CHAPTER TWO - Legal and Professional Issues

Management’s Responsibility

• to manage the business so that objectives are achieved

• assessing what business risks face the company

• devising the necessary strategies to deal with them

Management are Responsible for dealing with

WCGWs and the Internal Controls to deal with them

Auditor’s Responsibilities

• need to understand risks facing the business

• how the risks will affect their approach on the audit

Directors responsibilities are all in

Companies House 2006

Directors Responsibilities are

• safeguarding the assets

• maintaining accounting records

• prepare financial statements

• show financial statements to share holders

• s172 sustainability

S172 Sustainability

• large companies must disclose certain things in their strategic report

Sustainability - Related Disclosures

must highlight their impacts on the environment

Mandatory Sustainability Disclosures

• S172

• TCFD - Taskforce on Climate Related Financial Disclosures

Sustainability is

meeting the needs of the present without compromising the ability of future generations to meet their own needs

ESG is

environmental, social and governance through a corporate lens

ESG: Environmental

• counter the impact of climate change

• reduce organisation’s impact on the environment

ESG: Social

• consider the well-being and impact of work on society

• creating a good working environment for its employees

ESG: Governance

• implementing good governance practices from top-down

• offers good employment with good conditions

• meeting social and environmental requirements

ESG considers:

• Impacts

• Dependencies

ESG - Impacts

• how a business positively or negatively affects environmental, social, or governance issues

• influence that the company has on the world

ESG - Dependencies

• environmental, social, and governance issues that can affect a businesses ability to create and maintain value

• influence that the world has on the company

ESG - Impacts Examples

• polluting events

• use of finite resources

• waste management

• tax policies

ESG - Dependencies Examples

• climate change

• flooding

• wildfires

Assurance Services are determined by:

• legislation or regulation (ISAs)

• terms of engagement letter

• ethical standards

• quality management standards

Statutory Audit is

an audit of annual accounts under the Companies Act 2006 and the reporting framework (IFRS or GAAP)

Objectives of a Statutory Audit

• form an independent opinion

• confirm that annual accounts have been properly prepared

• state whether the director’s report is consistent with accounts

Achieving the Objectives of an Auditor:

• plan properly

• gather sufficient and appropriate audit evidence

• draw conclusions

Steps in Achieving the Objectives of an Auditor:

• Identify risks when understanding the entity

• Assess the identified risks and relate them to WCGWs

• Consider the risks can lead to misstatements

• Design tests to respond to the risks identified

Auditor Rights - Companies Act 2006

• right of access at all times to company’s books and accounts

• right to obtain any information for the audit

• right to attend any general meeting of the company

Auditor’s are responsible for

detecting material misstatements caused by error

Management are responsible for

preventing the material misstatements caused by error

Fraud is

the intentional act to deceive or obtain an unjust or illegal advantage

Fraud can be categorised into the following:

• fraudulent financial reporting

• misappropriation of assets

Auditors are responsible for

detecting material misstatement caused by fraud

Reporting Fraud - Those Charged With Governance

• only if actual fraud is discovered

• likely to the audit committee

Reporting Fraud - Shareholders

• only if it is material

Reporting Fraud - Third Parties

• only if it is money laundering

• money laundering overrides confidential

Where Fraud is Suspected

the implications of this should be considered

• e.g. if the financial director is the one is partaking in fraud

Risk Assessment

• the unique position of management to commit fraud

• circumstances that can indicate earnings management

• internal and external factors that could be an incentive to fraud being carried out

• unusual/unexplained changes in behaviour/lifestyle

• allegation of fraud being made

Things to look out for with Journals

• relate to accounts that aren’t used/suspense accounts

• are processed by individuals that do not usually do journals

• are unusual in timing/out of office hours

• contain no description or vague references

• lack commercial rationale

• involve related parties

Management Responsibilities - ISA250A

Those charged with governance have primary responsibility to ensure compliance with laws and regulations

Management Responsibilities being Fulfilled - ISA250A

• Monitor Legal Requirements

• Operate Internal Controls

• Develop a Code of Conduct

• Monitor Compliance with the Code

• Engage Legal Advisors

Money Laundering is

the using, acquiring, retailing, controlling, concealing and transferring the proceeds of crime and criminal property.

Money laundering includes:

• to disguise the origins of funds derived from illicit sources

• enable illicit funds to be used by those who control them