Chapter 7 - Reporting To Shareholders And External Audit Flashcards Preview

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Flashcards in Chapter 7 - Reporting To Shareholders And External Audit Deck (47)
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1

In what ways might financial statements be misleading to shareholders and other investors?

- fraudulent misrepresentation of the company's affairs (lying)
- accounting policies might present the accounts more favourable than they really are (bending the truth)
- the complexity of the accounts can make them difficult to understand. (confusing the truth)

2

What is meant by "window dressing" of financial statements?

Using accounting methods to hide the true state of affairs in a company.

3

What are "bond credit ratings"?

A scheme used by bond investors to assess the creditworthiness of companies in which they invest.

4

What does the UK Code state about the transparency of the annual report and accounts?

The board should present a fair, balanced and understandable view of the position and performance of the company.

5

What does the UK Code state about the transparency of the annual report and accounts?

The board should present a fair, balanced and understandable view of the position and performance of the company.

6

What are 4 methods of windows dressing the accounts?

The company may:
- claim profits earlier than it should
- taking debts off the balance sheet
- disguise loans as income
- overvalue assets

7

What were the facts in the 2002 WorldCom accounting fraud?

WorldCom incurred costs of $3.6bn that it accounted as capital expenditure, thereby reporting the money as "assets" instead of as what it really was - losses.

8

What does "business model" mean?

The basis on which the company generates or preserves value over time.

9

What is a going concern statement?

Directors must make a statement in the annual report and accounts that they believe the company will continue to trade for the next 12 months.

10

What is the purpose of external audit?

To make sure, as far as reasonable possible, that the financial statements are objective and can be relied upon.

11

Who is responsible for detecting fraud or errors in financial statements?

The board of directors, using the company's system of internal control. The auditor is not responsible.

12

Who is responsible for detecting fraudulent activity within the company, by some of its employees or others?

The board of directors.

13

What are the responsibilities of the external auditors with regard to the financial statements of a company?

Give an expert and independent view on:
- whether financial statements are fair and true
- whether financial statements comply with the relevant laws

14

What types of audit opinion might be given in an audit report?

Modified or unmodified

15

What is the significance of a modified audit report?

The professional accounts have stated that the shareholders cannot trust the information given to them by directors. The quality of corporate governance could hardly be lower.

16

When is an auditor liable for breach of duty?

CA 2006:
- knowingly causing an audit report to include misleading, false or deceptive content
- knowingly causing an audit report to omit a statement required by the CA.

17

When is an auditor liable for breach of duty?

CA 2006:
- knowingly causing an audit report to include misleading, false or deceptive content
- knowingly causing an audit report to omit a statement required by the CA.

18

What are the three types of modified audit opinion?

- qualified opinion (there is a single outstanding matter)
- adverse opinion (there are material misstatements in the report)
- disclaimer of opinion (the auditor has been unable to achieve the necessary information to give an opinion

19

Give examples of non-audit work for a company by auditors.

- taxation consultancy
- internal audit systems
- valuation services
- remuneration consultancy

20

What are five categories of threats to auditor independence?

1 Self-interest threat
2 Self-review threat
3. Advocacy threat
4 Familiarity threat
5 Intimidation threat

21

What is the difference between audit firm rotation and partner rotation?

The first is rotation of the audit firm doing the work, the second is rotation of partners within a single firm.

22

Why is it essential that auditors remain independent?

To ensure that their professional opinion on the accounts can be trusted.

23

What is self-interest threat?

The auditor wishes to protect their income stream from a particular company.

24

What is self-review threat?

The auditor is reviewing his own work that has been carried out for a company in a non-audit capacity.

25

What is advocacy threat?

The auditor has previously given his formal support to the company on an issue (e.g. issuance of shares), and is therefore not independent.

26

What is familiarity threat?

The auditor is over-familiar with a company's staff, and therefore is inclined to be over-trusting.

27

What is intimidation threat?

A bullying executive may coerce an auditor in favourable reporting.

28

According to the UK Code, how frequently must FTSE350 companies re-tender for audit ?

Every ten years.

29

Who should be the members of the audit committee?

UK Code:
- at least three members (2 for smaller than FTSE350)
- all members should be independent NEDs
- the company chairman should not be a member (FTSE350)
- non-FTSE350 chairman may be members, as long as they were considered independent on appointment.
- at least one member with recent and relevant financial experience.

30

What is the legal requirement for audit committees in the UK?

2008 EU Statutory Audit Directive