ANS:
TEMPEST :
a. Auditor must plan the audit:
The benefits of planning an audit before commencing an audit are
described as follows:
 It helps the auditors to build a foundation and a base of what and
how to start the audit and similarly guide the team accordingly.
 Planning an audit initially helps an auditor to focus on prime areas of
risk by finding out risks associated and building strategies
accordingly.
 Planning an audit is important for an auditor as it helps in proper
resources allocations such as time management, proper selection of
team according to expertise required based on the risk and nature of
the entity.
 Planning an audit helps to review the later work done by the audit
juniors and helps the audit seniors to supervise them accordingly.
The audit plan can also be used as benchmarks for comparing the
quality of audit performed by the audit team.
 Planning an audit helps in future review and references as it can be
used by future audit teams as references on what to do during
certain areas of risk.
b. Preparation of audit strategy for Tempest Company:
CHAPTER 3
a. How an audit committee can improve the effectiveness of the
external auditor’s work?
Your Answer:
- The audit committee can liason between the management, external auditor and internal auditors.
- The audit committee can review the procedures and policies of the company and instruct the internal
audit to carry out the audit in similar way so that it can assist in the external auditor's work.
- The audit committee can discuss any issues that arises during external audit and can necessary
changes and ammendments beforehand.
(a) Improving the effectiveness of the external audit
An audit committee provides the means of strengthening the external auditor’s independence by offering
a direct, formal link to non-executive directors (NEDs).
 It is a committee of the governing body of a corporate entity which has delegated responsibility for
the external financial reporting process and the system of internal control.
 The audit process is assisted by audit committees as the involvement of NEDs may pre-empt
unexpected corporate failure and undetected misconduct by senior officials.
 An audit committee can improve the effectiveness of the external auditor’s work by increasing the
assurance that the external auditors can derive from systems of corporate governance and
internal financial controls.
 The committee will be involved in ensuring that the external auditor is independent and will
participate in the selection of the auditor by recommending certain firms who have knowledge of
their industry and reviewing the source and rationale for selecting certain firms of auditors.
 Additionally the terms and scope of the external audit and corporate governance engagement will
be discussed as will the management letter and its effect on the current year’s audit.
 A meeting of internal auditors, external auditors and the audit committee will review the audit plan
with a view to minimising duplication of work, the impact of new auditing standards and
providing value for money for the company. The timing and nature of reports from the external
auditors will be reviewed as to their effectiveness and any contentious accounting issues
discussed.
 The opening up of communication channels between the external auditor and the audit committee
and two-way discussions enhances the quality of the audit and adds value to the audit process.
 The audit committee will further discuss with the internal and external auditor the intended scope
of their work with a view to satisfying itself that no unjustified restrictions have been imposed by
executive management.
 Additionally the following duties of the audit committee may assist in the external audit process.
o dealing with difficulties in the performance of the audit such as non-availability of client
personnel;
o reviewing the findings of the internal and external auditors;
o reviewing the company’s financial statements and annual report prior to the submission
to the board;
o reviewing public announcements that have a financial impact;
o reviewing and monitoring compliance with the corporate code of conduct, and legal and
statutory requirements.
Your Answer:
b. the problems of ensuring the “independence” of the members of the audit committee.
- The problems of independence of members of the audit committee arises as in most cases the
employee of the companies are part of audit committee which expertise level. They report to board of
directors and should follow some rigid rules and regulations of the company. The audit commmitee
members might not have appropriate skills and qualifications as well to put their 'opinion' infront of the
board in cases of any issue arising in the internal control of the company.
(b) Independence of audit committee members where only a voluntary code is in place
Tutorial note: The question refers to a voluntary code. Marks would not be awarded for discussing codes
that are in place because of legal or regulatory requirements.
The members of the audit committee generally comprise independent non-executive directors (NEDs).
For example, there may be a specified number or proportion of independent NEDs or even a requirement
that all should be independent NEDs.
Where the audit committee is voluntary, the general absence of regulations in this area (e.g. only
guidelines are followed) means that independence is often hard to achieve. For example, what if NEDs sit
on committees of several companies, there may well be conflicts of interest. What if executive directors
from one company act as NEDs for another and vice-versa? Can they be considered as independent?
Additionally the company pays the NEDs salaries and this fact ensures that independence is difficult to
achieve under a voluntary code.
The NEDs often sit not only on the audit committee but also on several other board committees making
strategic contributions to the running of the business. They have to balance their role as audit committee
member and the monitoring of executive directors and management with their role as corporate strategist.
In this situation, they are acting in several capacities and because of the complexity of the NED’s role it
may be difficult to act independently in exercising their governance role.
The internal structure of the company and the perception of the role of the audit committee by the main
board will determine the ability of the NEDs to exercise independent judgment.
Some members of the audit committee may have previous executive involvement with the company and
have participation in share option schemes which is inconsistent with the exercise of independent
judgment.
It may be extremely difficult for a NED to exercise independent judgment when they have any interest in
the company, are appointed by the company and are remunerated by the company.
Your Answer:
c. The view that the role of the audit committee should be regulated by the law in all countries.
- Audit committee have roles in detecting fraud in the companies, although 100% fraud and errors cannot
be detected, the audit committee can perform procedures in such a way that certain frauds can be found
out. Hence the role of audit committee should be regulated by the law in all countries. It should compose
of qualified manpowers atleast a head to assist the team in order to detect all type of fraud,
missappropriation of resources.
(c) Regulation of audit committees
If the audit committee is not governed by statute or the rules of the stock exchange, several issues arise.
Without statutory regulation, there will be inconsistency of practice and standards between audit
committees. Committee members may find it difficult to criticise management. The form of the annual
report of the audit committee may not be consistent without some form of strong regulation. Shareholders
who are poorly informed about the workings of the committee would benefit if publication of the report is a
statutory requirement.
However, a mandatory approach to the role of an audit committee may distort its significance to corporate
performance. Problems would certainly arise if a single “one size fits all” model were imposed given the
very wide range of companies of different sizes and financial profiles, and different internal structures.
Many smaller companies would not see the benefits of appointing an audit committee and consider
statutory regulation to be counterproductive, with the costs outweighing any benefits. However, some
form of monitoring report should be important to shareholders even in the case of small publicly quoted
companies.
If audit committees are unregulated, there is little formal requirement for adherence to professional values
of competence, independence or effective reporting to shareholders. Accountancy bodies then find it
difficult to set standards for NEDs on audit committees where such persons are non-accountants. The
problems of independence of NEDs (in part (b) above) suggest that some form of statutory regulation
may be required.
The UK Corporate Governance Code only applies to listed company under the regulations of the London
Stock Exchange on the basis of “comply or explain”. Listed companies are legally required to report on
their compliance, or otherwise, with the Code. This statement is reviewed by the company’s auditors (the
review is separate and not part of the auditor’s statutory duty of auditing the financial statements). The
Code gives UK companies the flexibility of applying the Code to their circumstances and then justifying
any departures.
MOCK TEST 1 PRE MOCK MARCH 2024
a. Auditor's responsibility in relation to prevent and detect fraud and error :It is the responsibility of auditor to detect
the fraud while conducting an audit in the company however the auditor is not fully responsible and isn't able to
detect 100% fraud and error during the audit.
The primary responsibility of the auditor is to conduct the audit in an ethical way which provides reasonable
assurance to the intended users. The auditor should comply with the International Standards of Auditing and should
clearly form an opinion whether or not the financial statements of the company gives true and fair view. The auditor
concludes an audit and assures about the fraud after collecting sufficient and appropriate evidence which should
indeed be collected by maintaining professional scepticism and alert mind. The fraud uncovered and errors found while
conducting the audit should be properly reported to those charged with governance.