.
• Let's look at the arguments for and against the small company
audit…

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 Objective of statutory audits and the audit opinion

The value of the statutory audit:

• Enhance the
credibility

• Highlight important
issues of corporate
managements such
as improvement of
effectiveness and
efficiency of internal
control

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 Objective of statutory audits and the audit opinion 2

Duties of auditors
Auditors are required to report on the financial statements.
The detail of auditors' duties may vary according to national legislation,
but typically* auditors will report:
• Whether the financial statements have been prepared in accordance
with the relevant legislation
• Whether the statement of financial position shows a true and fair
view of the company's affairs at the end of the period and the
statement of profit or loss and other comprehensive income (and
statement of cash flows) show a true and fair view of the results for
that period

* Based on legislation in UK, Companies Act 2006 and amended in 2016

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 Objective of statutory audits and the audit opinion 3

Duties of auditors (continued)

• Whether adequate accounting records have been kept and returns
adequate for the audit received from branches not visited by the
auditor
• Whether the accounts are in agreement with the accounting
records and returns
• Whether the information in the directors' report is consistent with
the financial statements
• Whether disclosure of directors' benefits has been made in
accordance with relevant regulatory requirements or legislation

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 Objective of statutory audits and the audit opinion 4

Rights of auditors
Auditors need certain rights in order that they can carry out their
duties effectively.
Again, these rights may vary according to national legislation, but
typically* will include:
• A right of access at all times to the books, accounts and vouchers
of the company (in whatever form they are held)
• A right to require from the company's officers such information and
explanations as they think necessary for the performance of their
duties as auditors

* Based on legislation in UK, Companies Act 2006

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 Objective of statutory audits and the audit opinion 5

Rights of auditors (continued)

• A right to attend any general meetings of the company and to
receive all notices of and other communications relating to such
meetings which any member of the company is entitled to receive
• A right to be heard at general meetings which they attend on any
part of the business that concerns them as auditors
• A right to receive a copy of any written resolution proposed

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 Auditor Authority

It is depended on every country

In the UK:
Who is the audit authority?
• Secretary of State or delegated body (eg UK Professional Oversight
Board) for a major audit
• Recognised Supervisory Body (eg ACCA) for other audits

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 Regulation of auditors 1

Vietnam
MOF, VAA and VACPA

China
Chinese Institute of Certified Public Accountants (CICPA)

United Kingdom
Various bodies eg ACCA, ICAEW, ICAS etc

France
• Ordre des Experts Comptables et des Comptables Agrées for
accountants
• Compagnie Nationale des Commissaires aux Comptes for auditors

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 Regulation of auditors 2

Germany
Institut der Wirtschaftsprüfer

United States of America

American Institute of Certified Public Accountants

Singapore
Institute of Singapore Chartered Accountants

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 Regulation of auditors 3

EC Member States
In EC member states, auditors must have permission of the relevant
authorities.

In the UK, the relevant authorities are called Recognised

Supervisory Bodies, of which there are five.

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 Regulation of auditors 4

Recognised Supervisory Bodies (RSBs) in the UK:

• ACCA
• ICAEW (Institute of Chartered Accountants in England and Wales)
• ICAS (Institute of Chartered Accountants of Scotland)
• CAI (Chartered Accountants Ireland)
• AAPA (Association of Authorised Public Accountants)

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 Regulation of auditors 5

Professional qualifications are pre-requisites for membership of an RSB.

These qualifications are offered by Recognised Qualifying Bodies
(RQBs):
• ACCA
• ICAEW
• ICAS
• CAI
• AIA (Association of International Accountants)
• CIPFA (Chartered Institute of Public Finance and Accountancy)

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 Regulation of auditors 6

International Federation of Accountants (IFAC)

• IFAC is a non-profit, non-governmental, non-political international
organisation of accountancy bodies.
• It is based in New York.
• IFAC co-operates with member bodies, regional organisations of
accountancy bodies and other world organisations to initiate, co-
ordinate and guide efforts to achieve international technical, ethical
and educational pronouncements for the accountancy profession.

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 Regulation of auditors 7

IFAC's mission:
'To serve the public interest by contributing to the development,
adoption and implementation of high quality international standards
and guidance; contributing to the development of strong professional
accountancy organisations and accounting firms, and to high quality
practices by professional accountants; promoting the value of
professional accountants worldwide; speaking out on public interest
issues where the accountancy profession's expertise is most
relevant.'

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 Regulation of auditors 8

How are accountants regulated, monitored and supervised?

This will vary country by country but there will be common elements
covering the following:
• Education and work experience
• Eligibility
• Supervision and monitoring

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 Regulation of auditors 9

Education and experience

IFAC highlights three important areas:
• Education – accountants need to have sufficient breadth and depth of
theoretical and technical knowledge to be able to perform their duties
to the expected standard
• Examinations – designed to assess that accountants not only
possess theoretical knowledge but can apply it competently in a
practical situation
• Experience – individuals need to complete an appropriate period of
approved and supervised practical experience

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 Regulation of auditors 10

Eligibility to act as auditor

• Need membership of an appropriate body eg ACCA
• Must be 'fit and proper'
• Audit work must be conducted properly and with professional
integrity
• There must be monitoring and enforcement mechanisms in place

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 Regulation of auditors 11

Who is ineligible to act as auditor?

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

Local legislation may also include further rules about connections

between a company or its officers and the auditor.

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 II. International Standards on Auditing 1

Need for assurance

• Readers of financial statements want assurance that the reliability

of those statements does not vary from company to company.
• To obtain this assurance, readers not only need to know that
financial statements have been audited, but that they have been
audited according to common standards.
• Audit needs to be regulated to ensure auditors follow the same
standards.

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 International Standards on Auditing 2

Who sets International Standards on Auditing (ISAs)?

• The International Auditing and Assurance Standards Board

(IAASB), a technical standing committee of IFAC.
• IAASB's objective is the development of a set of globally accepted
international standards.

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 International Standards on Auditing 3

What is the authority of the IAASB's pronouncements?

IAASB pronouncement Authority

International Standards on To be applied in the audit of historical

Auditing (ISAs) financial information

International Standards on To be applied in the review of historical

Review Engagements financial information
(ISREs)
International Standards on To be applied in assurance
Assurance Engagements engagements dealing with subject
(ISAEs) matters other than historical financial
information

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 International Standards on Auditing 4

What is the authority of the IAASB's pronouncements?

IAASB pronouncement Authority

International Standards To be applied to compilation engagements,

on Related Services engagements to apply agreed upon
(ISRSs) procedures to information and other related
services engagement as specified by the
IAASB
International Standards To be applied for all services falling under
on Quality Control the IAASB's engagement standards (ISAs,
(ISQCs) ISREs, ISAEs, ISRSs)
International Auditing Provide practical assistance to auditors
Practice Notes (IAPNs)

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 International Standards on Auditing 5

• ISAs do not override local regulations governing the audit of financial

or other information in individual countries.
• 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.
• 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).

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 International Standards on Auditing 6

What are smaller entities?

• Concentration of ownership and management in a small number of
individuals; and
• One or more of the following:
(i) Straightforward or uncomplicated transactions
(ii) Simple record-keeping
(iii) Few lines of business and few products within business lines
(iv) Few internal controls
(v) Few levels of management with responsibility for a broad range
of controls
(vi) Few personnel, many having a wide range of duties

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 International Standards on Auditing 7

The Audit threshold

According to the Company Act 2006, and emended 2016, the small companies will be exempt
from mandatory audit if they can satisfy two out of three the following criteria:
• The company has no more than 50 employees
• The Company’s turnover does not exceed £10.2m
• The company’s gross assets total does not exceed £ 5.1m

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 International Standards on Auditing 9

How have ISAs been drafted to include smaller entities?

• 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

IAASB's Guide to using international standards on auditing in the

audits of small and medium-sized entities

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 Tackling the exam

• The topics covered in this chapter are most likely to come up as a

multiple choice question in section A or as a short, knowledge-
based requirement in one of the longer section B questions.
• You could be tested on this area as part of a section B question on
audit planning or professional ethics.

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 International Standards on Auditing

Appendix

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 International Standards on Auditing 1 (ISA)
38 standards including Quality Control Standard:
1. ISA 200: Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with International Standards on Auditing
2. ISA 210: Agreeing the Terms of Audit Engagements
3. ISA 220: Quality Control for an Audit of Financial Statements
4. ISA 230: Audit Documentation
5. ISA 240: The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements
6. ISA 250: Consideration of Laws and Regulations in an Audit of Financial
Statements
7. ISA 260: Communication with Those Charged with Governance
8. ISA 265: Communicating Deficiencies in Internal Control to Those Charged with
Governance and Management

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 International Standards on Auditing 2 (ISA)

9. ISA 300: Planning an Audit of Financial Statements

[Link] 315: Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment
[Link] 320: Materiality in Planning and Performing an Audit
[Link] 330: The Auditor’s Responses to Assessed Risks
[Link] 402: Audit Considerations Relating to an Entity Using a Service
Organization
[Link] 450: Evaluation of Misstatements Identified during the Audit

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 International Standards on Auditing 3 (ISA)

[Link] 500: Audit Evidence

[Link] 501: Audit Evidence-Specific Considerations for Selected Items
[Link] 505: External Confirmations
[Link] 510: Initial Audit Engagements-Opening Balances
[Link] 520: Analytical Procedures
[Link] 530: Audit Sampling
[Link] 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures
[Link] 550: Related Parties
[Link] 560: Subsequent Events
[Link] 570: Going Concern
[Link] 580: Written Representations

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 International Standards on Auditing 4 (ISA)
[Link] 600: Special Considerations-Audits of Group Financial Statements (Including
the Work of Component Auditors)
[Link] 610: Using the Work of Internal Auditors
[Link] 620: Using the Work of an Auditor’s Expert
[Link] 700: Forming an Opinion and Reporting on Financial Statements
[Link] 701: Communicating Key Audit Matters in the Independent Auditor’s Report
[Link] 705: Modifications to the Opinion in the Independent Auditor’s Report
[Link] 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report
[Link] 710: Comparative Information-Corresponding Figures and Comparative
Financial Statements
[Link] 720: The Auditor’s Responsibilities Relating to Other Information in Documents
Containing Audited Financial Statements

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 International Standards on Auditing 5 (ISA)

[Link] 800: Special Considerations-Audits of Financial Statements Prepared in

Accordance with Special Purpose Frameworks
[Link] 805: Special Considerations-Audits of Single Financial Statements and
Specific Elements, Accounts or Items of a Financial Statement
[Link] 810: Engagements to Report on Summary Financial Statements

[Link] Standard on Quality Control (ISQC) 1, Quality Controls for

Firms that Perform Audits and Reviews of Financial Statements, and Other
Assurance and Related Services Engagements

Source: [Link]

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40
10/8/2024
Other International Standards on Auditing

❖ International Standards on Review Engagements (ISREs):

— ISRE 2400 Engagements to review historical financial statements
❖ International Standards on Review Engagements:
— ISRE 2410 Review of interim financial information performed by the
independent auditor of the entity

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41
10/8/2024
Other International Standards on Auditing

❖ International Standards on Assurance Engagements (ISAEs)

— ISAE 3000 Assurance engagements other than audits or reviews of historical
financial information
— ISAE 3400 The examination of prospective financial information
— ISAE 3402 Assurance reports on controls at a service organization
— ISAE 3410 Assurance engagements on greenhouse gas statements
❖ Other Standards/Guidance
— ISQC1 Quality control for firms that perform audits and reviews of financial
statements, and other assurance and related services engagements
— IESBA code of ethics

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