Question

1. What are the implications of requiring the auditor to seek reappointment on an annual basis?

2. An auditor of a limited company has to remain independent from the directors of that company yet the directors represent the auditor’s client for most practical purposes. Discuss this potential conflict.

3. How might Audit Committees help to enhance the independence of statutory auditors?

4. a) What are the main reasons that the auditing profession is regulated?

b) Discuss the advantages and disadvantages of the main options available for regulation of statutory auditors

5.​Compare and contrast the regulatory approach to the regulation of statutory auditor independence in the UK and US.

​Which approach do you prefer and why?

Answer 1

1. Reappointment of Auditor A retiring auditor may be re-appointed at the annual general body meeting by passing a resolution. A resolution at the annual general body meeting is required. 2. Director-auditor link has a significant positive effect on the issuance of unqualified audit opinion, thus confirm the prediction that interlink auditors are more lenient towards interlink companies as a result of the attachments developed by director-auditor link. This is consistent with the attachment theory which suggests that attachments create mutual dependence and mutual trusts between the parties involved. While auditors are expected to independently express their opinions, evidence suggests that the audit opinion issued is influenced by director-auditor link, hence raises questions on the auditor’s level of independence. Thus, suggests the need of active shareholders’ involvement in the auditor selection process 3. In order to enhance the independence of statutory auditors and audit firms from the audited entity when they are carrying out statutory audits, a statutory auditor or an audit firm, and any natural person in a position to directly or indirectly influence the outcome of the statutory audit, should be independent of the audited entity and should not be involved in the audited entity's decision-making process. In order to maintain that independence, it is also important that they keep records of all threats to their independence and of the safeguards applied to mitigate those threats. Moreover, where the threats to their independence, even after the application of safeguards to mitigate those threats, are too significant, they should resign or abstain from the audit engagement. Statutory auditors and audit firms should be independent when carrying out statutory audits of audited entities, and conflicts of interest should be avoided. In order for the independence of statutory auditors and audit firms to be determined, the concept of a network in which statutory auditors and audit firms operate has to be taken into account. The independence requirement should at least be fulfilled during the period covered by the audit report, including both the period covered by the financial statements to be audited and the period during which the statutory audit is carried out. 4. a) The factors that are important to a regulatory system are addressed by the self-regulating structure of the auditing profession in the following ways: a. Mandate b. Structure c. Competence d. Efficiency e. Independence f. Process and procedures b) Advantage 1. Lesser effort for the audit of the Annual Financial Statement. It’s logical: as the audit procedures are reduces in size and depth, the effort for the audit becomes smaller. Not only the cost is less but also the burden for the accounting department. 2. Orientation at the Standard fort he limited statutory audit. For the limited statutory audit only this Swiss standard is relevant. With this standard the limited statutory audit gets disconnected from the ever more complex international audit standards. This makes sense, as an audit by international standards would be completely overdone for SME enterprises. 3. Less extensive rules concerning the auditors independence. Our experience shows that SME expect high quality when it comes to services in the field of audit or business consulting. Disadvantage 1. No assessment of the internal control system (ICS) Neither the audit of the existence nor the control of the effectiveness of the ICS is intended within the limited statutory audit. Therefore the auditor cannot make any suggestions or help with ideas for improvement of the ICS. 2. No reporting to the board of directors Only a negative audit opinion: „financial statement is free from material misstatement“ is given. The report to the annual general meeting is restricted to violations of the Swiss Code of Obligations (CO). A comprehensive report to the board of directors is not provided. 5. Compare regulation of statutory auditors USA : The independence rules of the Securities and Exchange Commission (SEC) must be complied with for audits required by federal securities laws, including audits of the financial statements of issuers. The audit of an issuer must also be performed in accordance with the rules of the Public Company Accounting Oversight Board (PCAOB). To the extent an SEC rule is more restrictive or less restrictive than a PCAOB rule, the auditor must follow the more restrictive rule. Since the time of its formation, the PCAOB adopted interim independence rules and has adopted its own independence rules on an ongoing basis. It did not adopt the SEC independence rules, since those rules were already applicable to auditors of SEC issuers. UK and Republic of Ireland The Auditing Practices Board (APB) establishes and issues Ethical Standards (ES) which UK and Irish accountancy bodies are required to ensure that registered auditors apply to all statutory audits carried out in accordance with UK and Irish Auditing Standards. The approach is similar to that of the IESBA code – principles based, including threats and safeguards, plus specific prohibitions in some areas, particularly for listed entity audits. The Standards differentiate between clear requirements (set out in black-lined text) and supporting guidance. The Standards also assign responsibility for activity required and are quite prescriptive as regards process requirements within the firm. The most recent update in December 2010 applied from 30 April 2011 to audits of financial statements commencing on or after 31 December 2010. We prefer USA approach because; The SEC independence requirements are rules based and set forth specific prohibitions and specified conditions that must be met before an interest or relationship would be considered permissible. SEC rules do not incorporate a conceptual framework, but do outline overarching principles, to be considered from the perspective of a "…reasonable investor with knowledge of all relevant facts and circumstances…," where SEC rules do not explicitly address a circumstance that may raise an independence concern. In considering this standard, the Commission looks in the first instance to whether a relationship or the provision of a service: (a) creates a mutual or conflicting interest between the accountant and the audit client; (b) places the accountant in the position of auditing his or her own work; (c) results in the accountant acting as management or an employee of the audit client; or (d) places the accountant in a position of being an advocate for the audit client.