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Ethical Conflict Resolution Ethics Relevant to Taxation Tax Evasion and Avoidance
Principles Overview
Type Explanation This gives guidance on how to apply the Combined Code with regards to
Leadership – Effective board should lead and control the company internal control and encourages a risk based approach
(have Exec Chairman (head NED) and CEO (head ED) roles should be
and Non Exec separate, public justification required for combining roles Directors should consider the control environment, risk assessment,
Directors – Chairman is responsible for leading the board and information systems, control procedures and monitoring
E.D know the promoting culture of openness
company and Non-Exec’s, involved with strategic proposals, monitoring
N.E.D know managements performance, and reporting on Disclosure
the outside performance as well as remuneration and board A statement should be included in the annual report disclosing that there is a
perspective) appointments process for identifying, evaluating and managing risks
Majority of non-executives independent
Regular re-election
Effectiveness Appropriate balance of Exec and Non-Exec Directors (at
least 50% N.E.D)
Nomination committee, should lead process for board
appointments (maj of members being independent
N.E.D)
Full time executive director should not also have more
than one non-exec directorship of FTSE 100 company or
be Chairman of such company
Company secretary responsible for ensuring information
flows to board and advising on corporate governance
issues.
Directors should submit themselves for re-election at
least once every 3 years (larger company’s should be
each year).
Audit & Assurance Corporate Governance Revision Notes
Audit Committees -Communicate any weaknesses found during audit promptly (management
letter)
UK Corporate Governance Code guidelines are as follows:
Responsibilities relating to Internal Controls
Membership -report by exception as an emphasis of matter if problems arise
-report in directors report -include in the audit report, “we are not required to consider whether the
-have at least one member with financial experience board’s statement on internal controls covers all risks and controls, or form
-have all members trained an opinion on the effectiveness of the company’s corporate governance
-have at least 3 members of independent non-executive directors procedures or its risk and control procedures”
APB Advice
The relationship between the auditors and the audit committee should
consist of open communication and there should be a discussion at the end
of the audit about
-non-compliance with laws and regulations
-control environment
-significant adjustments to the financial statements
-how differences between management and the auditors were resolved
Sarbanes-Oxley Act
Principles
Audit committee responsible for the accuracy of the annual report
Increased financial statement disclosures
Internal code of ethics required
Restrictions on share trading by company officers
Auditors’ Responsibilities
Overview
The auditors are required by Stock Exchange listing rules to review parts of
the director’s statements on the code concerning:
-responsibilities of directors and auditors
-effectiveness of risk management and internal controls
-provisions relation to audit committees
-going concern
-remuneration of directors
Role and Context of Modern Auditing Planning and Risk Assessment Audit Evidence
Materiality
Transactions can be material by nature
(qualitative), size (quantitative) or impact
IT Environment Directors’ Loans and Other Transactions Assurance and Related Services
In the following situations, they could be held personally liable and ordered This gives a prescribed part, subject to a maximum of £600,000 that is set
to contribute to the assets of the company aside for unsecured creditors
Situation Description
Wrongful Trading unintentionally whilst the company is insolvent The floating charge holders are not entitled to participate in the prescribed
Trading Extends to shadow directors, so could also be a risk to part as an unsecured creditor to make up any shortfall under its floating
auditors
charge, therefore if there is insufficient net property after deduction of the
Directors should take steps to appoint an insolvency
practitioner at earliest possible stage to show they acted prescribed part, the floating charge holders will not receive any further funds
in creditors’ best interests, or inject their own finance
Fraudulent Civil and criminal offence where there is intentional Repayment Proforma
Trading trading whilst the company is insolvent £ £ Notes
Undervalue If took place in 2 years before liquidation, unless entered Assets of the company X
Transactions into in good faith for benefit of company’s trade Less amounts paid to
Preferences If company gives preference to a creditor so they will 1) Liquidators X
benefit if the company goes into liquidation within 6 2) Fixed charge holders X Proceeds of charged assets
months (or 2 years in the case of a connected person) 3) Preferential creditors X Employees
Floating Charge If created within 1 year before winding up (2 years if (X)
connected person), they may be void Net property X
Deduct prescribed part (X)
The above are civil offences, other than fraudulent trading, which is also a X
criminal offence Less amounts paid to
4) Floating charge holders X Any excess is lost
(X)
Risks to Auditors
Add prescribed part X
There is the possibility of being covered by the wrongful trading provisions X
above, if the auditor acted as a shadow director Less amounts paid to
5) Unsecured creditors X Includes unpaid fixed charge
There is also the possibility of being sued for negligence if the auditor failed 6) Preference holders X
to identify going concern problems, subject to negligence requirements, (X)
documented within fraud above Ordinary shareholders X
Repayment on Winding Up Note that at no point can this proforma be taken to a negative position, so
On winding up a company, any assets realised should be used to settle take care to restrict payments where necessary
outstanding liabilities or return funds to shareholders in the following order
1) Liquidators fees Once all assets have been distributed, those creditors and shareholders not
2) Fixed charge holders (out of proceeds only of assets under charge) yet paid do not receive any funds
3) Preferential creditors (employees, subject to limits)
4) Floating charge holders (subject to prescribed part) Questions may ask to calculate the expected repayment of an unsecured
5) Unsecured creditors (including any unpaid fixed charge holders) creditor, so complete the proforma to determine the total payments to
6) Preference shareholders unsecured creditors and then calculate as a percentage of total unsecured
7) Ordinary shareholders creditors and apply to the particular creditor in question
Audit & Assurance Company Size and Structure Revision Notes
Small Company Audits To meet their responsibilities, the principal auditor must consider the following
Consideration Description
Audit Exemption Whether to Considerations include
An audit is required if two of the following accept -materiality of part of group not audited by them
conditions are met for two out of the three appointment -degree of knowledge of components
-risk of material misstatements in components audited by other auditors
preceding years
-performance of additional procedures regarding other auditors
-annual turnover >£6.5m Legal rights The principal auditors have legal right to
-gross assets >£3.26m -information and explanations from the auditors of UK subsidiaries
-employees >50 -assistance from the parent company in obtaining information and explanation from
auditors of foreign subsidiaries
In addition a company should have an audit, Reliance on The principal auditor must evaluate
irrespective of size, if it is a regulated company or work of other -professional qualifications
auditors -membership of a professional body
if a shareholder requests it under Companies Act
-experience and reputation
2006 -adequacy of resources
Communication The principal auditor must communicate
If no audit is required, they may still be assurance with other -independence requirements
provided in the form of auditors -audit plan, including timetable and risk areas
-a voluntary audit Review work Considerations include
-a review of the financial statements done by other -discuss procedures
auditors -review written summary
-obtain written representations
Risk of Small Company Audits
Report of group This is the responsibility of the principal auditor alone
Business risks financial
-overtrading statements
-problems raising finance
-embryonic management Auditing Consolidations
-lack of accounting and legal knowledge The key risk when auditing consolidations is that auditors may undertake the consolidation audit purely
as an arithmetic exercise, whereas problems are more likely to arise from the adjustments and
Audit risks accounting treatment of components, particularly where there have been changes in the year to either
-going concern issues business combinations or accounting standards that would impact on the consolidation
-weak controls
-lack of comparatives The following are key considerations when auditing consolidations
-incentive to manipulate data to obtain or Consideration Description
continue receiving finance Audit Work Compare audited accounts of components to consolidation schedules
-reliance by bank on audited accounts Consider potential alignments of accounting policies
Review consolidation adjustments
Small companies often struggle to raise finance Compare consolidation adjustments with those made in the prior year
as they have a lack of assets available for security Review accounting treatment of combinations and disposals
Consider whether the treatment of existing combinations is appropriate
and do not have audited accounts and where
Check mathematical accuracy
finance is available, it is often more expensive
Review consolidated accounts for compliance and to confirm truth and fairness
due to the increased risk taken by the investor
Best Practice Get organised
for Group Analyse the group structure
Business Structures and Global Enterprises Audits Focus on quality of other auditors
Focus the group audit on high risk areas
Audit Risks Understand internal control across the group
The structure of a business has accounting and Ensure staff understand technical complexities
auditing implications and can give risk to specific Review other auditors’ working papers
risks, such as Related Transactions with consolidated subsidiaries need not be disclosed
Parties Related parties are only those related to the consolidated group
-impact of corporate change
Letters of The auditor of a subsidiary with going concern issues may use a support letter from the
-need to deal with other auditors
Support parent that the company is a going concern
-complexity
-geographical spread
The best practice for audit groups is taken from an ICAEW publication
-internal control systems
Global Enterprises
ISA 600 Other Auditors
Entities within a group may have different
Overview
auditors (component auditors)
These are particularly affected by the following
Type Description -financial risks (especially inflation, interest rates, exchange rates and currency restrictions)
Principal The auditor with responsibility for
-political risks
Auditor reporting on the financial
statements of the group -regulatory risks
Other The auditor with responsibility for
Auditor reporting on the financial Audit Considerations
statements of a component of the The following will need to be taken into account on the audit of global enterprises
group -internal control will need to take into account the varying local requirements
Component Division, branch, subsidiary, joint -international business strategy will have to pay attention to compliance
venture, associate or other entity,
-local auditors may not be of adequate quality to place reliance upon
whose results are included in the
-reliance may be placed upon the audited financial statements by many parties in different countries
group financial statements
-risk of widespread damage to the audit firm’s reputation in the event of problems
Audit & Assurance Specific Audit Procedures Revision Notes