Statutory audit and regulation (Small co. audit exemption (A smaller…
Statutory audit and regulation
Objective of statutory audits
Most companies are required to have an external audit by law, but some small companies are exempt.
Statutory audit opinion
The outcome of the audit is the auditor’s report, which sets out the auditor's opinion on the financial statements
the purpose of an audit is for the auditor to express an opinion on the financial statements.
The audit opinion may also imply certain things are true, because otherwise the audit report would have mentioned them. For example, in the UK, such implications include
Adequate accounting records have been kept.
Returns adequate for the audit have been received from branches not visited.
The accounts agree with the accounting records and returns
All information and explanations have been received that the auditor believes are necessary for the purposes of the audit.
Details of directors' emoluments and other benefits have been correctly disclosed in the financial statements.
Particulars of loans and other transactions in favour of directors and others have been correctly in the financial statements.
Value of statutory audit
the principal aim of the external audit – to provide an independent opinion on the truth and fairness of the financial statements
an external audit can be invaluable to an entity
because it may enhance the credibility of the financial statements, as they will have been examined independently.
The external audit can also highlight other issues as a result of work relating to the financial statements, such as deficiencies in the internal control system of the entity, which can be improved by the entity's management.
For these reasons, even where entities are not obliged to undergo an external audit, they may choose to do
so, regardless of the costs involved (time and money) because the benefits outweigh those costs.
Small co. audit exemption
The majority of companies are required by national law to have an audit. A key exception to this requirement is that given to small companies
Many European Commission (EC) countries have a small
company exemption from audit that is based on the turnover and total assets at the year end
Note that, unless otherwise stated, companies in the F8 paper will require an audit.
In most countries, the majority of companies are very small, employing few people (if any) and are often owner-managed. This is very different from a large business where the owners (the shareholders) devolve the day-to-day running of the business to a group of managers or directors. International auditing standards use the term 'smaller entities'.
A smaller entity is an entity which typically possesses qualitative characteristics like:
Concentration of ownership and management in a small number of individuals (often a single individual)
One or more of the following:
Straightforward or uncomplicated transactions
Few lines of business and few products within business lines
Few internal controls
Few levels of management with responsibility for a broad range of controls
Few personnel, many having a wide range of duties
There has long been a debate over the benefits of audit to small entities. Where such entities are owned by the same people that manage them, there is significantly less value in an independent review of the stewardship of the managers than where management and ownership are separate.
The case for retaining the small company audit rests on the value of the statutory audit to those who have an interest in audited financial statements statements; that is, the users of the financial statements. From the viewpoint of each type of user, the arguments for and against abolition are summarised in this table. (1)
Auditor rights and duties
The law gives auditors both rights and duties (in UK this law is the Companies Act 2006). This allows auditors to have sufficient power to carry out an independent and effective audit
The audit is primarily a statutory concept, and eligibility to conduct an audit is often set down in statute. Similarly, the rights and duties of auditors can be set down in law, to ensure that the auditors have sufficient power to carry out an effective audit
The auditors are required to report on every statement of financial position (balance sheet) and statement of profit or loss and comprehensive income (profit and loss account) laid before the company in general meeting. The auditors must consider the following: (2)
The auditors must have certain rights to enable them to carry out their duties effectively. The principal rights that auditors should have, excepting those dealing with resignation or removal, are set
out in the table that follows. (3)
If auditors have not received all the information and explanations they consider necessary, they should state this fact in their audit report.
The Companies Act 2006 makes it an offence for a company's officer to knowingly or recklessly make a statement in any form to an auditor which:
Conveys or purports to convey any information or explanation required by the auditor
Is misleading, false or deceptive in a material particular
Appointment, removal and resignation of auditors
There are various legal and professional requirements on appointment, resignation and removal of auditors which must be followed.
The auditors should be appointed by and therefore answerable to the shareholders
The Companies Act 2006 sets out the rules for appointment of auditors. An auditor must be appointed for each financial year unless the directors reasonably resolve otherwise on the grounds that audited financial statements are unlikely to be required.
The table summarises who can appoint auditors for UK public companies. (4)
The remuneration of the auditors, which will include auditors' expenses, will be fixed by whoever made the appointment.
However the auditors' remuneration is fixed, in many countries it must be disclosed in the annual financial statements of the company
Resignation and removal
We discuss the legal requirements for resignation and removal of auditors in the UK law.
It is important that auditors know the procedures, because as part of their client acceptance, they have a duty to ensure the old auditors were properly removed from office.
Resignation of auditors (5)
Removal of auditors (6)
The UK's Companies Act 2006 places a requirement on auditors to notify the appropriate audit authority in certain circumstances on leaving office
If it is a major audit (quoted company or major public interest company), the notification must be given whenever an auditor ceases to hold office.
If it is not a major audit, the notification is only required if the auditor is leaving before the end of their term of office.
The appropriate audit authority is
Secretary of State or delegated body (such as the UK Conduct Committee) if a major audit
Recognised Supervisory Body (eg ACCA) for other audits
Notice must inform the appropriate audit authority that the auditor has ceased to hold office and be accompanied by a statement of circumstances or no circumstances.
Regulation of auditors
Requirements for the eligibility, registration and training of auditors are extremely important, as they are designed to maintain standards in the auditing profession
The accounting and auditing profession varies in structure from country to country. In some countries accountants and auditors are subject to strict legislative regulation, while in others the profession is allowed to regulate itself. We cannot look at every country, but some of the examples below will show you the divergence of structure and we can make some general points.
In the UK there are a number of different accountancy, or accountancy-related, institutes and associations, such as the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants in England and Wales (ICAEW) and the Institute of Chartered Accountants of Scotland (ICAS).
All these bodies vary from each other but they are all characterised by various attributes:
Stringent entrance requirements (examinations and practical experience)
Strict code of ethics
Technical updating of members
In France, the accounting profession is split into two distinct organisations:
Accountants (Ordre des Experts Comptables et des Comptables Agréés)
Auditors (Compagnie Nationale des Commissaires aux Comptes)
Most members of the auditors' organisation are also members of the more important accountants' organisation. Examinations, work experience and articles are similar to those of the UK accountancy bodies. The profession's main influence is through the issue of non-mandatory opinions and recommendations of accounting principles relevant to the implementation of the National Plan.
The main professional body in Germany is the Institute of Certified Public Accountants (Institut der Wirtschaftsprüfer).
Members of this institute carry out all the statutory audits, and are required to have very high educational qualifications and experience
The Institute issues a form of auditing standard but
this is tied very closely to legislation.
As well as auditing, members are mainly involved in tax and
business management, with no obvious significant role in establishing financial accounting principles and practices.
There is no independent accounting standard-setting body.
In the US, accountants are members of the American Institute of Certified Public Accountants (AICPA), a private sector body
Although the Securities and Exchange Commission in the US can prescribe accounting standards for listed companies, it relies on the Financial Accounting Standards Board (FASB), an independent body, to set such standards
In turn, FASB keeps in close contact with the AICPA, which
issues guidance on US standards and is closely involved in their development.
In Ghana, the Institute of Chartered Accountants (Ghana), established in 1963, is the sole body charged with the regulation of the accountancy profession
Its members are the only persons recognised under the country's companies' legislation to carry out the audit of company financial statements
The institute is governed by a council of 11 chartered accountants.
The Institute of Certified Public Accountants of Singapore (ICPAS) is the national organisation of the accountancy profession in Singapore
It was established in 1963 and its objective is to develop, support
and enhance the integrity, status and interests of the accountancy profession in Singapore
ICPAS has a Joint Scheme of Examination agreement in place with ACCA.
It can be seen that the accounting and auditing profession in most Western countries is regulated by legislation to some extent
In the UK and the US the profession effectively regulates itself, ie regulation is devolved from statute to the private bodies involved in the accountancy profession.
In many European countries, statutory control by governments is much more direct
EU member states