Question

Audit question

Q1. set out the rights and dutoes of auditos unddr cimpany act 2006?

Q2. Explain the responsibilities of:
        - the directors
        - the auditors
       In connection with the preparation and publication of a company's financial statement

Q3. State whether the following statement are true or false and explanation to answer choosen in respect of external auditors responsibilities:
-auditors are responsible for the financial content of the annual account
   (true / false) and why?

-auditors do not have obsalute assurance that the figures that they audit are correct.
(true/false) and why?

Answer 1

Q. 1

498 Duties of auditor under Companies Act, 2006

(1)A company's auditor, in preparing his report, must carry out such investigations as will enable him to form an opinion as to—

(a)whether adequate accounting records have been kept by the company and returns adequate for their audit have been received from branches not visited by him, and

(b)whether the company's individual accounts are in agreement with the accounting records and returns, and

(c)in the case of a quoted company, whether the auditable part of the company's directors' remuneration report is in agreement with the accounting records and returns.

(2)If the auditor is of the opinion—

(a)that adequate accounting records have not been kept, or that returns adequate for their audit have not been received from branches not visited by him, or

(b)that the company's individual accounts are not in agreement with the accounting records and returns, or

(c)in the case of a quoted company, that the auditable part of its directors' remuneration report is not in agreement with the accounting records and returns,

the auditor shall state that fact in his report.

(3)If the auditor fails to obtain all the information and explanations which, to the best of his knowledge and belief, are necessary for the purposes of his audit, he shall state that fact in his report.

(4)If—

(a)the requirements of regulations under section 412 (disclosure of directors' benefits: remuneration, pensions and compensation for loss of office) are not complied with in the annual accounts, or

(b)in the case of a quoted company, the requirements of regulations under section 421 as to information forming the auditable part of the directors' remuneration report are not complied with in that report,

the auditor must include in his report, so far as he is reasonably able to do so, a statement giving the required particulars.

uties of auditor

(1)A company's auditor, in preparing his report, must carry out such investigations as will enable him to form an opinion as to—

(a)whether adequate accounting records have been kept by the company and returns adequate for their audit have been received from branches not visited by him, and

(b)whether the company's individual accounts are in agreement with the accounting records and returns, and

(c)in the case of a quoted company, whether the auditable part of the company's directors' remuneration report is in agreement with the accounting records and returns.

(2)If the auditor is of the opinion—

(a)that adequate accounting records have not been kept, or that returns adequate for their audit have not been received from branches not visited by him, or

(b)that the company's individual accounts are not in agreement with the accounting records and returns, or

(c)in the case of a quoted company, that the auditable part of its directors' remuneration report is not in agreement with the accounting records and returns,

the auditor shall state that fact in his report.

(3)If the auditor fails to obtain all the information and explanations which, to the best of his knowledge and belief, are necessary for the purposes of his audit, he shall state that fact in his report.

(4)If—

(a)the requirements of regulations under section 412 (disclosure of directors' benefits: remuneration, pensions and compensation for loss of office) are not complied with in the annual accounts, or

(b)in the case of a quoted company, the requirements of regulations under section 421 as to information forming the auditable part of the directors' remuneration report are not complied with in that report,

the auditor must include in his report, so far as he is reasonably able to do so, a statement giving the required particulars.

5)If the directors of the company—

(a)have prepared accounts in accordance with the small companies regime, or

(b)have taken advantage of small companies exemption[from the requirement to prepare a strategic report or] in preparing the directors' report,

and in the auditor's opinion they were not entitled to do so, the auditor shall state that fact in his report.]

(6)Where more than one person is appointed as auditor, the report must include a statement as to whether all the persons appointed agree on the statements given under subsections (2) to (5) and, if they cannot agree on those statements, the report must include the opinions of each person appointed and give reasons for the disagreement.]

498A Auditor's duties in relation to separate corporate governance statement

Where the company is required to prepare a corporate governance statement in respect of a financial year and no such statement is included in the directors' report—

(a)the company's auditor, in preparing his report on the company's annual accounts for that year, must ascertain whether a corporate governance statement has been prepared, and

(b)if it appears to the auditor that no such statement has been prepared, he must state that fact in his report.

Rights of Auditor under Companies Act 2006

499Auditor's general right to information

(1)An auditor of a company—

(a)has a right of access at all times to the company's books, accounts and vouchers (in whatever form they are held), and

(b)may require any of the following persons to provide him with such information or explanations as he thinks necessary for the performance of his duties as auditor.

(2)Those persons are—

(a)any officer or employee of the company;

(b)any person holding or accountable for any of the company's books, accounts or vouchers;

(c)any subsidiary undertaking of the company which is a body corporate incorporated in the United Kingdom;

(d)any officer, employee or auditor of any such subsidiary undertaking or any person holding or accountable for any books, accounts or vouchers of any such subsidiary undertaking;

(e)any person who fell within any of paragraphs (a) to (d) at a time to which the information or explanations required by the auditor relates or relate.

(3)A statement made by a person in response to a requirement under this section may not be used in evidence against him in criminal proceedings except proceedings for an offence under section 501.

(4)Nothing in this section compels a person to disclose information in respect of which a claim to legal professional privilege (in Scotland, to confidentiality of communications) could be maintained in legal proceedings.

500 Auditor's right to information from overseas subsidiaries

(1)Where a parent company has a subsidiary undertaking that is not a body corporate incorporated in the United Kingdom, the auditor of the parent company may require it to obtain from any of the following persons such information or explanations as he may reasonably require for the purposes of his duties as auditor.

(2)Those persons are—

(a)the undertaking;

(b)any officer, employee or auditor of the undertaking;

(c)any person holding or accountable for any of the undertaking's books, accounts or vouchers;

(d)any person who fell within paragraph (b) or (c) at a time to which the information or explanations relates or relate.

(3)If so required, the parent company must take all such steps as are reasonably open to it to obtain the information or explanations from the person concerned.

(4)A statement made by a person in response to a requirement under this section may not be used in evidence against him in criminal proceedings except proceedings for an offence under section 501.

(5)Nothing in this section compels a person to disclose information in respect of which a claim to legal professional privilege (in Scotland, to confidentiality of communications) could be maintained in legal proceedings.

501 Auditor's rights to information: offences

(1)A person commits an offence who knowingly or recklessly makes to an auditor of a company a statement (oral or written) that—

(a)conveys or purports to convey any information or explanations which the auditor requires, or is entitled to require, under section 499, and

(b)is misleading, false or deceptive in a material particular.

(2)A person guilty of an offence under subsection (1) is liable—

(a)on conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both);

(b)on summary conviction—

(i)in England and Wales, to imprisonment for a term not exceeding twelve months or to a fine not exceeding the statutory maximum (or both);

(ii)in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months or to a fine not exceeding the statutory maximum (or both).

(3)A person who fails to comply with a requirement under section 499 without delay commits an offence unless it was not reasonably practicable for him to provide the required information or explanations.

(4)If a parent company fails to comply with section 500, an offence is committed by—

(a)the company, and

(b)every officer of the company who is in default.

(5)A person guilty of an offence under subsection (3) or (4) is liable on summary conviction to a fine not exceeding level 3 on the standard scale.

(6)Nothing in this section affects any right of an auditor to apply for an injunction (in Scotland, an interdict or an order for specific performance) to enforce any of his rights under section 499 or 500.

502 Auditor's rights in relation to resolutions and meetings

(1)In relation to a written resolution proposed to be agreed to by a private company, the company's auditor is entitled to receive all such communications relating to the resolution as, by virtue of any provision of Chapter 2 of Part 13 of this Act, are required to be supplied to a member of the company.

(2)A company's auditor is entitled—

(a)to receive all notices of, and other communications relating to, any general meeting which a member of the company is entitled to receive,

(b)to attend any general meeting of the company, and

(c)to be heard at any general meeting which he attends on any part of the business of the meeting which concerns him as auditor.

(3)Where the auditor is a firm, the right to attend or be heard at a meeting is exercisable by an individual authorised by the firm in writing to act as its representative at the meeting.

Q. 2. The responsibilities of the directors & the auditors in connection with the preparation and publication of a company's financial statement

Under company law, responsibility for the preparation of financial statements rests with the directors. Recent disciplinary investigations into financial statements which fail to comply with accounting standards or the Companies Act have not been restricted to auditors; the conduct of directors has also come under scrutiny.

A registered auditor will be liable to disciplinary action in respect of financial statements which fail to comply with accounting standards or the Companies Act. If you act as a director, you may be liable to disciplinary action if it is deemed that the duties of your employment have been performed "inefficiently or incompetently to such an extent, or on such a number of occasions, as to bring discredit on [yourself].
In these circumstances, you may have a defence if you can demonstrate that your duties were fulfiled diligently, for example through careful consideration of any subjective issues and by full consultation with the other directors and the audit committee as appropriate, and through the taking of advice.

Although it is important to take advice, it is generally presumed that if you hold a position of director, in particular in respect of a public interest company, you will have an adequate knowledge of the accounting standards and the Companies Act, and will refer to the relevant standards when considering material issues in relation to financial statements. This is of particular relevance if you act as a member of an audit committee.

Under company law, responsibility for the preparation of financial statements rests with the directors. You are party to a decision to approve financial statements which, subsequently, are found not to comply with accounting standards or the Companies Act, there may be a risk of liability to disciplinary action. Recent disciplinary investigations into financial statements which fail to comply with accounting standards or the Companies Act have not been restricted to auditors; the conduct of directors has also come under scrutiny.

The Institute obtains information from a variety of sources and this may result in an investigation concerning the financial statements of public companies. Most investigations originate from press notices issued by the Financial Reporting Review Panel (FRRP), following FRRP enquiries into the relevant financial statements. The FRRP has become proactive in its review of public interest company financial statements, and the conduct of directors and auditors is coming under increased scrutiny.

A registered auditor will be liable to disciplinary action in respect of financial statements which fail to comply with accounting standards or the Companies Act. If you act as a director, you may be liable to disciplinary action if it is deemed that the duties of your employment have been performed "inefficiently or incompetently to such an extent, or on such a number of occasions.

In these circumstances, you may have a defence if you can demonstrate that your duties were fulfiled diligently, for example through careful consideration of any subjective issues and by full consultation with the other directors and the audit committee as appropriate, and through the taking of advice.

Although it is important to take advice, it is generally presumed that if you hold a position of director, in particular in respect of a public interest company, you will have an adequate knowledge of the accounting standards and the Companies Act, and will refer to the relevant standards when considering material issues in relation to financial statements. This is of particular relevance if you act as a member of an audit committee.

Q3. State whether the following statement are true or false and explanation to answer choosen in respect of external auditors responsibilities:
-auditors are responsible for the financial content of the annual account
   (true / false) and why?

False

In publicly held companies, management produces the financial statements showing the results of operations and the financial position of the company. The auditor’s role is to consult with management if any deficiencies have been identified through an audit. Assuming that all discovered material deficiencies are accounted for, the external auditor certifies that, based on his examination of the financial statements and their underlying documentation, the statements do fairly represent the financial position of a firm at that time.

The depth of the audit can vary; it depends on the cost of more audit time versus the potential benefit of a greater level of assurance. Thus, if external auditors are assigned the task of assuring that there is no fraud in financial statements, the cost of audits inevitably will rise—probably dramatically.

Only management has the resources (internal auditors) and the authority to institute internal controls and the leadership to establish and maintain the standards of ethics. Such leadership is necessary to provide even a reasonable level of assurance that the financial statements are fair representations of the company’s financial condition.

In an effort to increase management’s awareness of and responsiveness to its responsibility for the financial statements, the Commission on Fraudulent Financial Reporting, in its April 1987 report, made many significant recommendations, among which the following two would be most far reaching:

"The Auditing Standards Board should revise the auditor’s standard report to state that the audit provides reasonable but not absolute assurance that the audited financial statements are free from material misstatements as a result of fraud or error."

"All public companies should be required by SEC rule to include in their annual reports to stockholders signed by the chief executive officer and chief accounting officer. The management report should acknowledge management’s responsibilities for the financial statements and internal control, discuss how these responsibilities were fulfilled and provide management’s assessment of the effectiveness of the company’s internal controls." ¹

Together, these two recommendations not only would make the public aware of the inherent limitations of cost/benefit–driven external audits and management’s ultimate responsibility for the financial statements, but they would also force management to assume its responsibility for assuring that the statements are fair.

auditors do not have obsalute assurance that the figures that they audit are correct.
(true/false) and why?

True

1. This standard establishes requirements and provides direction that applies when an auditor is engaged to perform an audit of management's assessment1 of the effectiveness of internal control over financial reporting ("the audit of internal control over financial reporting") that is integrated with an audit of the financial statements.

2. Effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. If one or more material weaknesses exist, the company's internal control over financial reporting cannot be considered effective.

3. The auditor's objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the company's internal control over financial reporting. Because a company's internal control cannot be considered effective if one or more material weaknesses exist, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain appropriate evidence that is sufficient to obtain reasonable assurance about whether material weaknesses exist as of the date specified in management's assessment. A material weakness in internal control over financial reporting may exist even when financial statements are not materially misstated.

4. The auditor should use the same suitable, recognized control framework to perform his or her audit of internal control over financial reporting as management uses for its annual evaluation of the effectiveness of the company's internal control over financial reporting.