ATC f8 materials for jun08 session study systemf8 AA (int)session02 j08

SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT

OVERVIEW
Objective
To describe the regulatory framework in which statutory audits take place.

REGULATION

INTERNATIONAL
FEDERATION OF
ACCOUNTANTS (IFAC)

STANDARDS
ISSUED BY THE
IAASB
IAASB
Codification
Structure overview

Organization &
Membership
Mission
IFAC Council
Structure

STATUTORY
AUDIT
Audit requirement
Audit exemption
Eligibility
RSBs

Rights and duties
Appointment
Removal

ETHICAL
CODE
Session 4

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT

1

INTRODUCTION
As the concept of the independent external auditor developed in the late 1800s,
individual countries established frameworks (eg through statutory requirements) to
regulate the auditing profession, their relationship with the entities they could audit
and the form of work they could conduct.
From their foundation (the ACCA was founded in 1904) the various professional bodies
around the world also developed their own regulatory framework governing the way
their members operated.
In many instances, the audit regulatory requirements required by a jurisdiction’s laws
were delegated to the appropriate professional body to enact.
After several scandals caused by company collapses, many professional bodies began to
issue formal auditing standards in the mid 1970s (eg 1976 in the UK) to ensure a
uniform approach to all audits carried out by their members. Before the issue of
national standards, “best practice” was established by the leading firms (eg the “top
10”).

Following the formation of the International Accounting Standards Committee (now the
International Accounting Standards Board – IASB) in 1973, The Council of the
International Federation of Accountants (IFAC) was established in 1977. Under the
IFAC, the International Auditing Practices Committee (IAPC) was formed in 1979.
Between 1980 and 1991 the IAPC issued International Auditing Guidelines (IAG), and
addendums to these. The first International Standard on Auditing (ISA) was issued in
1991. Many national jurisdictions and professional bodies are now adopting ISAs as
their national auditing standards, mirroring the approach taken by many countries to
IFRS. Note the aim of the IFAC in ensuring a uniform, high standard of auditing and
assurance practice across international borders.
As further company financial reporting scandals have occurred (the most “notorious”
being Enron Corp 2000/2001 and WorldCom 2001/2002) the statutory and other
regulations on auditors have been revised, expanded and tightened (eg issue of
Corporate Governance codes, Sarbanes Oxley in the USA, removal of self-regulation
from member bodies).

2

INTERNATIONAL FEDERATION OF ACCOUNTANTS
(IFAC)

2.1

Organisation and membership
A non-profit, non-governmental, non-political international organisation of 155 member
accountancy organisations (with 2.5m professional accountants) from 118 countries.
IFAC membership (full or as an associate) is open to national accountancy organisations
and international organisations that have an interest in the international accountancy
profession.

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
Through cooperation with member bodies and other accountancy organizations, IFAC
initiates, coordinates and guides efforts to achieve international pronouncements for the
accountancy profession.
Members (and associates) are required to participate in the IFAC Member Body
Compliance Program. Through the application of a series of Statements of Membership
Obligations, the program is designed to support the adoption and implementation of
high quality auditing, accounting, ethical and educational standards as well as quality
assurance and enforcement mechanisms (across international boundaries).

2.2

Mission and primary activities

2.2.1

Mission

To serve the public interest through strengthening the worldwide accountancy
profession and contribute to the development of strong international economies by:
establishing and promoting adherence to high-quality professional standards;
furthering the international convergence of such standards; and
speaking out on public interest issues where the profession's expertise is most
relevant.
In carrying out this mission, IFAC:
supports the work of the International Accounting Standards Board (IASB); and
acts as an advisor and coordinator for its members.

2.2.2

Primary activities

Serving the public interest
through the development of standards in the areas of auditing, education, ethics,
and public sector financial reporting;
by advocating transparency and convergence in financial reporting;
by providing best practice guidance for professional accountants employed in
business; and
by implementing a membership compliance program.
Facilitating collaboration and cooperation among member bodies – to ensure the
competence and integrity of accountants worldwide and to support accountants in their
efforts to provide high quality services.
Speaking out on behalf of the international profession – IFAC is the primary
spokesperson for the international profession and speaks out on a wide range of public
policy issues.

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2.3

Structure
IF A C C o u n cil

IF A C B o ard

In tern atio n al A u d itin g
an d A ssurance
S tan d ard s B o ard

T ran snatio n al
A u d itors
C o m m ittee

F o ru m o f
F irm s

2.3.1

Intern ation al E thics
S tan d ard s B o ard for
A cco u n tan ts

C o m p lian ce
A d viso ry P anel

Intern ation al
A cco u n tin g E d u catio n
S tan d ard s B o ard

S m all an d
M ed iu m
P ractices
C o m m ittee

In tern atio n al P u blic
S ector A ccou n tin g
S tand ard s B o ard

D evelo p in g
N atio ns
C o m m ittee

P ro fessio nal
A cco un tan ts in
B u sin ess
C o m m ittee

P u blic In terest
O versight B o ard
(P IO B )

IFAC Council

Initial governance of IFAC rests with the IFAC Council.
This comprises one representative from each member body.
The Council meets once a year and is responsible for deciding constitutional questions
and electing the Board.

2.3.2

International Auditing and Assurance Standards Board (IAASB) objective

To improve the uniformity of auditing practices and related services throughout the
world by issuing pronouncements (e.g. ISAs) on audit and assurance functions and

promoting their acceptance worldwide.

2.3.3

International Ethics Standards Board objective

To develop guidance on professional ethics and promote its understanding and
acceptance by member bodies.
To continually monitor and stimulate debate on a wide range of ethical issues to ensure
that the IFAC ethical guidance is responsive to the expectations and challenges of
individuals, businesses, financial institutions and others relying on accountants’ work.

2.3.4

International Accounting Education Standards Board objective

To develop guidance, conduct research, and facilitate the exchange of information to
ensure that accountants are adequately trained to meet their responsibilities.

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2.3.5

Transnational Auditors Committee

Transnational audits are “those audits of financial statements which are or may be used
across national borders; this will include all companies with listed equity or debt and

other major public interest entities such as banks and other financial institutions”
The terms of reference for the committee are to:
Encourage member firms to meet high standards in the international practice of
auditing.
Identify audit practice issues to be considered by the appropriate IFAC committees.
Provide a forum to discuss “best practices” in audit and assurance procedures.
Act as a formal conduit for interaction among transnational firms and international
regulators and financial institutions.

2.3.6

The Forum of Firms

The Forum of Firms brings together firms which perform transnational audits in order
to involve them more closely in IFAC’s activities thus enhancing its effectiveness and
ability to achieve its (IFAC’s) mission.
The objectives of the Forum include:
Promoting high quality standards of auditing and financial reporting.
Encouraging the use of ISAs and IFRSs as a step towards the global harmonization
of accounting and auditing standards.
Participating in IFAC’s standard setting activities in the areas of Auditing,
Assurance and Related Services, Ethics and Education.
Participating in IFAC’s standard setting activities through the PIOB.
Developing an enhanced dialogue between the firms and international regulators
and other financial institutions.
Encouraging convergence of national systems of regulation.
Implementation of the Forum’s Quality Standard.

2.3.7

The Public Interest Oversight Board (PIOB)

Following a series of US financial reporting scandals in the late 1990s and early 2000
(many of which had far reaching international consequences, eg Enron and World Com)
the IFAC noted that the public trust in auditors had been seriously impaired.
They recognised that whilst the IFAC standard setting and quality control processes
were well established and of a high quality, this did not appear to be the case in the eyes
of the entity stakeholders and the general public.
To regain public trust, the IFAC decided that a high quality, transparent standardsetting processes with public and regulatory input, together with regulatory monitoring
and public interest oversight, was necessary to enhance the quality of external audits of
entities.
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The PIOB was formally established in February 2005 to oversee IFAC's auditing and
assurance, ethics, and education standard-setting activities as well as its compliance
programme (designed to encourage member bodies to adopt international standards
and to implement quality assurance, investigation and discipline programs).
The objective of the Public Interest Oversight Board (PIOB) is to increase the confidence
of investors and others that the public interest activities of the IFAC are properly
responsive to the public interest. This is achieved by ensuring that auditing and
assurance, ethics and educational standards for the accounting profession are set in a
transparent manner that reflects the public interest.
The establishment of the PIOB was the result of a collaborative effort by the
international financial regulatory community (eg the International Organisation of
Securities Commissions, the Basal Committee, the World Bank and the European
Commission amongst others) working with IFAC.
The PIOB also maintains active liaison with independent audit regulators/monitors
around the world, many of which were also established in response to Enron et al. Note

that before Enron, the regulation of auditors was primarily undertaken by a member
body (eg ACCA). Post Enron, many jurisdictions required that the monitoring of (at
least) listed and public interest company auditors be carried out by an independent
body.

3

STANDARDS ISSUED BY THE IAASB

3.1

International Auditing and Assurance Standards Board (IAASB)

3.1.1

Objective

To improve the uniformity of auditing practices and related services throughout the
world by issuing pronouncements (e.g. ISAs) on audit and assurance functions and
promoting their acceptance worldwide.

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3.1.2

Operating procedures

Project is proposed and input sought

If approved, project assigned to a Task Force

Research carried out and Exposure Draft prepared

ED placed on IFAC website and widely distributed for
comment to member bodies, interested parties and
general public

Comments received are considered, ED revised and reissued if substantive changes made

Revised ED approved and issued as a Standard
Projects are identified by the members of the IAASB, the Consultancy Advisory Group,
the Forum of Firms, national auditing standard setting bodies and IFAC members.
The Consultancy Advisory Group gives representatives of the business community and
international organisations the opportunity to contribute to the development of
international auditing guidance. Members of the Group represent organisations that
have an interest in international auditing.
The Task Force carries out the basic research and development of an Exposure Draft
(ED). This may be done as a joint project with a national auditing standard setting
body.

3.1.3

Scope and authority of documents issued

Documents issued by the IAASB include:
International Standards on Auditing (ISA) to be applied in the audit of financial
statements.

International Standards on Review Engagements (ISREs) to be applied in the
review of historical financial information.
International Standards on Assurance Engagements (ISAEs) to be applied in
assurance engagements dealing with subject matters other than historical financial
information.
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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
International Standards on Related Services (ISRSs) to be applied to compilation
engagements, engagements to apply agreed upon procedures to information and
other related services engagements as specified by the IAASB.
International Auditing Practice Statements (IAPSs) to provide interpretive guidance
and practical assistance in implementing ISAs and to promote good practice.
International Review Engagement Practice Statements (IREPSs), International
Assurance Engagement Practice Statements (IAEPSs) and International Related
Services Practice Statements (IRSPSs) are issued to serve the same purpose for
implementation of ISREs, ISAEs and ISRSs respectively.
ISAs, ISREs, ISAEs and ISRSs are collectively referred to as the IAASB’s Engagement
Standards.
International Standards on Quality Control (ISQCs) are to be applied for all services
falling under the IAASB’s Engagement Standards.
ISAs, taken together, provide the necessary standards for the auditor’s work to enable
them to express an opinion on the financial statements being audited. All Standards
that are relevant to the audit process for a particular assignment must be followed.
If the auditor is unable to obtain reasonable assurance as to whether the financial
statements are free from material misstatement, ISAs require that they modify their
opinion or withdraw from the engagement.
Each Standard contains objectives and requirements (“shall”) with related guidance
(introductory, explanatory, application, definitions and other material, including

appendices). The entire text of a Standard must be understood in order to apply the
requirements of that Standard.
Each of the objectives within a Standard must be considered within the context of the
overall objective of the audit as a whole. If an objective cannot be achieved, the auditor
must use their judgement to evaluate the impact on their ability to achieve the overall
audit objective.
By their very nature, ISAs require auditors to use their professional judgement when
applying them.
Practice Statements have the same authority as Standards and should be applied
appropriately.
In exceptional circumstances, a professional accountant may judge it necessary to
depart from a basic principle or essential procedure of a Standard (and Practice
Statement) to achieve more effectively the objective of the engagement. When such a
situation arises, the professional accountant should be prepared to justify the departure.
The requirements of the Standards do not override local regulations governing audit
and assurance in a particular country. If local regulations have been followed and ISAs
(and Practice Statements) that are applicable to the engagement have not been applied
in their entirety, then compliance with ISAs cannot be stated as fact.

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
The effective date of a Standard is stated within that standard. Unless specifically stated
otherwise, the auditor can apply the requirements of that standard as soon as it has
been issued.

3.2

Codification

The codification of the Standards by subject matter is as follows (the 100 to 800 series are for
International Standards on Auditing (ISA)):
100 series Introductory Matters
200 series General Principles and Responsibilities
300 series Risk Assessment and Response to Assessed Risks
400 series (continuation of 300 series)
500 series Audit Evidence
600 series Using the Work of Others
700 series Audit Conclusions and Reporting
800 series Specialized Areas
1000 series International Auditing Practice Statements(IAPS)
2000 series International Standards on Review Engagements (ISRE)
3000 series International Standards on Assurance Engagements (ISAE)
4000 series International Standards on Related Services (ISRS)

3.3

Structure overview
IFAC Code of Ethics for Professional Accountants
Services coved by IAASB Pronouncements
ISQCs International Standards on Quality Control

International Framework for Assurance Engagements
Audit and Reviews of
Historical Financial
Information

ISAs 100+
International

Standards on
Auditing

Assurance Engagements
other than Audits or
Reviews of Historical
Financial Information
ISREs 2000+
International
Standards on
Review
Engagements

ISAEs 3000+
International
Standard on
Assurance
Engagements

Related Services

ISRSs 4000+
International
Standards on
Related Sevices

Related services include:
agreed-upon procedures (eg where the practitioner reports on the factual findings
of their procedures as agreed with the client – no conclusion is given); and

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
compilation of financial statements (eg where the practitioner prepares a set of
financial statements from the books and records of the entity for the directors, but
does not audit or provide any form of assurance on them).
Related services do not provide any form of assurance and no opinion (positive or
negative basis) is given. Any report or comments made by the practitioner are limited
to the facts as found by the practitioner.
Note that related services and assurance engagements other than audits and reviews
(ISA 3000+) are outside the scope of the examination syllabus.

4

STATUTORY AUDIT AND AUDITOR REQUIREMENTS
Because of the importance of the company auditor and their relationship between
directors and shareholders, the role of audit and duties of the auditor are often
specifically laid down in statute. Statutory regulations cover, for example:
Requirement for audited accounts and audit exemption.
Eligibility and requirements to become and remain statutory auditors.
Appointment, removal or resignation of auditors.
Auditors’ report, duties and rights.
Monitoring of auditors.
Rights of shareholders to raise audit concerns at the company’s annual general
meeting.
Liability of auditors.
Specific reports required, eg standard annual audit; report on interim financial
statements for listed companies; reports on private companies becoming listed;
reports on accounts of small companies; redemption and buy back of share capital.

4.1

Requirement for audit
In many jurisdictions the requirements for entities to be audited are set out in statute.
For example, companies acts (e.g. for private and public companies limited by shares)
within the UK, which in turn enact the requirements of European Directives on audits
and auditors.
Public services (e.g. providing Health, Education, etc) may also require an audit under
related legislation.
Charities, Friendly Societies and Trusts may require audits under their charters,
constitution or relevant legislation (and many charities are also companies).
Within some jurisdictions, exemptions to a statutory audit requirement are permitted,
e.g.:
dormant (non-trading) companies; and
“small” companies (meeting relevant size criteria).

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT

4.2

Audit exemption
It is a standard requirement in nearly all jurisdictions that companies must be audited.
However, in some jurisdictions it is recognised that for a certain level of company, the
benefit of having an audit is relatively limited and/or may not justify the costs
involved.

4.2.1

Criteria

Will vary from jurisdiction to jurisdiction, but a general understanding of a “small
company” revolves around:
Concentration of ownership and management in a small number of individuals, eg
owner managers.
Few sources of income.
Uncomplicated management structures and accounting functions.
Usually limited control functions. Greater involvement by management in
overseeing/applying controls (thus greater potential for management override?).
In the UK size limits are applied as follows (both must be met):
Turnover less than £5.8m (GBP)
Statement of financial position total less than £2.8m (GBP)
In addition:
If the company is listed, involved in financial services or a parent company, it
cannot be exempt from audit.
If members holding more than 10% of an eligible company’s issued share capital
require an audit, an audit must be carried out.

4.2.2

Arguments for and against

Shareholders not involved in management need the assurance provided by an audit.
The 10% rule provides reasonable protection for minority shareholders.
Audited financial statements are essential for valuation of shares in an unlisted
company.
A separate valuation exercise can be carried out at any time. Shareholders

expecting to dispose of their shares after the next year end and who hold more than
10% can request an audit at the next year end.
There are other critical factors to valuing a share holding outside of the scope of an
audit.

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
Banks rely on audited financial statements when making loans and reviewing the value
of security.
The bank can require an audit to be carried out as a condition of the loan.
Valuations of security (ie land and buildings) are relatively easy to obtain.
Reviews can be carried out of management accounts, budgets and cash flows.
Trade creditors need audited financial statements to assess the entity’s ability to pay.
Financial statements will be 6 to 18 months out of date, depending on when the
credit is taken.
Trade and credit references will be taken before any substantial credit is granted.
Management guarantees can also be given/taken.
Management need an audit as an independent check.
An audit can still be carried out if management decide to have one.
Other assurance services and reviews can be provided to management to cover the
specific benefits management believe were obtained from an audit.

4.3

Eligibility to become an auditor
Most jurisdictions require that to be a statutory auditor (only recognised statutory
auditors may carry out statutory audits, eg of companies) a person or firm (usually a
partnership, but may be a company) must be appropriately qualified. For example:

a member of a recognised professional body (e.g. in the UK a member of ACCA); or
holding an approved overseas qualification.
Note that, for example, within the UK (and the EU) it is essential that an ACCA member
has studied and passed the Advanced Auditing and Assurance paper (P7). Without this
paper they would not be able to act as a statutory auditor (referred to as a registered
auditor within the UK) and sign off audit reports.
Being “appropriately qualified” not only means having passed examinations of a
recognised body, but also:
obtaining a minimum number of years of practical and post-qualified relevant audit
experience (to obtain a practicing certificate and statutory auditor status);
continuous application of ethical criteria;
continuous relevant practical experience; and
continuous professional education.
Many countries now have “mutual recognition” arrangements by which, for example,
after passing country specific examinations, eg law and taxation (in the language of that
country) a statutory auditor of one country may become a statutory auditor of another.

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
In most jurisdictions, officers (i.e. directors) and employees of an entity (or any
associated undertaking) are usually ineligible to become statutory auditors.
Although statute is often not prescriptive in barring others (e.g. family and friends)
from being a company’s auditor, this is addressed by the IFAC ethical codes (see Session
4).
In addition to educational and experience requirements, in most jurisdictions, there are
many other statutory requirements that auditors must comply with in order to remain a
statutory auditor.
By following the requirements of the IFAC’s Code of Professional Ethics, International

Standards on Quality Control and Statements of Membership Obligations, most (if not
all) of these statutory requirements would be meet.
If a jurisdiction’s statutory requirements are less than those of the IFAC regulations,
the IFAC regulations prevail.
In the unlikely event that applying an IFAC requirement would be illegal in a
jurisdiction, the statutory provision overrides that of the IFAC. The IFAC’s
members in that jurisdiction are then expected to lobby for the appropriate change
in statute to bring the conflicting regulation into line with the IFAC.

4.4

Recognised Supervisory Bodies (RSBs)

4.4.1

Basic concept

As an example of the application of the statutory environment, within the UK whilst the
regulation of auditors is a statutory matter (eg the Companies Act 2006) it is managed
through the use of Recognised Supervisory Bodies (RSBs).
An RSB is a professional body (eg ACCA) whose rules, regulations and procedures have
been reviewed (and approved by government) and whose members are recognised by
statute as being eligible (after having met appropriate criteria) to sign audit reports on
companies and public interest entities. That is, whilst statute lays down the “day to day
management” requirements, the RSB implements them.
Note that the ACCA is also a RQB (Recognised Qualifying Body) in that it is allowed to
examine and award relevant professional qualifications.
RSBs must have rules to ensure that:
A person is not eligible unless “appropriately qualified”, eg ACCA including the
higher level auditing paper.

Only “fit and proper” persons are appointed as company auditors, eg have meet all
appropriate criteria.
Company audit work is conducted “properly and with integrity”, eg following
ISAs including ethical requirements.
Technical standards are applied to company audit work, eg quality control
procedures and ISAs.

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
Competence of company auditors is maintained, eg continuing professional
development.
Compliance with rules is effectively monitored and enforced, eg quality control
procedures and reviews.
Admission and expulsion of members is “fair and reasonable”.
Investigation of complaints against members promptly and thoroughly conducted.
Company auditors take steps to ensure that they can meet monetary claims against
them for penalties and damages (e.g. they carry appropriate level insurance –
Professional Indemnity Insurance (PII)).

4.4.2

Monitoring of RSBs and auditors

Continuing the UK example, the monitoring and oversight of the RSBs is carried out by
an independent body, the Professional Oversight Board for Accountancy (POBA) which
is part of the Financial Reporting Council (FRC). The FRC is a unified, independent
regulator.
Part of the POBA’s role is to monitor all listed and public interest audits. This function

is carried out by the Audit Inspection Unit (AIU – see www.frc.org.uk/pob ) through
visiting and reviewing the audit procedures of all firms that carry out such audits.
The monitoring of other auditors (ie those that do not have listed or public interest
clients) is carried out by the member bodies (eg ACCA) who report directly to the
POBA on their findings.
Prior to Enron, the member bodies monitored all auditors. However, as part of the UK
profession’s review of the impact and lessons to be learnt from Enron, the monitoring of
auditors who audited “high risk” entities (ie listed and public interest) was transferred
to an independent body (the POBA).
The basic functions of monitoring (AIU and ACCA) are:
to ensure that the RSB and firms are in compliance with the statutory (and IFAC)
audit requirements; and
to assist in the raising of standards within the profession.
Similar processes exist in other jurisdictions, eg the USA with the Sarbanes-Oxley Act
being the prime driver for the independent regulation of public interest audits.
An interesting “duplication” currently arises in that any auditor of a company (or a
subsidiary) that is listed in the USA, must be monitored by the US regime. This means,
for example, that a UK auditor of a UK subsidiary of a US listed company must be
monitored (and visited) by two sets of regulators – the US and UK.

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT

4.5

Rights and duties of auditors

4.5.1

Duties

The primary duty of a statutory auditor is (usually) to report to the company’s members
on financial statements (i.e. statement of financial position, statement of comprehensive
income, statement of cash flows, accompanying notes etc) prepared to an accounting
reference period (usually for a year).
The audit report must usually state explicitly:
the financial statements audited;
the financial framework used in preparing them;
the separate duties of directors and auditors;
the scope of the audit (identifying the audit standards used);
an opinion (e.g. in true and fair terms – see Session 1); and
compliance (e.g. in accordance with the relevant legislation and if non-compliance,
details as such must be given)
In some jurisdictions a “short-form” opinion is required which refers to other matters
only by exception. (Note that such matters would be referred to as part of the auditors’
responsibilities within the report.) For example, in the UK a “clean” audit opinion
assumes that:
proper accounting records have been kept;
the accounts are in agreement with the records and returns;
all necessary information and explanations have been received by the auditors;
proper returns, adequate for audit purposes, have been received from any branches
not visited by the auditor;
information, as required by law to be disclosed, on directors’ remuneration and
other transactions has been disclosed.
Within the UK, it is a criminal offence for auditors not to refer to any of these matters in
their report if they have not been applied.
In other jurisdictions, such matters are expressly referred to in a “long-form” opinion.

4.5.2

Rights

An auditor cannot fulfil statutory duties without commensurate rights (which must also
be legislated). For example:
To have access at all times to the books, accounts and vouchers of the reporting
entity.
To require from officers of the company any information and explanations
considered necessary for the purposes of the audit.

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
To receive notice of, attend and be heard at general meeting of the company on
business which concerns them as auditor (e.g. a resolution to remove them from
office).
Also, the auditor may have rights associated with their vacation of office (e.g. by
resignation or removal) to bring matters to the attention of members and creditors (e.g.
if the auditor is removed because he gives a qualified audit opinion, or if he resigns
because he is not given access to necessary information).

4.6

Appointment of auditors
In many jurisdictions auditors are appointed by the members (share holders) to whom
they report. This procedure may be delegated to directors, or under corporate
governance to a supervisory or audit committee, and then approved by members.
Directors may have “emergency powers” and be allowed to make appointments in

limited circumstances (e.g. upon the death of a sole practitioner auditor; for the first set
of accounts of a new company to be audited).
Yet in other jurisdiction, all appointments may be made by a government body.
In general, the appointment is for a period of one year. The auditors will then offer
themselves for re-appointment, eg at the annual general meeting of the entity, to be
voted upon by the members. Re-appointment is not automatic.
The auditor’s remuneration is generally fixed by those who appoint them. In practice,
members usually delegate the negotiation of this to the directors, or under corporate
governance procedures to be recommended by the audit committee (see Session 3
‘Regulatory environment – corporate governance).

See Session 5 for specific details of the audit appointment process.

4.7

Removal of auditors

4.7.1

Removal by directors

In most jurisdictions, it is more difficult to remove auditors than it is to appoint them.
This is for the simple reason that auditors should not be removed just on the whim of
directors, eg because the auditor wants to qualify their opinion and the directors
disagree.
As a general rule, as the members of an entity usually appoint the auditor, it will only
be the members who are able to remove them.
Whilst the exact requirements may differ from legal jurisdiction to jurisdiction, the
following procedures are usually required:
The directors must inform the auditor in writing of their intention to remove them

as auditor of the entity.

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
A special meeting of members must be held to discuss/vote upon the directors’
resolution to remove the auditor. It is not uncommon for the timing of the removal
of auditors to coincide with the annual general meeting of the entity.
The auditor should be informed of the meeting and be able to make representations
at the meeting as to why they should stay in office (if they so wish). They may also
require the directors to include such representations within the notice to members
of the meeting.
If the auditors are removed, the directors must inform the statutory regulatory
authorities and statutory audit authorities (eg the RSB and POBA). The auditors
must produce a ‘statement of circumstances’ concerning their removal which must
be given to the entity and also to the authorities.
If there are no matters the auditors wish to bring to the attention of the members, a
statement to this effect should be given to members and the authorities.
Note that in all circumstances of auditors no longer acting for an entity, a ‘statement of
circumstances’ or ‘of no circumstances’ must be made by the auditors and the entity
must seek replacement auditors.

4.7.2

At point of re-election

If, for whatever reason, the auditor no longer wishes to act for a client after the end of
their current appointment, they simply do not offer themselves for re-election after
completing their annual audit.

In most jurisdictions the auditor will be required to provide a statement to members
(and appropriate regulatory and audit authorities) that there are no circumstances that
need to be brought to the attention of members.
As a matter of professional courtesy, the auditor will usually have discussed with
management their decision not to seek re-appointment in good time to allow their
replacement to be proposed for appointment at the annual general meeting of the entity.

4.7.3

Resignation

Whilst relatively rare, there are reasons why an auditor would resign from an
engagement, eg significant limitations placed on the work of the auditor by
management, loss of trust/working relationship with management (eg significant doubt
over management’s integrity), regulatory requirements (eg discovery of significant
fraud).
In most jurisdictions the following procedures may apply:
Upon resignation, the auditors must give written notice to the client. This would
then be sent to the appropriate regulatory and audit authorities.
A ‘statement of circumstances’ (or a statement that there are no circumstances)
must also be sent to the authorities and the members/shareholders of the entity
(and others who are entitled to receive a copy of the financial statements).

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SESSION 02 – REGULATORY ENVIRONMENT – STATUTORY AUDIT
The auditors may have the right to require the directors to call a special meeting of
members to discuss the circumstances of their resignation.
In all resignation circumstances the auditor must consider their professional duty to

complete their engagement (eg they should not resign to avoid giving a qualified audit
opinion) and the legal ramifications of resignation.
In some situations, eg fraud, suspicion of money laundering, resignation may result in
the auditor being charged with a criminal offence (see Session 11). In such
circumstances the auditor should seek ethical and legal advice before taking any action
(eg from the ACCA and solicitors).

FOCUS
You should now be able to:

explain the development and status of International Standards on Auditing;
explain the relationship between International Standards on Auditing and national
standards;
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, removal and resignation
of auditors;
state the objectives and principle activities of statutory audit and assess its value (e.g. in
assisting management to reduce risk and improve performance);
describe the limitations of statutory audits.

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