1. SeSSION 3: THE RULES AND WHO SETS THEM
SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT AFIN 318:AUDIT & ASSURANCE
SeSSION 3: THE RULES AND WHO SETS THEM

2. Corporate Governance In Session 2 we learnt;
The objective, relevance and importance of corporate governance;
the provisions of international codes of corporate governance that are most relevant to auditors;
What good corporate governance requirements relating to directors' responsibilities and the reporting responsibilities of auditors were

3. Corporate Governance
Analysed the structure and roles of audit committees and discussed their benefits and limitations; and
Explained the importance of internal control and risk management.

4. Chapter learning objectives
Upon completion of Session three (3) you will be able to:
Describe the regulatory environment within which statutory audits take place;
Discuss the reasons and mechanisms for the regulation of auditors;
Explain the statutory regulations governing the appointment, rights, removal and resignation of auditors;

5. Chapter learning objectives
Explain the development and status of International Standards on Auditing;
Explain the relationship between International Standards on Auditing and national standards e.g. (UK syllabus: between ISA's and the Auditing Practices Board).

6. Standard setting and regulation

7. Standard setting and regulation

8. The need for regulation
The role of the auditor has come under increased scrutiny over the last thirty years due to an increase in high profile, economically damaging fraud cases. The most high profile case, and the catalyst for regulatory change, was the collapse of Enron and its auditor Arthur Andersen.
In order to try and regain trust in the auditing profession national and international standard setters and regulators have tried to introduce three initiatives:

9. The need for regulation
In order to achieve this practitioners now have to follow three sets of regulatory guidance:
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;
and

10. The need for regulation
adherence to a strict ethical code of conduct, to try and improve the perception of auditors as being independent, unbiased service providers.
The Code of Ethics; ZICA code, OAG code
whose principles are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.
Auditing Standards (the basis of this text is International Standards on Auditing); and
National corporate law. Zambian Company’s Act in this case will provide the needful.
REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC) Zambia
ACCOUNTING AND AUDITING June 25, 2007
Zambian authorities provided updates and comments to the original ROSC A&A prepared in This addendum, dated June 25, 2009, is attached to this
ROSC.
The standards as espoused by the technical Committee of ZICA are derived from the IFAC Standards and are adapted to local conditions.

11. Setting auditing standards
Examples of national laws/guidance
IFAC
The International Federation of Accountants (IFAC) is the global organisation for the accountancy profession.
One of the subsidiary boards of IFAC is the International Audit and
Assurance Standards Board (IAASB). It is their responsibility to develop and promote International Standards on Auditing (ISA's). There are currently 36 ISA's and one International Standard of Quality Control.

12. Setting auditing standards
You do not need to learn the names or numbers of the auditing standards, but you will need to know and be able to apply the key principles and requirements of the standards.

13. • regulating the audit profession • implementing auditing standards
The relationship between international and national standards and regulation
Because IFAC is simply a grouping of accountancy bodies, it has no legal standing in individual countries. Countries therefore need to have arrangements in place for:
• regulating the audit profession
• implementing auditing standards

14. Who needs an audit and why?
The Law
Who needs an audit and why?
In most countries companies are generally required to carry out an audit, as it is a legal requirement.
However, small or owner managed companies are often exempt (e.g. in UK, companies with annual turnover of less than £6.5 million while in Zambia a cap appears not to have been set with the exception for tax purposes of up to ZMW to be charged at a flat rate of 10%.
Zambian Institute of Chartered Accountants (ZICA) provisions
1. Listed Companies, Public Interest Entities and Government Owned Enterprises Full IFRS
2. Economically Significant Companies – companies that are not public companies or quoted at the stock exchange market with turnover of K20 billion and above. IFRS for SMEs or Full IFRS if the Company opts to use it
3. Micro and Small Entities – entities with Turnover of less than K20 billion Zambian Financial Reporting Standard for Micro and Small Entities

15. The Law National regulatory bodies ZICA
Audit exemptions in the case of Zambia not expressly stated and is therefore reliant on what is obtaining at IFAC
The exempted companies according to IFAC may choose to have an audit because of the benefits it can offer, namely:
• High quality, reliable information circulates the market (giving investors faith and improving the reputation of the market).
• Independent verification (management may value having their business scrutinised).

16. The Law
• Reduces the risk of management bias, fraud and error (by acting as a deterrent).
• Enhances the credibility of the information (especially for raising finance and for tax authorities).
• Deficiencies in the internal control system may be highlighted (in the management letter).

17. Who may act as auditor?
Elsewhere to be eligible to act as auditor, a person must be:
A member of a Recognised Supervisory Body (RSB), e.g. ACCA and allowed by the rules of that body to be an auditor; or
Someone directly authorised by the state.
In Zambia however, from the establishment of the Accountants Act 2008 there is no exemption.

18. Who may not act as auditor?
Excluded by law: The law in most countries excludes those involved with managing the company and those who have business or personal connections with them.
This is equally applicable here in Zambia.
Excluded by the Code of Ethics: The IFAC and ACCA Code of Ethics require auditors to be and be seen to be independent and objective, and to consider whether it is appropriate to act as auditor given the impact of factors affecting their independence and objectivity. OAGZ code of Ethics.
Zambian situation
All that applies in this regard to private sector is also been adopted in the public sector through the ZICA public sector committee
ZICA is responsible for approving the accounting standards to be used in Zambia. The Public Sector Committee of ZICA recommends the adoption of International Public Sector Accounting Standards (IPSASs) as issued by the International Public Sector Accounting Standards Board (IPSASB).

19. The Code of Ethics
The Code of Ethics also requires the auditor to consider any other factors that would prevent
them acting as auditor, such as competence or issues regarding confidentiality.
(This will be discussed in more detail in a later chapter).
Support for Adoption and Implementation of Code of Ethics for Professional Accountants (IESBA)
ZICA is responsible for the development of a Code of Ethics for its members. As an institute, ZICA adopted the most recent version of the IESBA Code of Ethics for Professional Accountants (effective 2011) as the Code of Ethics to be used by all accountants in the country. As a compulsory component of membership, all ZICA members are required to comply with the IESBA Code of Ethics. To facilitate this, all members are provided a CD containing the IESBA Code of Ethics upon induction in ZIA membership. To ensure proper implementation of the ethical standards, ZICA incorporates ethics presentations into CPD programs for ZICA members to raise awareness about the Code of Ethics including any updates and modifications to the standards.

20. How are auditors appointed and removed?
Who appoints the auditor?
In most jurisdictions the members (shareholders) of the company appoint the auditor by voting them in at the Annual General Meeting (AGM).
Directors can appoint the first auditor to fill a ‘casual vacancy' interim if you wish, this requires the members’ approval at the next AGM, and in some countries the auditors may be appointed by the directors as a matter of course.

21. How are auditors appointed and removed?
Auditors are appointed from one AGM until the end of the next one.
However, private companies can elect to dispense with the requirement for an AGM. In these circumstances the auditor is automatically reappointed unless a shareholder objects.

22. Removing the auditor
Arrangements for removing the auditor have to be structured in such a way that:
To enable this balance to be maintained, the removal of auditors can usually be achieved by a simple majority at a general meeting of the company.
There are some safeguards, such as a specified notice period, to prevent the resolution to remove the auditors being ‘sprung’ on the meeting.

23. Resigning as auditor
In practice, if the auditors and management find it difficult to work together, the auditors will usually resign.
To prevent the circumstances of the resignation being hidden from the company’s members, the auditors have to submit a statement of the circumstances surrounding their resignation.
Casual vacancy of auditor.
Casual vacancy of auditor arises due to the reasons such as Disqualification of the auditor; or Death; or Resignation.
Appointment of Statutory auditors is the exclusive right of the members of the company. That is, the Board of Directors has no right to appoint auditors to the company. But Section 224(6) of the Companies Act, 1956 allows the Board to fill the casual vacancies of auditors except the casual vacancy due to resignation of the auditor. Proviso to this Section empowers the members to fill a casual vacancy of auditor due to resignation of the auditor.
The auditor appointed by the Board in casual vacancy can continue till the conclusion of next AGM.
In a situation, where no auditor is appointed by the members at the General Meeting, then the right to appoint auditor goes to Central Government. Such a vacancy cannot be filled by the Board and such a vacancy cannot be treated as “casual vacancy”.
Similarly, if the appointed auditor refuses to accept the appointment, it cannot be treated as casual vacancy. In such a case fresh appointment at General Meeting is essential.
A sample ordinary resolution to be passed at a General Meeting for filling the casual vacancy of auditor.( No special resolution is required and hence no need to file form 23)
“RESOVED that M/s ABC, the Chartered Accountants (Firm Regn. No. ___________) , be and are hereby appointed as auditors of the company to fill up the casual vacancy caused by the resignation of M/s XYZ, Chartered Accountant, until the conclusion of the next Annual General Meeting of the Company at a remuneration as the Board of directors may determine”.
Procedure for appointing auditors in casual vacancy due to the resignation of the Auditor

24. Notifying ACCA/ZICA
If an auditor resigns or is removed from office before the end of their term of office, they must notify ACCA.
• the auditor has sufficiently secure tenure of office, to maintain independence of management
• incumbent auditors can be removed if there are doubts about their continuing abilities to carry out their duties effectively.

25. The auditor's responsibilities on appointment and removal
The auditor’s rights, during the audit/continued appointment and on resignation
right to access to the company’s books and records.
right to receive information and explanations necessary for the audit.
right to receive notice of and attend any general meeting of members of the company.

26. The auditor's responsibilities on appointment and removal
To be heard at such meetings on matters of concern to the auditor.
To receive copies of any written resolutions of the company.
To request an Extraordinary General Meeting (EGM) of the company to explain the circumstances of the resignation.
To require the company to circulate the notice of circumstances relating to the resignation.

27. The auditor's duties
In accordance with ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing the auditor's fundamental objectives are to:
obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error;

28. The auditor's duties
express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and
report on the financial statements, and communicate as required by ISA's, in accordance with the auditor's findings.
Auditors have various duties to perform in their role as auditors, for example, to assess the truth and fairness of the financial statements.

29. Assessment of the truth and fairness of the financial statements.
By “true” is meant that financial statements are:
free from material misstatement based on verifiable evidence
By “fair” is meant that the financial statements are:
objectively presented
free from management bias
relevant to the needs of users
The concept is a dynamic concept and is incapable of precise lasting legal definition, but to be true and fair, financial statements must live up to the current needs and expectations of users.
Concept of “True and Fair”
Many countries’ legislation requires that financial statements give a “true and fair view” (e.g. the UK) or “present fairly, in all material respects” (e.g. the USA) · There has never been, however, any definition in legislation as to the meaning of the expression.
The following would be generally accepted definition (based on legal opinion commissioned by the UK Accounting Standards Committee in 1983):
The financial statements comply with Accounting Standards whose purpose is to narrow the areas of divergent opinion and practice in accounting – these are the profession’s attempt, in the absence of statutory definition, to define true and fair view
By “true” is meant that financial statements are:
free from material misstatement based on verifiable evidence By “fair” is meant that the financial statements are:
objectively presented
free from management bias
relevant to the needs of users
The concept is a dynamic concept and is incapable of precise lasting legal definition, but to be true and fair, financial statements must live up to the current needs and expectations of users.

30. The basic need of appointing an auditor is to provide independent assurance but this by no means that whatever the auditor says is factually true as he relies on information generated by others; who themselves may be interested parties,
circumstances under which the transaction may have been executed may be now be different,
laws may have changed,
needs may have changed among others.
These may have a bearing on the outcome of the audit.

31. END
Session 4 is Risk