Chapter 2 – Regulation Topics -Audit of SMES -Rights and Duties of Auditor -Appointment and Removal of Auditor - Role of IFAC - ISA and IAASB Audit of SMES As per UK law, SME’s are those companies that have: - - Turnover of £6.5 million or less Balance Sheet £2.6 m or less Employees 50 or less o Other characteristics Fewer product lines Less complex operations (forex) Fewer controls NOTE: Audit is exempt for SME’S because o Cost benefit analysis is unfavourable o Owners and directors are usually few (and often the same) so there is no agency problem Rights and Duties of an Auditor Rights: - Right to have access to all records Right to attend AGM of the company Right to speak and be heard at AGM of company Right to receive all notices which members of company (s/h) are entitled to receive Right to seek explanation from management on any matter (criminal offence) Duties: - Duty to maintain confidentiality Duty to report all findings at the end of audit in the form of a written report Duty to maintain consistency b/w accounting records and f/s Duty to maintain consistency b/w other information and f/s o Other info: company annual report (everything other than f/s Appointment & Removal of Auditor Appointment of Auditor Auditors are appointed by s/h vote in AGM but: - First time appointment: by directors Subsequent Appointment: by s/h vote in AGM If s/h fail to appoint: again, directors should appoint (deadlock) If director fails to appoint: secretary of state will appoint Removal of Auditor - Auditor can be removed by s/h vote in AGM Auditor has the right to speak Auditor must be sent notice in advance that company plans to remove him in AGM, notice to be sent to regulator (gov) too After removal, auditor can still retain office by giving statement of circumstance Resignation of Auditor - Auditor can resign by giving a resignation letter He may be asked to give statement of circumstance He must send notice in advance if he plans to resign, notice should be sent to regulator too. He has the right to speak Role of IFAC (Int Federation of Accountants) - All professional bodies are a part of IFAC IFAC – conflict and dispute resolution Syllabus and study guide Practical experience requirement ISA (International Standards on Auditing) - Developed by the IAASB and they must be applied during audit of financial statements. IAS (int acc standards) is made by IASB and must be applied during prepareration of f/s ISA is made by IAASB and must be applied during audit of f/s following is the process of issuing an ISA o a task force is made which is given task to make draft standard o the draft std. is then discussed in a meeting open to public o any comments and recommendations received from public are incorporated and draft standard is kept on IAASB website for minimum 120 days o any suggestions received are accommodated and draft std is updated o the updated standard is then presented to IAASB board and approved if 2/3 majority votes. How are ISA’s applied in individual countries? o If there is a similarity in local laws and ISA’s, it is very simple to apply ISA’s. However, if there is a conflict b/w local laws and ISA’s, local laws prevail. However, IAASB is constantly working for convergence b/w local laws. Quality Control Review (QCR) Audit of companies is done by audit firms BUT audit firms are also subject to audit. Audit of audit firms are done by RSB (recognised supervisory bodies) who are given powers by parliament (ICAP, ACCA etc.) The RSB’s conduct audit of audit firms, give them ratings and publish results of ratings on RSB’s website so that clients of the audit firms can see them when opting for firms. This activity is also called QCR.
