This paper will critically analyse the current UK Auditing and Assurance framework including an in-depth overview of two of the thirty six International Standards on Auditing (ISAs) ISA 200 and ISA 210. There will also be an exploration of the regulatory bodies and of the Companies Act 2006, specifically around their control of the UK Auditing framework. An examination of the big four auditing companies in the UK will be performed KPMG, Deloitte, Ernst & Young and Pricewaterhouse-Coopers (PwC), focusing on their current monopoly within the UK auditing market.
An audit is the process of checking that the way a company presents information about its financial position is true and fair, and that any assumptions they include are reasonable. On completion of the audit an organisation can publish a set of 'audited accounts' - which is a detailed report of the financial position of the company which has been verified by its auditors.
Get your grade
or your money back
using our Essay Writing Service!
An independent and unbiased audit confirms that a company's claims about its financial position are true and fair and is useful for various reasons, including giving Investors and shareholders who are not involved in its day to day running a trusted second opinion on the organisation's financial statements and an insight as to how well it is being run. Company directors who are in charge of the finances of an organisation will also feel rewarded and confident, when their financial statements are given an independent audit with a true and fair opinion is given.
International Federation of Accountants (IFAC) was formed in 1977 and includes over 160 bodies and two million accountants around the globe. Their mission is to support the accountancy profession and contribute to the development of international economies. IFAC also have a subsidiary board the International Audit and Assurance Standards Board (IAASB) they develop and promote the ISAs worldwide. IFAC itself is only a group of accountancy bodies and has no legal standing in individual countries.
The main aims of international auditing bodies in recent years have been to introduce three initiatives, the harmonisation of auditing procedures, so that users of audit services are confident in the nature of audits being conducted around the world, a focus on audit quality, so that the expectations of users are met, adherence to a strict ethical code of conduct to try and improve the perception of auditors as independent unbiased service providers. To achieve this auditors are required to adhere to regulatory quality guidance which include a Code of Ethics, National corporate law and auditing standards.
The UK has a national regulatory body the Financial Reporting Council (FRC) it is independent and responsible for promoting high quality corporate governance and reporting to promote investment within the UK. Standards for corporate reporting and actuarial practice are enforced to achieve high accounting and auditing standards and codes and standards are published to ensure companies, auditors, actuaries and accountants adopt the same auditing and accountancy methods.
The national auditing standard setter Auditing Practices Board (APB), have now been replaced by the Audit & Assurance Council (AAC), they have been brought under the control of the Financial Reporting Council after numerous worldwide accounting scandals e.g. Enron this and similar problems within international auditing brought the end of self regulation. The codes and standards committee still continues to supplement and revise ISA's before issuing them in the UK.
Recent changes within the FRC include Urgent Issues Task force (UITF) which was disbanded in July 2012; also the Professional Oversight Board (POB) have been established to oversee the operation of the accountancy and actuarial professions. An Audit Inspection Unit (AIU) was created to monitor the quality of the audits of public interest companies. An Accountancy Investigation and Disciplinary Board (AIDB) were established. Their aim is to ensure appropriate standards are maintained by members and member firms. These changes are used to ensure that they remain compliant with national laws, such as the Companies Act 2006.
Companies Act 2006 has brought about changes within the audit and assurance climate, the main one being the 'accounts and audit provisions of companies' this relates to exemption from audit for a small limited companies who are able to meet a strict criteria. If they can meet two out of the three following conditions within their first financial year, turnover not more than £6.5m, balance sheet total not more than £3.26m and number of employees not more than 50 then an audit will not be a legal requirement. In future years the company will only incur a change if it fails two out of the three conditions for both the current and previous financial years.
Always on Time
Marked to Standard
The International Auditing and Assurance Standards Board (IAASB) make it clear that an understanding of ISAs is crucial and fundamental to auditors internationally. All of the thirty six International Standards on Auditing set out to show their objectives, requirements and how to understand and apply the material contained within them.
New ISA auditing standards have come into effect for audits of financial statements from December 2009. The International Auditing and Assurance Standards Board's (IAASB) Clarity Project has been undertaken to improve the understanding and readability of ISAs to make them compatible and future proof within the UK framework.
ISA 200 contains basic objectives and requirements that should be followed in all audits of historical information. It is such a fundamental standard that all the other ISAs contain a prompt saying they should be read in conjunction with ISA 200. There are several key elements to ISA 200:
Objectives that clearly state the overall objectives of the auditor;
Definitions that clarify key terms relevant to auditing generally; and
Requirements that set out the conduct of an audit.
ISA 200 has two objectives of the auditor which are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework and Secondly to report on the financial statements, and communicate as required by the ISAs in accordance with the auditor's findings.
The five separate requirements within ISA 200 include:
Ethical requirement that the auditor will comply to all ethical codes within the jurisdiction that the audit takes place including quality control measures which underpins the conduct of an audit.
Professional scepticism shall be performed throughout an audit with relevance to circumstances which cause the financial statements to be materially misstated especially important in audit evidence.
Professional judgment should be performed within planning an audit of financial statements and is essential in enabling the auditor to make key decisions for e.g. materiality. The IAASB also consider sound professional judgement is a fundamental requirement when contentious matters arise when conducting an audit.
Sufficient appropriate audit evidence will be required to obtain reasonable assurance, the auditor will be required to find appropriate audit evidence to reduce audit risk to an acceptably low level and this will enable the auditor to draw reasonable conclusions on which to give a professional opinion.
Final requirement of ISA 200 is the failure of the auditor to achieve their objective, if the auditor fails to express an unmodified opinion based on the evaluation of evidence obtained; the auditor is required to state the relevant findings that as caused the failure within the audit and fully document them.
The overall objective and requirements of ISA 200 are to fully support the audit of financial statements regardless of size or difficulty of the entity being audited. The IAASB recommends that ISA 200 should be used and fully complied with when conducting an audit.
ISA 210 is the Term of Audit Engagement Letter; this formulates the arrangement reached between the auditor and their prospective client. This letter also serves as a contract which outlines the responsibilities of both parties and is normally sent before commencement of an audit, this helps to avoid any misunderstanding within the terms of the engagement. It will also confirm an auditor's acceptance of the appointment and the objective and scope of the audit including responsibilities to the client.
The auditor and client should also agree on the terms of engagement which should be documented within the audit engagement letter. The contents of the engagement letter should include for e.g. objective of an audit financial statement, management have responsibility for the information within the financial statements and fee or billing arrangement.
A new engagement letter each year may not be required unless certain circumstances have changed since the original contract was agreed; the following changes would require a new letter to be agreed for e.g. an indication that the client misunderstands the objective and scope of the audit. A recent change of senior management or those charged with governance, significant change in nature or size of the client's business.
This Essay is
a Student's Work
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.Examples of our work
Competition Commission (CC) has recently held an inquiry into the dominance of the big four audit companies of KPMG, Deloitte, Ernst & Young and Pricewaterhouse-Coopers (PwC). The commission has examined the accounts of publicly traded companies after it was revealed that the big four audit all but one company in the FTSE 100 list.
More than 70 per cent of FTSE 100 companies have not held a competitive tender to appoint auditors for at least 15 years.
Grant Thornton the fifth largest audit company have accused the big four of building up cosy relationships with the City due to their perceived brand strength, with some bankers even requiring particular auditors to be hired when they are appointed to advise a listed company.
The European Commission in Nov 2011 have issued new proposals for reform; their aim is to achieve a higher quality audit and an open audit market. In 2008 the financial crisis highlighted problem areas within the European audit system, audits produced by the big four within 2008 on the large FTSE 100 companies produced clean audit reports, inspection reports since by national supervisors have criticised the quality of those audits.
Within the European Commission proposals audit companies are to rotate after a maximum engagement period of 6 years (with some exceptions), there will also be a cooling off period of 4 years is before the audit company may be used again by the same client. The period before which rotation is obligatory can be extended to 9 years if joint audits are performed, joint audits are not made obligatory but are encouraged.
Mandatory tendering: Public-interest entities will be obliged to have an open and transparent tender procedure when selecting a new auditor. The audit committee (of the audited entity) should be closely involved in the selection procedure.
The Commission proposes that the coordination of the auditor supervision activities is ensured within the framework of the European Markets and Securities Authority (ESMA). This will lead to the creation of a Single Market for statutory audits by introducing a European passport for the audit profession.
The Impact Assessment Unit (IAU) has questioned the proposals for reform by the EC arguing that reasons for reform of the audit market were "less clearly evidenced" than the problem areas identified by the Commission. The IAU also question the Commission's analysis had been distorted as a result of a high level of market concentration, chiefly the dominance of the Big Four.
The role of the regulatory bodies within UK Auditing is very important. We should not underestimate their role they play in the regulation of finance within the UK. Trust and order have been a key objection within recent years and to facilitate this goal the auditing profession has introduced national and international standards.
The global downturn of 2008 has highlighted some possible flaws within the European auditing framework. Proposals for change within the EU and the UK may require more investigation before drastic changes are made; it is important that UK Parliament and the EC reflect on the new proposals and only make changes where the evidence is justified for the need for reform.
Since the end of self regulation in the 1980s auditing has been heavily governed within the UK. The development of ISAs has been fundamental within auditing to ensure auditors in the UK and internationally apply the same objectives and control when producing an audit.
UK Financial Reporting Council Framework Structure