Responses to this Discussion Paper will be of particular importance to the Professional Oversight Board ('POB'), including the Audit Inspection Unit ('AU') which monitors the quality of audits of listed entities and other entities. of great public interest, and the Auditing Practices Board ('APB') which sets the standards of auditing and ethics in the UK. Establishment of the Financial Reporting Council ('FRC') (with oversight from the Accounting Standards Board4 ('ASB') and the Financial Reporting Review Panel5 ('FRRP')); Changes to the composition of the Auditing Practices Board ("APB") (to introduce more non-practitioners and give it operational independence from accounting institutes and the Consultative Committee of Accounting Bodies).
The Audit Inspection Unit (hereinafter: AIU) was established to independently monitor the audit quality of listed companies and other major public interest entities.
2 AUDIT QUALITY
Companies have no way of communicating the importance they attach to the quality of the audit of their financial statements. The terms on which the audit is undertaken are usually discussed between management and the audit firm and confirmed under the supervision of the audit committee (and ultimately the board).
3 THE CULTURE WITHIN AN AUDIT FIRM
This includes, for example, ensuring that the behavior of audit partners and employees is not influenced by encouraging them to believe that they will be indirectly rewarded for success in selling non-audit services to their audit clients or penalized for jeopardizing a client relationship through a robust stance on audit issues. Whether the firm avoids decisions motivated by short-term financial considerations when those decisions would have a negative effect on audit quality. The leadership of the audit function has insufficient input into management decisions because of the conflicting interests of other parts of the practice.
An overemphasis on obtaining audit appointments and retaining audit clients at the expense of the quality of audit judgments. Excessive cost-cutting (including reduction of partners and staff) in the audit practice during the economic crisis, which harms audit quality assurance in the medium term. To address this, an agreement was reached between the Department of Trade and Industry and a number of major audit firms, whereby they agreed to publish information about their internal management and quality control procedures.
However, there are concerns that this information is not individually identified and in many cases is formulated in terms that are too general for its original purpose of promoting confidence in the companies' internal governance and quality control17. Q2 Are there any pressures that could jeopardize the culture of accounting firms not mentioned above? Q3 Are there any further steps to be taken to build trust in the culture of audit firms and, if so, what could they be and why are they needed?
4 THE SKILLS AND PERSONAL QUALITIES OF AUDIT PARTNERS AND STAFF
For example, one of the professional bodies offering an audit qualification no longer has a clean audit paper in the final exam. Firms generally provide training on the technical aspects of auditing and on the firm's audit methodology requirements. And as auditors are increasingly expected to address broader public interest issues (such as those raised by the Combined Code), the training provided by firms must go beyond merely teaching staff the use of firm methodologies related to accounting and revision.
In principle, this is undoubtedly the right approach, because classroom training is only part, and perhaps only a small part, of the process by which auditors develop skills and experience. For example, training on the technical aspects of auditing may focus on the application of the company's methodology, with the. And such people may have other demands on their time, including "special" or non-audit work or involvement in the company's internal management, which they may view as more career-advancing.
An important part of larger companies' quality control systems is the process of accepting or continuing to act for a customer. The structure, experience and knowledge of the audit team is appropriate for the engagement and resources are sufficient to enable an informed response to issues that may arise. The objectives of ethical standards are met, providing confidence in the integrity, objectivity and independence of the auditor.
5 THE EFFECTIVENESS OF THE AUDIT PROCESS
THE RELIABILITY AND USEFULNESS OF AUDIT REPORTING
Furthermore, since the key elements of the auditor's report are specified by law and auditing standards, the report has become highly codified and standardized. Unless modified (either by qualification or emphasis), it contains little information that provides users with an insight into the underlying quality of the audited company's financial information. It encourages dialogue about the scope of the audit and the areas and issues that should be subject to greater scrutiny.
The type of information exchanged may include matters relating to the auditor's independence and objectivity, information on the planning of the audit and the results of the audit, including the auditor's views on the qualitative aspects of the company's accounting and reporting (including assessments and estimates); and. There is concern that the inclusion of the additional words will limit the scope of the meaning of "true and fair view" and will encourage auditors to adopt a more compliance-oriented approach. The Companies Act 2006 will result in a continuation of the obligations of both directors and auditors in this regard.
Some institutional investors believe that it can be advantageous to require information in the audit opinion about the basis for. In particular, which changes to the form and content of the audit report should be considered. Tight reporting deadlines limit the possibility of detailed work by auditors after the reporting period and result in increased reliance on work done before the end of the reporting period.
7 FACTORS OUTSIDE THE CONTROL OF AUDITORS AFFECTING AUDIT QUALITY
RECENT CHANGES IN THE REGULATION OF CORPORATE REPORTING IN THE
Making recommendations regarding the appointment and remuneration of external auditors and approving the terms of engagement; 30 Since 1993, the Listing Rules have specified those aspects of the Combined Code that auditors are required to review. Consider the consistency and perceptibility of auditors in dealing with key accounting and auditing judgments;.
Obtain feedback on audit performance from key stakeholders (e.g. CFO and Head of Internal Audit); and. APB issued a standard that reflected the requirements of the consolidated code regarding the relationship between auditors and audit committees38. Remove any ambiguity regarding the requirements to be met by the professional accountant arising from the use of the present tense in the instructions contained in the current standards; and.
The ethical standards issued by APB represented a comprehensive revision of ethical guidelines previously issued by accounting bodies. The audit registration committees of the accounting bodies receive formal reports from the SAI on their monitoring work, with the BOP overseeing the actions taken by them in response to the SAI. In response, 13 of the 20 largest audit firms gave a voluntary commitment to comply with the Government's proposals for transparency reporting.
THE PROVISIONS OF THE COMPANIES ACT 2006 THAT AFFECT AUDIT
The directors of a company must not approve accounts unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit and loss of the company. If annual accounts are approved which do not comply with the requirements of the Act, every director who knew that they did not comply, or was reckless in complying with them and failed to take reasonable steps to ensure compliance or prevent the accounts from being approved. an offense and is punishable by a fine;. Under section 221, Companies Act 1985, companies are required to keep accounting records capable of preparing accounts for the company and enabling the directors to determine the company's financial position from time to time.
Auditors must (section 237) make such inquiries as will enable them to form an opinion as to whether the company is keeping "adequate" accounting records and report if they consider that the company is not doing so. The APB intends to review those standards and guidelines that relate to this requirement to ensure that the auditor's responsibilities are clearly addressed. Pursuant to the Companies Act 2006, a disclaimer agreement between a public company and its auditor may be approved by the company passing a resolution approving the agreement or its main terms at a general meeting.
The limitation of liability agreement is not effective to limit the auditor's liability to less than the amount that is fair and reasonable in all the circumstances of the case. Under the Companies Act 2006, an auditor commits an offense if he knowingly or recklessly causes an auditor's report on a company's accounts to include any matter which is misleading, false or fraudulent in a material detail44. 44 A person who is guilty of such an offense shall be fined on conviction or indictment.
RESEARCHING AUDIT QUALITY
Firstly, much of the research in this area has been carried out in North America and its applicability in the UK environment cannot be assumed. Simunic (1994) "The relationship between audit quality, retained ownership and firm-specific risk in the United States, and it remains uncertain whether any higher fees reflect higher underlying audit quality or the market power of the major providers of audit services49. The occurrence of conduct that may bring the audit quality at risk and the related.actions taken by audit firms to prevent such behavior and encourage high-quality auditing partly reflect the firm's culture, values and management.
A further source of evidence on what factors undermine audit quality can be obtained by examining the circumstances that have occurred in real cases of alleged audit failure52. Unlike the research approaches mentioned above, the main difficulty with this type of evidence is specification. As audit committees' responsibilities regarding matters such as auditor appointment have grown, it is relevant to consider what attributes audit committee members equate with high quality auditing.
There is the potential for a virtuous circle in which different parts of the management structure reinforce each other. The product of the quality of the audit can be related to the quality of the. In general, the way in which the market reacts to information about the financial statements has been found to be influenced by the reputation of the auditor (again tested by comparing top-tier audit firms with other firms)55.
AUDIT RESOURCES WITHIN MAJOR FIRMS AT 31 DECEMBER 2005
NOTICE TO READERS
November
Discussion Paper
PROMOTING AUDIT QUALITY
