CURRENT TRENDS QUESTION AND ANSWERS

QUESTION 1

Maxwell and Associates, an audit firm comprising three professional accountants has been in operation for the past three years. The staff in the firm includes two junior auditors and two trainees. The firm’s clients include small companies, partnership firms and sole proprietors.

The country in which Maxwell and Associates operates recently decided to adopt international standards of accounting and auditing. The auditors have been using national standards while conducting audits.

Required:

Explain how the change to international standards of accounting and auditing would affect Maxwell and Associates approach to audit.

  • Lack of staff – The firm may lack required manpower. Therefore, it would not be possible for it to concentrate on new areas such as international standards.
  • Lack of quality staff- The firm does not have experienced staff in specific areas such as due -diligence, internal audit and systems audit
  • Lack of international experience – The firm has a local client base and no international operations.
  • Limited capital – The firm has limited capital to invest in innovative and changing profession& requirements of quality control. It may also not be able to train its staff.

QUESTION 2

Explain the procedure for setting Auditing Standards.

Procedure for setting auditing standards

  • The Auditing and Assurance Standards Board (AASB) determines the broad areas in which the standards on Auditing (SAs) need to be formulated and the priority in regard to the selection there of.
  • In the preparation of ISAs, the AASB is assisted study groups constituted to consider specific-subjects. In the formation of study groups, provision is made for participation of a cross-section of members of the institute.
  • On the basis of the work of the study groups, an exposure draft of the proposed SA is prepared the committee and issued for comments members of the institute.
  • After taking into consideration the comments received, the draft of the proposed SA is finalized the AASB-and submitted to the council of the institute.
  • The council of the institute considers the final draft of the proposed SA, and, if necessary, modifies the same in consultation with the AASB. The SA is then issued under the authority of the council.

QUESTION 3

Corporate governance has become an issue of worldwide importance. In furtherance to corporate governance, audit committees have been established various companies.

Required:

Explain six ways in which the establishment of an audit committee would assist in improving the effectiveness of external audit work.

  • Increasing public confidence in the creditability and objectivity of published financial information including unaudited interim statements
  • Assisting directors (particularly non-executive directors) in meeting their responsibilities in respect of financial reporting

 

  • Strengthening the independent position of a company’s external auditor providing an additional channel of communication.

It is recommended that companies should have a committee of the board called the auditing committee. This would consist of at least three non-executive directors with written terms of reference which Cleary deal with its authority and duties.

– An audit committee has various responsibilities which include: –

  • Review of a company’s internal control procedures
  • Review of the internal audit function. The audit committee providing an independent reporting channel
  • Review of the company’s current accounting policies and possible changes resulting from the introduction of new accounting standards
  • Review of regular management information (e.g. monthly management accounts).
  • Review of annual financial statements presented to the shareholders
  • Review of the results of the external auditor’s examination to ensure that the auditors have performed an effective, efficient and independent audit.
  • Procedures for reviewing published interim (preliminary) statements, draft prospectus, profit forecasts etc. a Receiving and dealing with external auditors. Criticisms of management and ensuring that recommendations of internal and external auditors have been implemented.
  • Recommending nomination and remuneration of the external auditors.

The relationship between the audit committee and the external auditor should be close such that the auditor should have unrestricted access to the committee. The auditor should present his findings regarding any fraud involving the management to this committee.

It is recommended that a majority of the non-executive directors on the committee should be independent of management. The notion that the non- executive members of the audit committee can be suitably independent may b difficult to achieve.

Ideally’ the audit committee should comprise of persons who have a suitable range of professional and business skills, sufficient knowledge of the business and yet have not developed close relationships with the main board.

They should have had FIO recent actual movement with the direct management of the organization thus their judgment should be impartial free from influence and therefore unbiased.

The ban on advertising of accountancy services in Kenya is not sustainable. Discuss.

  • Developments in the developed countries have led to accountants advertising their services in several countries.
  • The arguments for advertising include:
  • Increasing awareness of the: services provided accountant’s hence increasing business. Eliminating the quacks or those who are not licensed because the public will know who is licensed and who is not.
  • Giving clients a wide choice
  • Enhancing competition hence leading to provision of higher quality services at lower costs and making the services of accountant more affordable to small enterprises.

However it has been argued that advertising will lead to unfair competition and unethical adverts claiming superiority over others. This would dent the image of the profession.

However these events have not occurred in these-countries which advertise and therefore since the movement globally is towards advertising it probably a matter of time before advertising is allowed in Kenya.

Failure to make it legal will only promote unethical non-standardized process which will actually age the reputation of the profession.

The auditors have a legal duty to their clients. This legal duty appears to have, of late, been extended to cover third parties not in direct contractual relationship with the auditors.

State specific actions an auditor or an audit firm should take to minimize liability deriving from audit risk.

  • Incorporation into limited liability companies where the laws allow
  • Introducing disclaimers in their audit reports and limiting the circulation
  • Taking professional indemnity insurance • Adhering to professional guidelines strictly.

QUESTION 4

In an attempt to improve Corporate Governance of companies in Kenya banks and listed companies are now required to have audit committees.

Explain the composition and the role of audit committees-and offer suggestions as to how their role can be strengthened.

The composition of the audit committee.

It is recommended that a majority of the non-executive directors on the committee should be independent of management. The notion that the non-executive members of the audit committee can be suitably independent may be difficult to achieve.

The main objectives usually associated with audit committees include;

    • Increasing public confidence in the creditability and objectivity of published financial information including un audited interim statements
    • Assisting directors (particularly non-executive directors) in meeting their responsibilities in respect of financial reporting
    • Strengthening the independent position of a company’s external auditor providing an additional channel of communication.

An audit committee has various responsibilities which include: –

  • Review of a company’s internal control procedures
  • Review of the internal audit function. The audit committee providing an independent reporting channel
  • Review of the company’s current accounting policies and possible changes resulting from the introduction of new accounting standards
  • Review of regular management information (e.g. monthly management accounts).
  • Review of annual financial statements presented to the shareholders
  • Review of the results of the external auditor’s examination to ensure that the auditors have performed an effective, efficient and independent audit.
  • Procedures for reviewing published interim (preliminary) statements, draft prospectus, profit forecasts etc.
  • Receiving and dealing with external auditors. Criticisms of management and ensuring that recommendations of internal and external auditors have been implemented.
  • Recommending nomination and remuneration of the external auditors.
  • The relationship between the audit committee and the external auditor should be close such that the auditor should have unrestricted access to the committee. The auditor should present his findings regarding any fraud involving the management to this committee.

Ideally the audit committee should comprise of persons who have a suitable range of professional and business skills, sufficient knowledge of the business and yet have not developed close relationships with the main board.

They should have had no recent actual movement with the direct management of the organization, thus their judgment should be impartial free from influence and therefore unbiased.

QUESTION 5

Auditors and Auditing standards are controlled and regulated in a number of different ways.

Required

  • Explain how international Standards on auditing (ISAs) are developed I.AASB and explain the role and authority of ISAs.
  • ISAs set out the basic principles and essential procedures that auditors should follow in the conduct of an audit of financial statements.
  • Auditing Standards are in bold type. The grey type found in ISAs provides guidance on the application of ISAs.
  • International Standards on Auditing are set the International Auditing Practices Committee (IA PC) of the International Federation of Accountants (IFAC). The IAPC is made up of representatives of the profession who are members of IFAC. iv) ISAs and other documents issued the IAPC are developed using a process of exposure and consultation in order to obtain consensus and wide-spread acceptance of standards. Consultation is with interested parties outside the profession, as well as within the profession itself
  • ISAs apply to all audits of financial statements that are expressed in true and fair, fair presentation, or similar terms.
  • ISAs are developed with due regard for developments in national standard’s as described in (c) below.
  • Explain the role of professional bodies in the regulation of auditors
  • Auditors are regulated differently in different countries. In some countries governments regulate auditors directly, or through government organisations, i n other countries the
  • Profession is self-regulating. In most cases, there is some combination of self-regulation and government regulation.
  • The professional bodies regulating auditors in the Kenya include the ICPAK. There is a strong tradition of self-regulation in the Kenya which is not the case in, for example, certain European countries where government regulation is more direct.
  • Professional bodies such as the ICPAK, like other regulators, seek to uphold professional standards, to investigate complaints against auditors, and to assist auditors in the performance of their duties. They have both investigative powers and sanctions against auditors who do not comply with professional standards. These include fines, exclusion from membership, and the withdrawal of the license to audit (audit registration). Members of the ICPAK are bound its Rules of Professional Conduct.
  • The ICPAK encourages high professional standards setting academic requirements for those wishing to study for the examinations, setting the examinations and requiring additional experience of those who wish to practice as auditors.
  • Describe how ISAs and national auditing standards in some individual countries influence each other.
  • In a global market-place it is increasingly important that Auditing Standards are harmonized across the world, particularly for multinational companies. It is also important that Auditing Standards are applied consistently. Over the last ten years, standard setters in those countries where the profession is mature have sought to harmonize their own standards with International Standards, and to influence International Standards.
  • In many countries, all new national Auditing Standards contain a statement to the effect that compliance with the national standard will ensure compliance with the relevant International Standard in all material respects, if that is the case, or it will explain the difference(s).
  • It is not always possible for local Auditing Standards to be the same as International Standards because of local legal requirements. Nevertheless, a number of countries have accepted International Standards in their entirety, or have accepted them subject to some minor local variations. International Standards are thus extremely useful for countries where the profession is not strong and where government does not seek to detail Auditing Standards, and where there are few resources to develop local standards.
  • Standard setters in countries where the profession is mature make a significant contribution to the development of ISAs providing representatives to sit on IF AC Committees and working parties and providing the resource to help draft standards. National standard setters comment on consultation papers and exposure drafts issued the JAPC and help summarise responses on certain projects.
  • ISAs only have force internationally if they have the support of those countries who lead the profession internationally. It is therefore essential for both national standard setters and international standard setters to take account of each other’s work.

QUESTION 6

International Standards on Auditing-(ISAs) are produced the International Auditing and Assurance Standards Board (IAASI3), which is a technical committee of the International Federation of Accountants (IFAC). In recent years, there has been a trend for more countries to implement the ISAs rather than produce their own auditing standards.

A school friend who you have not seen for a number of years is considering joining ACCA as a trainee accountant. However, she is concerned about the extent of regulations which auditors have to follow and does not understand’ why ISAS have to be used in your country.

Required;-

Write a letter to your friend explaining the regulatory framework which applies to auditors. Your letter should cover the following points:

  • The due process of the IAASB involved in producing an ISA.

ISAs are produced the international Auditing and Assurance Standards Board, IAASB, which is a technical standing committee of the International Federation of Accountants, IFAC. Initially an exposure draft is produced for consideration the IAASB. If this is approved, it is circulated to the member bodies of the IFAC (such as ACCA) and any other interested parties. It is also published on the IAASB’s website. These bodies make comments on the exposure draft which is then amended as necessary. The exposure draft is then re-issued as an ISA or an International Auditing Practice Statement, IAPS.

  • The overall authority of ISAs and how they are applied in individual countries.

ISAs contain auditor’s objectives, basic principles and requirements (including essential procedures] together with related guidance in the form of explanatory and other material. The whole text must be considered in order to understand and apply the basic principles and essential procedures.

ISAs do not override the requirements for the audit of entities in individual countries. To the extent that ISAs conform to local regulations in regard to a particular subject, the audit in that country in accordance with local regulations will automatically comply with the ISA on that subject. Where local Regulations differ from or conflict with ISAs, member bodies should comply with the obligations of members in the IFAC constitution, i.e. encourage changes in local regulations to comply with ISAs.

  • The extent to which an auditor must follow ISAS.

There may be exceptional circumstances under which the auditor may judge it necessary to depart from an ISA in order to achieve the objective of an audit more effectively. In this case, the auditor must be-prepared to justify and document the reason for the departure. ‘Ibis situation is likely to be the exception rather than the rule.

  • The extent to which ISAS apply to small entities.

ISAs apply to the audit of financial information of any entity, regardless of its size. However, small entities possess distinct characteristics, such as a lack of segregation of duties, which mean that auditors must adapt their audit approach when auditing the financial statements of a small company, This is likely to include a substantive-based audit approach and more reliance on written representations, for example.

The !AASB published a ‘questions and answers’ document in August 2009 which highlights how the design of the clarity ISAs enables them to be applied in a manner proportionate with the size and complexity of an entity. This publication is helpful for those firms auditing small companies.

 

(Visited 6 times, 1 visits today)
Share this:

Written by 

Leave a Reply

Your email address will not be published. Required fields are marked *