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Chapter 5
Case Study
What will be the key points Tickitt & Run will have to explain to them
about auditing standards?
Consider:
How will accounting standards, broadly, affect these businesses?
Consider:
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How would you go about explaining to entrepreneurial management
the need for all these auditing and accounting rules?
Examination questions
Question 1
Auditing standards are set by the Auditing Practices Board (APB) by
considering each International Standard on Auditing issued by the IAASB
supplementing where necessary and then issuing the standard as an ISA (UK
& Ireland). The accountancy bodies adopt all of the auditing standards
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(ii) Currently the responsibility with a company for the prevention and
detection of fraud rests with management. As part of their business
responsibility the directors of a company have a fiduciary duty (a duty based
on trust) to safeguard the assets. The Cadbury Committee has recommended
(iii) The auditors should always strive to be professional in objective
judgements. They should not only be independent in fact but they must
clearly be seen to be independent in practice. There is no objection in
principle to providing non audit services but care must be taken not to
In all cases in which a practice is concerned in the preparation of accounting
records for an audit client the following safeguards should be observed
xThe client should accept responsibility for the records as its own
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(iv) Under the Companies Act 2006 a company shall, at each general meeting
of the company at which accounts are laid, appoint an auditor to hold office
from the conclusion of that meeting until the conclusion of the next annual
(b) (i) Disciplinary procedures applied against an auditor for non compliance
with auditing standards are enforced by the RSB, although the Accountancy
(ii) It is quite apparent from the press and audit research that the public
believes that the auditor should and, in fact, does search for fraud during the
(iii) Audit firms do not act exclusively in the capacity of auditors for their
clients. Audit work is, in some cases, not the main business of audit firms.
Auditors provide many other services such as tax advice, valuation and
(iv) It has been argued that the long term nature of the company audit
engagement can lead to a loss of independence due to an increasing
familiarity with the company’s management. Again, this was a feature of the
Arthur Andersen/Enron relationship. In many European countries the audit
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(ACCA)
Question 2
(a) Common ownership and management
(i) The existence of an owner-manager who is actively involved in the day-to-
day running of the business is a common feature of smaller entities.
(b) A control framework that is different to the control framework for larger
entities
(i) International Standards on Auditing need to accommodate the needs of
auditors of larger and smaller entities and always make reference to a full
range of internal formal controls. Many smaller entities lack formal internal
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(c) The use of standardised computer packages
(i) Well-established standardised computer packages are generally more
reliable and ‘auditor-friendly’ than they used to be. Computer Assisted Audit
Techniques (CAATS) have been developed for use with some such packages,
for example, and many small firms of auditors advise their clients on the
selection of such packages, although this can create independence problems
(see below).
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(d) Reliance on the auditor for accounting expertise
(i) The packages referred to above mean that staff at many smaller entities
are able to produce a trial balance, which might not have been possible with
a manual system. However, many smaller entities still rely on auditors for
the preparation of the final statutory financial statements. ACCA’s Rules of
Professional Conduct permit this.
(e) A lack of sufficient appropriate audit evidence to support financial
statement assertions relating to income for cash transactions
(i) Where auditors are unable to obtain sufficient appropriate audit evidence
on any material area in the financial statements, they must qualify their audit
report on the grounds of a limitation in the scope of the audit (‘except for’).
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investigation. This may harm the relationship between auditor and client and
the client may seek to persuade the auditor to issue an unqualified opinion
where it is not appropriate.
(iv) Auditors should consider carefully whether they wish to accept audit
engagements where they know at the outset that the client is unable or
unwilling to provide them with sufficient appropriate audit evidence (auditors
should not be associated with fraud).