One of the competencies you require to fulfil Performance Objective 18 of the PER is the ability to describe the audit regulatory and legal framework. You can apply the knowledge you obtain from this section of the Study Text to help you demonstrate this competency.
You have studied the regulatory framework in earlier papers. The following summaries will provide a quick reminder. Note that the UK regulatory framework is given in this International-stream Study Text as an example only.
1.2.1 Overview of the UK regulatory framework
The EU Eighth Directive on company law requires that persons carrying out statutory audits must be approved by the authorities of EU member states. The authority to give this approval in the UK is delegated to Recognised Supervisory Bodies (RSBs). An auditor must be a member of an RSB and be eligible under its own rules. The ACCA is an RSB.
The RSBs are required by the Companies Act to have rules to ensure that persons eligible for appointment as a company auditor are either:
Individuals holding an appropriate qualification
Firms controlled by qualified persons
The Financial Reporting Council
The Financial Reporting Council (FRC) is the UK's independent regulator for corporate reporting and governance. Its structure has recently been revised.
The FRC now has the following core structure and responsibilities under the overarching FRC Board.
Codes and Standards Committee – responsible for actuarial policy, audit and assurance, corporate governance, and accounting and reporting policy
Conduct Committee – responsible for audit quality review, corporate reporting review, professional discipline, professional oversight, and supervisory inquiries
Executive Committee – providing day to day oversight of the work of the FRC
FAST FORWARD
The main changes that concern P7 students are:
The APB (Auditing Practices Board) is no longer responsible for auditing standards (ISAs). This is now the direct responsibility of the FRC Board – but the Board is advised by the new 'Codes and Standards Committee', which is in turn advised by the new 'Audit and Assurance Council'.
The ASB (Accounting Standards Board) is no longer responsible for accounting standards. Again, this responsibility has now passed to the FRC Board, which is advised by the 'Codes and Standards Committee' and the 'Accounting Council' in turn.
The revised role of the FRC Board is:
To set high standards of corporate governance through the UK Corporate Governance Code
To set standards for corporate reporting and actuarial practice
To monitor and enforce accounting and auditing standards
To oversee regulatory activities of the actuarial profession and professional accountancy bodies
To operate independent disciplinary arrangements for public interest cases The revised structure is shown by the following diagram.
Although this restructure took place some time ago, the FRC is still in the process of 'rebranding'
documents and other publications issued by the former APB and other bodies under the old structure. You will therefore see references in the Text to APB pronouncements where these still exist and are in force.
Point to note
1.2.2 International standard setting
International Standards on Auditing (ISAs) are produced by the International Auditing and Assurance Standards Board (IAASB), a technical standing committee of the International Federation of Accountants (IFAC). You should also be familiar with the International Ethics Standards Board for Accountants (IESBA), another body of IFAC and the producer of the Code of Ethics (see Chapter 2).
The IAASB's Preface to International Standards on Quality Control, Auditing, Assurance and Related Services Pronouncements states that all the IAASB's 'engagement standards' above are 'authoritative material', which means that they must be followed in an audit that is conducted in accordance with ISAs.
The IAASB also publishes four kinds of 'non-authoritative material'.
International Auditing Practice Notes (IAPNs). These do not impose additional requirements on auditors, but provide them with practical assistance.
Practice Notes Relating to Other International Standards, eg in relation to ISREs, ISAEs or ISRSs
Staff Publications, which are used to help raise awareness of new or emerging issues, and to direct attention to the relevant parts of IAASB pronouncements
Consultation Papers, which seek to generate discussion with stakeholders
Within each country, local regulations govern, to a greater or lesser degree, the practices followed in the auditing of financial or other information. Such regulations may be either of a statutory nature, or in the form of statements issued by the regulatory or professional bodies in the countries concerned.
National standards on auditing and related services published in many countries differ in form and content. The IAASB takes account of such documents and differences and, in the light of such knowledge, issues ISAs which are intended for international acceptance.
The European Union, for example, has since 2014 required ISAs (as issued by the IAASB) to be adopted at EU level. Member states may impose additional requirements on auditors (such as the FRC, whose ISAs (UK and Ireland) are in some places more stringent than the IAASB's ISAs) but these must not contradict EU ISAs.
IFAC
(International Federation of Accountants)
IAASB
(International Auditing and Assurance Standards Board)
ISAs (International Standards on Auditing)
ISQCs (International Standards on Quality Control)
ISREs (International Standards on Review Engagements)
ISAEs (International Standards on Assurance Engagements)
ISRSs (International Standards on Related Services)
IESBA
(International Ethics Standards Board for Accountants) Board
for countants)
Code of Ethics for Professional Accountants
The IAASB issued A Framework for Audit Quality (February 2014) in this area, which is covered in Chapter 18.
1.2.3 The IAASB clarity project
In 2003 the IAASB reviewed the drafting conventions used in its ISAs, with a view to improving the clarity and overall understandability, and therefore the consistent application of its ISAs.
The IAASB's Preface to international standards on quality control, auditing, review, other assurance and related services (2007) established the conventions to be used by the Board in drafting future ISAs. In accordance with this, redrafted ISAs are structured as follows.
Objective. This provides the context in which the requirements of the ISA are met.
Requirements. These are contained in a separate section and expressed using the word 'shall'.
Application and other explanatory material. This is an integral part of the ISA.
1.2.4 Current ISAs
No Title
200 Overall Objective of the Independent Auditor, and the Conduct of an Audit in Accordance with International Standards on Auditing
210 Agreeing the Terms of Audit Engagements
220 Quality Control for an Audit of Financial Statements 230 Audit documentation
240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements 250 Consideration of Laws and Regulations in an Audit of Financial Statements 260 Communication with Those Charged with Governance
265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
300 Planning an Audit of Financial Statements
315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment (Revised)
320 Materiality in Planning and Performing an Audit 330 The Auditor's Responses to Assessed Risks
402 Audit Considerations Relating to an Entity Using a Service Organization 450 Evaluation of Misstatements Identified during the Audit
500 Audit Evidence
501 Audit – Specific Considerations for Selected Items 505 External Confirmations
510 Initial Audit Engagements – Opening Balances 520 Analytical Procedures
530 Audit Sampling
540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
550 Related Parties 560 Subsequent Events 570 Going Concern
580 Written Representations
600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)
Point to note
No Title
610 Using the Work of Internal Auditors (Revised) 620 Using the Work of an Auditor's Expert
700 Forming an Opinion and Reporting on Financial Statements 705 Modifications to the Opinion in the Independent Auditor's Report
706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report
710 Comparative Information – Corresponding Figures and Comparative Financial Statements 720 The Auditor's Responsibilities Relating to Other Information in Documents Containing Audited
Financial Statements
ISQC 1 Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements
Notes
1 Students should be aware of the nature and meaning of the audit report and should be able to discuss the contents and wording of the report. Students would not be asked to reproduce the audit report in full in an exam question, but they may be requested to prepare explanatory paragraphs for inclusion in the report, particularly in situations leading to a modified report.
2 Students are advised that questions will be based on the principles and good practice set out in the ISA.
International standards are quoted throughout this Text and you must understand how they are applied in practice. Make sure you refer to auditing standards when answering questions.