regulation of auditors: 1 companies act 2 auditing standards (ISAs) 3 code of ethics

1 companies act auditor duties and rights (text P20-21) appointment, removal and resignation of auditors

appointment of auditors who? when? term of office fee

who? auditors are commonly appointed by shareholders, directors or audit committee. it is usually the shareholders that appoint auditors, although in practice they generally accept the recommendations of directors. a simple majority may be required.

where for formerly stated-owned enterprises are privatized in developing economies, it is common for the ministry of finance or trade to appoint the first auditors. when? the directors should appoint an auditor within three months of incorporation who shall hold office until the conclusion of the first AGM

auditors should be appointed/re-appointed at each AGM and shall hold office until the conclusion of the next AGM. the directors may appoint an auditor to fill a casual vacancy (death\incapacity\disqualification extraordinary general meeting)

term of office generally one year, it is often extended. fee have a contract with the company generally be disclosed in the annual accounts of the company.

removal of auditors procedures? Dec 2005 Q5(c)

You have determined that the under-provision is material to the financial statements and therefore need to modify the audit report. The directors have informed you that they do not intend to take any action regarding the under-provision of depreciation. They also disagree with your action and have threatened to remove your company as the auditors of LALD unless you agree not to modify your report. Required: Explain the procedures that the directors must follow in order to remove your company as the auditors of LALD. (6 marks)

1 mark per relevant point

To remove the auditors from office before their term of office has expired, the directors of LALD must proceed as follows: Arrange for a meeting of the shareholders of the company. Write to the shareholders providing notice of the meeting and the agenda. The notice must also be sent to the auditor. Attend the meeting and organize a counting of votes at the meeting on the resolution to remove the auditor from office. In most situations, a simple majority of the shareholders is required to confirm the resolution. Auditors are sometimes given the right to make written representations on why they ought to stay in office and to speak at the meeting.

If the auditor is removed, where necessary, obtain a statement of circumstances from the auditor. If there are no circumstances that need to be brought to the attention of the shareholders then a statement of no circumstances is required. Where required by specific country legislation, deposit this statement along with notice of removal of auditor, with the appropriate authorities. Make arrangements to appoint another auditor as companies are normally required to have auditors.

objectives of statement of (no) circumstances : ensure auditors not to be removed for improper reasons without the knowledge of shareholders. ensure auditors not to avoid their responsibilities by ‘going quietly’.

resignation of auditors permitted to speak and communicate in writing with shareholders and others require the company to call a meeting in order to discuss the reasons for the resignation written notice together with statement of circumstances or statement of no circumstances to the company and to the regulatory authorities (not ‘going quietly’)

International Federation of Accountants (IFAC)

IAASB Compliance Committee Ethics Committee IFAC council IFAC Board Education Committee professional Accountants in Business Public Sector Committee Transnational Auditor Committee

ISAs June 2006 Q6 Dec 2010 Q2b

June 2006 Q6 (a) The due process of the IAASB involved in producing an ISA. (b) The overall authority of ISAs and how they are applied in individual countries. (c) The extent to which an auditor must follow ISAs. (d) The extent to which ISAs apply to small entities.

(c) The extent to which an auditor must follow ISAs. An auditor should follow the ISAs wherever possible. However, in some situations an auditor may consider it necessary to depart from the ISA so that the objectives of the audit can be achieved more efficiently. In this situation, the auditor can depart from the ISA, but he or she must be prepared to justify the departure. It is expected that departure from any ISA will be the exception rather than the rule. (d) The extent to which ISAs apply to small entities. To be clear, ISAs are meant to be applicable to the audit of any entity, no matter what its size. However, in small entities, the auditor may have to amend the audit approach to fit the circumstances of that business. For example, there will be greater reliance on substantive testing and management representations. However, the appropriate ISAs should be followed.

Dec 2010 Q2b Explain the status of International Standards on Auditing. (2 marks) Up to 1 mark per valid point Issued by IAASB Apply to audit of historical financial information Contain basic principles/essential procedures/explanatory material and appendices – the whole text must be read and understood If depart from ISA – justify