LESSON - 2

AUDITORS’ RIGHTS & DUTIES

APPOINTMENT, REMOVAL,
RESIGNATION AND
AUDIT REGULATIONS
 Auditors’ rights
Typical rights include:
1) access to all books and records
2) access to all information and explanations
3) the right to:
–be given notice of a annual general
meeting
–attend the annual general meeting
–speak at the annual general meeting
4) the right to resign without finishing the audit
5) the right to have information sent to
shareholders, should the auditors wish to.
 Auditors’ duties
Typical duties:
1) to issue an audit report, giving opinions on:
 truth and fairness of the Financial Statements
 whether the Financial Statements are
properly prepared (within GAAP)
 any other opinions required by government,
(e.g; whether proper accounting records kept
or whether Directors' Report is consistent
with the Financial Statements)
 Auditors’ duties (cont.)
2) when leaving a client, to issue a Statement of
Circumstances, explaining whether there are
any specific reasons for them leaving.

3) after leaving a client, to respond to any

requests for information from the firm of
auditors who replace them.
 Auditors’ duties regarding fraud
prevention and fraud detection
Fraud prevention is entirely the responsibility
of company management and those charged
with governance of the company.
Fraud detection is also the responsibility of
management and those charged with
governance, backed up by internal audit.
The external auditor has a responsibility to
plan and carry out their work in such a way
that material frauds are likely to be discovered.
 Qualification of external auditors
An auditor:
 Must pass an approved set of professional
examinations, set by a Recognised Qualifying Body
(RQB) e.g. the ACCA / ICAB.
 Must become a member (and stay a member!) of a
Recognised Supervisory Body (RSB) e.g. the ACCA
 The auditor must not be a director or employee of
the company, or of any associated companies.
 The auditor must not be a business partner of a
director or employee of the company, or of any
associated companies.
Appointment of external auditors
 The Board of Directors will propose a Firm and
this will then be voted on by the shareholders.
 Usually, they are appointed on an annual basis at
the AGM.
 If auditors are needed mid-year (e.g. because the
previous firm resigned) then it is often possible
for the Board of Directors to appoint a firm up till
the next AGM.
 In most large companies, there will be a specialist
Board Committee that will recommend a firm to
the main Board – this committee is called the
Audit Committee.
 Resignation of auditors
 Auditors can resign by giving written notice and a
Statement of Circumstances to the company.
 Auditors may have resigned because they are
deeply concerned about some aspect of the
company’s activities.
 The auditor feels that the company is now too
large for the auditing firm to deal with.
 If the auditors have resigned because of the
company, they could also require the directors to
call an extraordinary general meeting, where they
can speak to the members and explain their
concerns and why they have resigned.
 Removal of auditors
Auditors could be removed from office for
perfectly legitimate reasons.
Perhaps the auditors failed to the find a material
fraud in the company and the directors have lost
faith in them.
 Perhaps the company has now become
international and a larger firm of auditors is
needed.
 They breach a major code of conducts
 Audit Regulation
Auditors are regulated by:
 Professional bodies (e.g. ACCA / ICAB)
 International bodies (e.g. IFAC, the International
Federation of Accountants).
 National bodies (Bangladesh Auditing Standard
Board)
 IAASB (International Auditing and Assurance
Standards Board): ISAs and other assurance
standards
 The International Ethics Standards Board for
Accountants (IESBA): IFAC Code of Ethics.
 TAC (Transnational Auditors Committee):
international dimension of audits.
PROFESSIONAL ETHICS
 Fundamental principles of Auditors
1) Integrity, basically this means that members
should be honest, straightforward.
2) Objectivity, members should be influenced
by the facts and the facts only. They must
avoid bias, conflict of interest and undue
influence.
• Professional competence and due care:
Auditor must keep themselves up-to-date with
legislation and recent developments. They
must be diligent, they must be careful.
Fundamental principles of Auditors
(cont.)

4) Confidentiality: That information must be

held confidentially. Members should not
disclose confidential information unless they
have a legal or professional duty to do so.
5) Professional behaviour: They should
comply with the law and they should avoid
any actions which discredit the profession.
 Threats to professional principles and
ethics
Threats to professional principles and ethics arise
from
• Self-interest
• Self review
• Advocacy
• Familiarity
• Intimidation.
 Self-interest threats
The threat that auditors act in their own personal
interests (or are believed to be doing so).
Examples include:
 owning shares in their client
 receiving excessive gifts or hospitality from clients
 receiving excessive fees from a single client
 having personal or business relationships with
clients
 audit fees that are calculated in a way that might
encourage unethical behaviour by the auditor.
 Safeguards against Self-interest
threats
Safeguards include:
not owning shares in clients
keeping staff off the audit team if they are
connected with the client
 not accepting gifts or hospitality if they would
appear valuable to the outside world
no “contingency fees” - i.e. fees that are
dependent on the result of the audit work
 Safeguards against Self-interest
threats (cont.)
Audit firms should avoid having any one client
that makes up a significant proportion of their
fee income. The specific guidelines is as
follows;
Listed Clients: Gross recurring fees from a
single listed client should not be >10% of audit
firm’s total income. When these fees reach
5%, the situation should be reviewed.
 Safeguards against Self-interest
threats (cont.)
Non Listed Clients: Gross recurring fees from a
single listed client should not be >15% of audit
firm’s total income. When these fees reach
10%, the situation should be reviewed.
 Self-review threats
The threat that if auditors do certain tasks for
clients, their audit work may result in
checking their own work. Examples:
giving advice on accounting or control
systems, then auditing them
preparing the accounting information, then
auditing it
helping with calculations of numbers in the
Financial Statements, then auditing them.
Safeguards against Self-review threats
Safeguards include:
not doing other non-audit work if it results in
the audit work being undermined or if audit
objectivity id threatened
use independent other partner to review any
work already carried out
 Advocacy threats
The threat caused when auditors are asked to
do other work that means they are taking
their client's position on something. By taking
this position, they may be seen to be “on the
client's side”, rather than being independent.
Examples include:
representing an audit client in a legal case or
tax enquiry
 taking legal action against a client, or being
sued by a client.
 Safeguards against Advocacy threats
Safeguards include:
Auditor should withdraw from the
engagement if they are involved in serious
litigation with their client.
 Familiarity threats
The threat that if auditors are too familiar /
friendly with a client, they might deliberately
or accidentally put too much trust in their
client and not be sceptical enough, leading to
under-auditing.
Examples include:
 auditing companies where the auditor's relatives or
friends work
 auditing the same company for many years in a row
 if a client is offering a lot of hospitality, this may be a
clue that there is too close a relationship with the
auditor
 there are people working at the client who are recent
ex-employees of the audit firm.
Safeguards against Familiarity threats
Safeguards include:
not putting staff on the audit team if they
have been employed by the client within the
last 2 years
rotate audit staff to ensure nobody works on
the same audit so many years in a row that
they might become close to the client (Note –
on Listed clients the engagement partner
must be changed at least every 5 years)
 Intimidation Threats
The threat caused by a client being in a
position to put pressure on an auditor.
Examples could be threatened litigation,
blackmail, or there might even be physical
intimidation, though it is to be hoped that
that is rare.
 Safeguards against Intimidation
threats
The intimidation threat is very closely related
to the self-interest and advocacy threats so
the safeguards are the same.