Unit

2
The Legal and Regulatory Framework

Overview

Auditing is an assurance service which provides an independent review and assessment

of a subject matter to the audit stakeholders, that is, persons who have an interest in the
audit findings. The subject matter may be a process, a procedure or information. Auditing
provides an independent assessment in order to give assurance to persons relying on the
information that it is properly represented and presented in all material respects. Different
stakeholders require different types and levels of assurance, rendering it quite difficult
to meet every expectation to the fullest. Auditors are guided by a range of legislation
and regulations which impact how their audits are conducted (methodology) and their
opinions or assurances expressed or given.

Statutory audits are governed by legislation which generally stipulates the rights and
responsibilities of the auditor. Non-statutory audits are not mandated by statute but are
commissioned by management to provide assurance as required. Both statutory and non-
statutory audits are guided by legislation and regulations which govern the institution,
the industry and the region within which the entity operates. Breach of legislation is
likely to result in fines and penalties, including imprisonment of offending officers and
the auditors.

The auditing profession is regulated by different oversight bodies which provide

mandatory standards and guidelines for licensed and practicing auditors to abide by.
Non-compliance with regulations is likely to result in fines and penalties, as well as
disciplinary action imposed by the regulators including suspension or even expulsion
from the professional body which regulates the auditing profession in that jurisdiction.
Ignorance is no excuse for not complying with legislation and regulations. In this unit
we will look at the legal and regulatory framework within with the auditors operate and
highlight some of the significant provisions of the different legislations and regulations.

21 ACCT3043 Auditing - UNIT 2

 Unit 2 Learning Objectives

At the end of this unit you will be able to:

1. Understand the terms of reference for audits and the regulations governing the
conduct of audits, including banking regulations.
2. Distinguish between statutory and non-statutory audits.
3. Cite the statutory provisions addressing the requirements for statutory audits.
4. Understand the provisions of the Auditing Standards and Guidelines, and requirements
for compliance.
5. Understand the purpose and role of the Code of Professional Conduct in the regulation
of the accounting/auditing profession.
6. Specify the terms of the Code of Professional Conduct, including disciplinary action
for non-compliance.
7. Distinguish between ethical and non-ethical behavior, in personal and business
context.
8. Understand the significance of ethical conduct, independence and objectivity for the
accounting/auditing profession.
9. Explain the responsibilities and obligations of the auditor, including the liability of the
auditor to the various stakeholders under statute and under common law.
10. Cite landmark cases for the determination of auditor’s liability.
11. Understand Section 404 requirements for auditor reporting on internal control.

There are two sessions in this unit:

Session 2.1: The Legal Framework of Auditing

Session 2.2: The Regulatory Framework of Auditing

Reading

Arens, Alvin, A. et al., (2010). Auditing and Assurance Services: An Integrated Approach. (13th
ed). New Jersey: Prentice Hall.
Chapter 1 – Auditing and the Public Accounting Profession
Accounting Profession and its Associated Organisations
Regulatory Framework for Ensuring Quality Services
Chapter 4 – Ethics
Chapter 10 – Internal Controls Risks

22 ACCT3043 Auditing - UNIT 2

 Articles
media.wiley.com/product_data/excerpt/26/04708632/0470863226.pdf

Websites
The Bank of Jamaica
http://www.boj.org.jm

Videos- youtube
Generally Accepted Accounting Standards
http://www.youtube.com/watch?v=a89XlhXqmXk

4Auditing Ethics and Rules of Professional Conduct

http://www.youtube.com/watch?v=t9SggNKfEt4&feature=relmfu

Audit 1 - class presentation about ETHICS

http://www.youtube.com/watch?v=Rysw5Z1VWK0&feature=related

Terms of Use: You are reminded to respect and observe the copyright and terms of use
indicated for all of the websites and other resources to which you are being directed
for readings.

23 ACCT3043 Auditing - UNIT 2

Session 2.1

The Legal Framework of Auditing

Introduction
The legal framework for audits is based on two primary sources of law, namely, statute
and case law precedents. The role of the auditor, including duties and rights, is outlined
in various pieces of legislation which oftentimes serve as the terms of reference for the the
engagement of auditors. This legislation is usually interpreted in case law. It is important
that auditors and those that engage them are aware of the law which governs audits.
Failure to comply could result in fines and penalties, as well as other disciplinary actions.

In this session, we will look at some of the legislation which governs the auditing function.
The material used is based on Jamaican laws but you are encouraged to familiarise
yourself with the legal framework of the auditing profession in your country. We will
examine the provisions for audits/auditors in the Companies Act 2004, Bank of Jamaica
Act 1960 and Financial Institution Act 1992. We will then look at some popular case laws
and their rulings on issues relating to the auditor. Remember to familiarise yourselves
with comparative legislation in your respective territories.

Key Terms
Companies Act 2004 (Jamaica) – The law which governs all registered companies in
Jamaica
Bank of Jamaica Act 1960 (Jamaica) – The law which established and governs the Bank
of Jamaica
Financial institution Act 1992 (Jamaica) – The law which governs all registered financial
institutions in Jamaica
Public Accountancy Act (1970) (Jamaica) – The law which governs all registered public
accountants in Jamaica

Legislation Relevant to Auditing

There are pieces of legislation which mandate the rendering of audited financial reports,
along with guidelines for the appointment, termination, rights and responsibilities of the
auditor. These audits are referred to as statutory audits. Statutory audits are mandated by
law. Examples of some statutes in Jamaica that require audited accounts for entities which
they govern include the Companies Act, the Building Societies Act, the Banking Act, the
Insurance Act, the Cooperative Societies Act, the Financial Institution Act, the Bank of

24 ACCT3043 Auditing - UNIT 2

 Jamaica Act and the Securities Act. The auditor is required to comply with the provisions
of the relevant statutes in fulfilling the terms of their engagement. Additionally, the auditor
has to abide by the provisions of the Public Accountancy Act which legislates on the body
of person who are qualified to conduct audits and provide guidance accordingly.

Non-statutory audits are not mandated by law; however, the auditor must abide by the
statutes which govern the business as well as those which govern the auditing profession,
when auditing such entities. The provisions under the law of contract and law of tort
apply to auditors as to other legal persons, so auditors (and those who engage them) must
be aware of these various aspects of the legal environment in which they operate.

The main issues covered by the statutes include:

• The requirement for an audit
• The requirements (deliverables) of the auditor
• The persons qualified/disqualified to conduct such audits
• The rights of the auditor
• The duties of the auditor
• The appointment and remuneration of the auditor
• Exemption from the provisions of audited reports

We will highlight the relevant provisions in three such pieces of legislation mentioned
above, namely the:
i. Companies Act 2004
ii. Bank of Jamaica Act 1960
iii. Financial Institution Act 1992

Companies Act 2004

The requirement for an audit
Right to receive copies of balance sheets and auditor’s report
153.(1) In the case of every company, a copy of every balance sheet, including every document
required by law to be annexed thereto which is to be laid before the company in general
meeting, together with a copy of the auditors’ report, shall, not less than twenty-one
days before the date of the meeting, be sent to every member of the company (whether or
not he is entitled to receive notice of general meetings of the company), every holder
of debentures of the company (whether or not he is so entitled) and all persons other than
members or holders of debentures of the company, being persons so entitled.

(2) In the case of a company not being a private company any member of the company, and any
holder of debentures of the company, shall be entitled to be furnished on demand without
charge with a copy of the last balance sheet of the company, including every document
required by law to be annexed thereto, together with a copy of the auditors’ report on the
balance sheet.

25 ACCT3043 Auditing - UNIT 2

 The persons qualified/disqualified to conduct such audits
Qualification for appointment as auditor

155. A person shall not be qualified for appointment as auditor of a company which is
not a private company or of a private company which is obliged to file accounts unless he
is a registered public accountant as defined in section 2 of the Public Accountancy Act.

Disqualification for appointment as auditor

156. None of the following persons shall be qualified for appointment as auditor of a company –
(a) an officer or servant of the company;
(b) a person who is a partner of or in the employment of an officer or servant of the company;
(c) a body corporate.

The rights of the auditor

Auditor’s report and right of access to books and to attend and be heard at general meetings

157. (1) The auditors shall make a report to the members on the accounts examined by them,
and on every balance sheet, every profit and loss account and all group accounts
laid before in general meeting during their tenure of office, and the report shall
contain statements as to the matters mentioned in the Seventh and Eighth Schedules.
(2) The auditors’ report shall be read before the company in general meeting and shall be
open to inspection by any member.
(3) Every auditor of a company shall have a right of access at all times to the books and
accounts and vouchers of the company, and shall be entitled to require from the
officers of the company such information and explanation as he thinks necessary for
the performance of the duties of the auditors.
(4) The auditors of a company shall be entitled to attend any general meeting of the
company and to receive all notices of and other communications relating to any general
meeting which any member of the company is entitled to receive and to be heard at any
general meeting which they attend on any part of the business of the meeting which
concerns them as auditors.
(5) If any person makes default in complying with any of the requirements of this
section, he shall be liable to a fine not exceeding one hundred thousand dollars.

The duties of the auditor

157.— (1) The auditors shall make a report to the members on the accounts examined by them, and
on every balance sheet, every profit and loss account and all gorup accounts laid
before the company in general meeting during their tenure of office, and the report shall
contain statements as to the matters mentioned in the Seventh and Eighth Schedules.

(2) The auditors’ report shall be read before the company in general meeting and shall be
open to inspection by any member.

26 ACCT3043 Auditing - UNIT 2

 The appointment and remuneration of the auditor
154.—(1) Every company shall at each annual general meeting appoint an auditor or auditors to
hold office from the conclusion of that, until the conclusion of the next annual general
meeting.

Exemption from the provisions of audited reports

159. – (1) A company, which meets the criterial specified in paragraph of Part II of the
Seventh Schedule in a given financial year and in respect of which a resolution
is passed in accordance with subsection
(2) and is not –
(a) a public company;
(b) a private company whose articles provide otherwise;
(c) a company licensed under the Banking Act;
(d) an insurance company registered under the Insurance Act;
(e) a company licensed under the Securities Act;
(f) a company licensed under the Financial Institutions Act;
(g) a society registered under the Building Societies Act or the Cooperative
Societies Act;
(h) a subsidiary of a company, falling within any of the categories in paragraphs
(a) to (g), shall be exempt from providing audited financial statements and
an auditor’s report as required under this Act with respect to that financial
year.

Bank of Jamaica Act 1960

Accounts and audit

43. (1) The accounts of the Bank shall be audited by Accounts auditors appointed
annually by the Board with the approval and audit of the Minister.
(2) Without prejudice to the provisions of subsection (1) the Minister may at any
time require the Auditor General to examine and report on the accounts
of the Bank as a whole or any aspect of the Bank’s operations and the
Bank shall provide the Auditor General with all necessary and proper facilities
for such an examination.

Reports
44. (1) The Bank shall, within, three months after the end of financial year, cause to be
made and trasmit to the Minister-
(a) a report dealing generally with the operations of the Bank during the last
preceding financial year; and
(b) a copy of the annual statement of accounts of the Bank certified by the
auditors.

(2) The Minister shall as soon as possible after their receipt-

(a) cause a copy of the report together with the annual statement of accounts

27 ACCT3043 Auditing - UNIT 2

 and the auditor’s report thereon to be laid before each House of Parliament; and
(b) cause a copy of the annual statement of accounts to be published in the Gazette.

(3) The Bank shall as soon as practicable after the close of businee on the second
and fourth Wednesday in each month cause to be made and published in the
Gazette and transmit to the Minister a statement showing its assets and liabilities
at the close of business on that day.

Financial Institution Act

Presentation and publication of balance sheet and profit and loss account.
18. (1) Every licensee shall-
(a) not later than ninety days after the end of each financial year, submit the
prescribed documents to the Bank of Jamaica;
(b) not later than fourteen days after the date on which the prescribed
documents are submitted pursuant to paragraph (a), cause a copy thereof
to be published in a daily newspaper printed and circulated In Jamaica;
(c) exhibit throughout each year a copy of the latest prescribed document in a
conspicuous position in each place of business of the licensee in Jamaica.
(2) For the purposes of this section “prescribed documents” means- (a) an audited
balance sheet and profit and loss account in respect of all business transacted
by the licensee in its last financial year and signed by not less than two of the
licensee’s directors; and (b) the auditor’s report.
(2A) Except as otherwise directed in writing by the Act. Supervisor the audited
balance sheet and profit and loss account shall be prepared in accordance with
generally accepted accounting principles as set out in the Handbook of the
Institute of Chartered Accountants of Jamaica.
(3) Any licensee which contravenes this section shall be guilty of an offence.

Source: The Bank of Jamaica

http://www.boj.org.jm/pdf/BANK%20OF%20JAMAICA%20ACT.pdf

LEARNING ACTIVITY 2.1 •

1. Select three issues addressed by the Companies Act 2004.

2. Discuss with your colleagues why legislation is necessary to address these concerns.
What concerns regarding the role of the auditor and the process of auditing does the
legislation help to ameliorate?

We should have an appreciation that the requirement for auditors is set by extensive
legislation. The law stipulates the rights of auditors and also provides for their
responsibilities. The news media carries reports of auditors who, having breached their
duties, were dragged through the courts. Persons rely on the auditor’s assurance to make

28 ACCT3043 Auditing - UNIT 2

 certain critical decision and wehre such reliance is misplaced financial loss may result for
which the auditor may be deemed responsible. Litigation against auditors has always
existed but in recent times the number of incidents and level of compensation have grown
significantly. Auditors therefore have to be aware of the legal environment in which
they operate to meet their obligations and minimise law suits which affect not only the
individual but impact negatively on the auditing/accountancy profession.

LEARNING ACTIVITY 2.2 •

Click on the following link to view a video to understand more about an auditor’s liability.
ACCA P7 – 4. Auditors’ Liability
http://www.youtube.com/watch?v=6dKIfXAHjMU

So, having watched the video, you should have a clearer understanding of how auditor’s
liability arises, based on third party reliance on informaion vetted by the auditor.

LEARNING ACTIVITY 2.3 •

1. Click on the following two links to access two of your readings for this session.
Auditor’s Liabilities, Liabilities of an Auditor. [This article outlines various ways in which
legal action may be pursued against the auditor.]
http://www.friendsmania.net/forum/b-com-part-2-auditing-notes/28425.htm

Make notes on the different ways in which legal action can be brought against an
auditor and the conditions that must be met for such actions to succeed.

Case law contributes significantly to the material on authors’ liability. In the following article
you will read about some of the main cases which have been used in the development of
this subject. Pay special attention to the landmark rulings in the case re Kingston Cotton
Mill. The article is Nigerian-based but its content is relevant to us as the case laws noted
are primarily UK cases.

2. Current Trends on Auditors Liability to Third Parties for Negligent Statements in

Company Law
http://dspace.unijos.edu.ng/bitstream/10485/1465/1/Current%20Trends%20on%20
Auditors%20Liability%20to%20Third%20P.pdf
Make notes on the different case laws noted and the ruling concerning the auditor’s
liability in the respective cases noted.

29 ACCT3043 Auditing - UNIT 2

 Session 2.1 Summary

In this session we covered the terms of reference for audits and the regulations governing
the conduct of audits, including the statutory provisions addressing the requirements for
statutory audits. We examined the rights and obligations of the auditor, including the
liability of the auditor to the various stakeholders under statue and under common law,
highlighting the landmark cases for the determination of auditor’s liability.

30 ACCT3043 Auditing - UNIT 2

Session 2.2
Regulatory Framework of Auditing

Introduction
The accounting profession is heavily self-regulated to ensure that certain basic standards
of competence and efficiency are upheld in the public interest as well as to promote
the integrity and viability of the profession. We have already looked at the statutory
provisions which govern various aspects of the auditors’ role, but apart from these
legislations, there are regulations which govern the practice of accountancy. In Jamaica,
the accountancy profession is goverened by the Public Accountancy Act 1970 which sets
out the requirements for the practice of public accountancy in Jamaica. An auditor, that
is , external auditor, is required to be a registered public accountant and comply with the
provisions of the Act.

In this session we will look at the regulations which govern the practice of accountancy
and auditing in Jamaica, the Caribbean and internationally. W will not be able to cover
all the international regulations but we will attempt to cover as much as impact our local
environment and are relevant to the practice of accountancy in our region.

Key Terms
Pubic Accountancy Board – A public body with oversight of the practice of public
accountancy in Jamaica
Public Accountancy Act (PAA) – The Act which regulates public accountancy practive
in Jamaica
Institute of Chartered Accountants of Jamaica (ICAJ) – The institution which regulates
the practice of accountancy in Jamaica
Institute of Chartered Accountants of the Caribbean (ICAC) – The institution which
facilitates cooperation and collaboration between accounts of the English-speaking
Caribbean
Auditing Standards – Basic principles and practices which auditors are expected to follow
in the conduct of an audit
Auditing Guidelines – Guidelines to assist in the interpretation and application of the
Auditing Standards
International Federation of Accountants (IFAC) – The global organisation for the
accountancy profession dedicatd to serving the public interest by strengthening the
profession and contributing to the development of strong international economies

31 ACCT3043 Auditing - UNIT 2

 The International Auditing and Assurance Standards Board (IAASB) – An independent
standard setting body that enhances the quality and consistency of the practice of auding
and assurance services throughout the world thereby strengthening public confidence in
the global auditing and assurance profession
International Standards on Auditing (ISAs) – The body of auditing standards developed
by the International Auditing and Assurance Standards Board of the Internation Federation
of Accountants
Generally Accepted Auditing Standards (GAAS) – The set of standards agaisnt which
the quality of audits is performed and may be judged
Statements on Auditing Standards (SAS) – Guidance to external auditors on GAAS in
regards to auditing an entity and issuing a report issued by the authoritative body in teh
region where the standards apply

Regulatory Bodies
Professional bodies provide the framework for self-regulations and are also responsible
for administering training and examinations for students and members. The law generally
provides for the regulatory authority to provide practicing certificates for persons meeting
criteria in qualification and experience. There are various professional bodies which will
come across in your readings, which regulate the accounting profession in their respective
territories.

Some of these are:

• US – American Institute of Certified Public Accountants (AICPA)
• UK – Association of Chartered Certified Accountants (ACCA)
• UK – Institute of Chartered Accountants in England and Wales (ICAEW)
• Canada – Canadian Institute of Chartered Accountants (CICA)
• Canada – Certified General Accountants Association of Canada (CGA)
• Caribbean:
* Bahamas Institute of Chartered Accountants
* Institute of Chartered Accountants of Barbados
* Institute of Chartered Accountants of Belize
* Institute of Chartered Accountants of the Eastern Caribbean
* Institute of Chartered Accountants of Guyana
* Institute of Chartered Accountants of Jamaica
* Institute of Chartered Accountants of Trinidad and Tobago
* Institute of Chartered Accountants of the Caribbean (ICAC)

We will examine the regulatory framework of the accounting profession by using examples
from Jamaica. You are encourages to enquire and determine how the accounting profession
in your country is regulated, and tomake the comparison with the Jamaican case.

32 ACCT3043 Auditing - UNIT 2

 The Public Accountancy Act 1970 (Jamaica) provides a regulatory framework for the
accounting profession in Jamaica. It established the Public Accountancy Board (PAB)
a statutory body to issue licences to registered public accountants and to promote, in
the public interest, acceptable standards of professional accountants in Jamaica and, in
particular, to perform the functions assigned to the Board by the other provisions of the
Act.

LEARNING ACTIVITY 2.4 • Article

1. Click on the following link to access Jamaica’s Public Accountancy Act

http://pab.gov.jm/index.php?option=com_content&view=article&id=59&Itemid=94

2. Read the material carefully and make notes.

3. The Public Accountancy Board provides oversight for the governance of public
accountants in Jamaica. Select another country within the Caribbean region and
one outside the region and identify the entity within each of those 2 countries that
has oversight of the governance of public accountants there. Now that you are aware
of these three different entities, compare their key terms. What are the significant
similarities and differnces in their definitions of their roles and functions?

The Public Accountancy Board in Jamaica issues practising certificates to eligible persons
to act as public accountants, but in addition they are given the responsibility to supervise
and monitor such licensed accountants. The Board is required to put measures in place
to ensure that its registered members maintain a high standard of technical competence
and conduct themselves in an ethical manner. Non-compliance is punishable by taking
disciplinary actions and in extreme cases, withdrawal of registration, thereby restricting
such persons from practicing.

Decisions by the Public Accountancy Board (PAB) are subject to approval by the Minister
of Finance who has legal authority to issue regulations relating to the profession. The PAB
carries out its mandate by being the legal authority that issues licences to registered public
accountants who must also hold a practicing certificate from the PAB.

Only registerd public accountants have the legal authority to sign audit reports on financial
statements.

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 LEARNING ACTIVITY 2.5 • Discussion Forum

1. Click on the following link to access a newspaper article which reported the case of a
breach in the rules of the PAB.
http://jamaica-gleaner.com/gleaner/20020322/business/business1.html

2. How effective do you think the oversight bodies have been in the regulation of the
practice of public accountants in your country?

3. Do you think that the action taken against Mr Marshall in the above case
was appropriate? Explain.

Institute of Chartered Accountants of Jamaica (ICAJ)

In 2001 the PAB designated the ICAJ as the sole agent of the PAB. According to Mrs.
Patricia Hayle, the then President of the ICAJ, as a result of the new designation, “the
Institute may well find itself establishing and monitoring experience requirments for
all licensees, and evaluation the appropriateness of the experience of all applicants for
licences” (The Jamaica Gleaner, 2001).
• Promote and increase the knowledge, skill and proficiency of its members and students
• Regulate the discipline and professional conduct of its members and students
• Promote and protect the welfare and interest of the Institute and the Accountancy
profession, both in Jamaica and abroad
• Make provision for the training, education and examination of persons engaging or
intending to engage in the profession
• Do all such things as are incidental to realising the objectives of the profession

Source: http://www.icaj.org/index.php/about-us/who-we-are/about-us/overview

Terms of Use: You are reminded to respect and observe the copyright and terms of use
indicated for all of the websites and other resources to which you are being directed
for readings.

The Companies Act 2004 (Jamaica) provides that all companies, excepting for very
small companies, are required to prepare their financial statements in accordance with
accounting standards promulgated by the ICAJ. The ICAJ and the PAB have an agreement
to share the responsibilities to ensure unified standards for the control, monitoring and
discipline of all registered public accountants in Jamaica and to improve the effectiveness
of the PAB as the legal authority for the oversight of registered practicing accountants in
Jamaica.

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 Financial services regulators rely significantly on external auditors of the regulated entities
to ensure compliance with accounting and financial reporting requirements and to report
compliance failures. These firms are the primary source of knowledge on International
Financial Reporting Standards (IFRS) and ISA issues and share this knowledge with the
regulators.

The ICAJ is collaborating with the PAB and Institute of Chartered Accountants of the
Caribbean (ICAC) to establish a regional practice monitoring system with responsibility
for the evaluation and assessment of the quality of audit and other public practice work
in member countries.

The ICAJ is a member of International Federation of Accountants (IFAC) and requires its
members to comply with IFAC’s ethical and professional standards. The ICAJ promulgates
the standards issued by the IFAC and the International Accounting Standards Board
(IASB).

International Bodies
The International Federation of Accountants (IFAC)
The IFAC is the global organisation for the accountancy profession. It regulates the
profession through the cooperation of its members in enforcing its standards and
guidelines, which are decided on by its standards setting arm, the IAASB.

The International Auditing and Assurance Standards Board (IAASB)

The IAASB is a committee of the IFAC responsible for standard setting to enhance the
quality and consistency of the practice of auditing and assurance services. The following
is a list of pronouncements issued by the IAASB:

International Standards on Auditing (ISAs) – these are applied in the audit of financial
information
International Standards on Review Engagements (ISREs) – these are applied in the review
of historical financial information
International Standards on Assurance Engagements (ISAEs) – these are applied in
assurance engagements other than the audit and review of historical financial information
International Standards on Related Services (ISRCs)
International Standards on Quality Control (ISQCs)6. International Auditing Practice
Statements (IAPSs) – these provide guidance in implementing ISAs and promoting good
practice

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 International Standards on Auditing (ISAs)

The following is a list of the current standards in force.

ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing
ISA 210 Agreeing the Terms of Audit Engagements
ISA 220 Quality Control for an Audit of Financial Statements
ISA 230 Audit Documentation
ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements
ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements
ISA 260 Communication with Those Charged with Governance
ISA 265 Communicating Deficiencies in Internal Control to Those Charged with
Governance and Management

ISA300 Planning an Audit of Financial Statements

ISA315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment
ISA 320 Materiality in Planning and Performing an Audit
ISA330 The Auditor’s Responses to Assessed Risks
ISA402 Audit Considerations Relating to an Entity Using a Service Organisation
ISA450 Evaluation of Misstatements Identified during the Audit ISA 500 Audit
Evidence
ISA501 Audit Evidence-Specific Considerations for Selected Items ISA 505 External
Confirmations
ISA 510 Initial Audit Engagements-Opening Balances
ISA520 Analytical Procedures
ISA530 Audit Sampling
ISA540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures
ISA550 Related Parties
ISA560 Subsequent Events
ISA570 Going Concern
ISA 580 Written Representations
ISA600 Special Considerations-Audits of Group Financial Statements (Including the
Work of Component Auditors)
ISA610 Using the Work of Internal Auditors ISA 620 Using the Work of an Auditor’s
Expert
ISA 700 Forming an Opinion and Reporting on Financial Statements
ISA 705 Modifications to the Opinion in the Independent Auditor’s Report
ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report
ISA710 Comparative Information-Corresponding Figures and Comparative Financial
Statements

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 ISA720 The Auditor’s Responsibilities Relating to Other Information in Documents
Containing Audited Financial Statements
ISA800 Special Considerations-Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks
ISA805 Special Considerations-Audits of Single Financial Statements and Specific
Elements, Accounts or Items of a Financial Statement
ISA 810 Engagements to Report on Summary Financial Statements International
Standard on Quality Control (ISQC) 1, Quality Controls for Firms that Perform
Audits and Reviews of Financial Statements, and Other Assurance and
Related Services Engagements

The IAASB recently embarked on a project (dubbed the IAASB’s Clarity Project) to
improve the clarity of ISAs. The ISAs now have a new structure, in which information is
presented in separate sections: Introduction, Objective, Definitions, Requirements, and
Application and Other Explanatory Material.
1. Introduction–Introductory material may include information regarding the purpose,
scope, and subject matter of the ISA, in addition to the responsibilities of the auditors
and others in the context in which the ISA is set.
2. Objective–Each ISA now contains a clear statement of the objective of the auditor in
the audit area addressed by that ISA.
3. Definitions–For greater understanding of the ISAs, applicable terms have been defined
in each ISA.
4. Requirements–Each objective is supported by clearly stated requirements. Requirements
are always expressed by the phrase “the auditor shall.”
5. Application and Other Explanatory Material–The application and other explanatory
material explains more precisely what a requirement means or is intended to cover, or
includes examples of procedures that may be appropriate under given circumstances.

Relevance of Auditing Standards and Guidelines to the Auditor

Auditing standards prescribes the basic principles and practices which members of
the accountancy bodies are expected to follow in the conduct of an audit. Auditors are
expected to apply the standards whenever they conduct an audit. Auditing Guidelines
are not prescriptive in nature but are intended to guide the auditor in the appropriate
application of the standards.

The governing auditing standards used by the ICAJ are the International Standards on
Auditing (ISA). Compliance with the rules and guidelines stipulated in these standards
is imperative in ensuring quality and consistency of audit work. Failure to appropriately
apply the rules and guidelines may result in fines, penalties or other disciplinary action
– in extreme cases it may result in withdrawal of registration as a public accountant
prohibiting the offender from practicing as an auditor. If the person continues to accept
engagements as an auditor they can be charged with a criminal offence. Additionally, the

37 ACCT3043 Auditing - UNIT 2

 courts take the regulations as a guide to good practice and will use them in deciding on
the adequacy of audit work in negligence cases brought against the auditors.

Source: http://www.ifac.org/auditing-assurance

Terms of Use: You are reminded to respect and observe the copyright and terms of use
indicated for all of the websites and other resources to which you are being directed
for readings.

Relevance of Accounting Standards to the Auditor

The auditor is required to express an opinion on whether or not the financial statements
give a true and fair view of the financial performance and position of the entity. This
requires the auditor to test the information presented for compliance with accounting
standards and guidelines, as well as other regulatory provisions. The auditor is expected
to apply such expertise in the gathering and analysis of audit evidence in arriving at and
expressing an opinion.

The governing accounting standards used by the ICAJ are International Financial
Reporting Standards (IFRSs) issued by the International Accounting Standards Board
(IASB) a committee of the IFRS Foundation.

IFRS Foundation
The IFRS Foundation is an independent, not-for-profit private sector organisation working
in the public interest.

The principal objectives of the IFRS Foundation are:

• to develop a single set of high quality, understandable, enforceable and globally

accepted international financial reporting standards (IFRSs) through its standard-
setting body, the IASB;
• to promote the use and rigorous application of those standards;
• to take account of the financial reporting needs of emerging economies and small and
medium-sized entities (SMEs); and
• to promote and facilitate adoption of IFRSs, being the standards and interpretations
issued by the IASB, through the convergence of national accounting standards and
IFRSs.

The IASB (International Accounting Standards Board)

The IASB is the independent standard-setting body of the IFRS Foundation. It is responsible
for the development and publication of IFRSs, including the IFRS for SMEs and for
approving Interpretations of IFRSs as developed by the IFRS Interpretations Committee
(formerly called the IFRIC). The IASB engages closely with stakeholders around the
world, including investors, analysts, regulators, business leaders, accounting standard-
setters and the accountancy profession.

38 ACCT3043 Auditing - UNIT 2

 International Financial Reporting Standards
IFRS 1 First-time Adoption of International Financial Standards 2008
IFRS 2 Share-based Payment 2004
IFRS 3 Business Combinations 2008
IFRS 4 Insurance Contracts 2004
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 2004
IFRS 6 Exploration for and Evaluation of Mineral Assets 2004
IFRS 7 Financial Instruments: Disclosures 2005
IFRS 8 Operating Segments 2006
IFRS 9 Financial Instruments 2010
IFRS 10 Consolidated Financial Statements 2011
IFRS 11 Joint Arrangements 2011
IFRS 12 Disclosure of Interests in Other Entities 2011
IFRS 13 Fair Value Measurement 2011

International Accounting Standards

IAS 1 Presentation of Financial Statements 2007*
IAS 2 Inventories 2005*
IAS 3 Consolidated Financial Statements Superseded in 1989 by IAS 27 and IAS 28 1976
IAS 4 Depreciation Accounting Withdrawn in 1999
IAS 5 Information to Be Disclosed in Financial Statements Superseded by IAS 1
effective 1 July 1998 1976
IAS 6 Accounting Responses to Changing Prices Superseded by IAS 15, which was
withdrawn December 2003
IAS 7 Statement of Cash Flows 1992
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 2003
IAS 9 Accounting for Research and Development Activities Superseded by IAS 39
effective 1 July 1999
IAS 10 Events After the Reporting Period 2003
IAS 11 Construction Contracts 1993 IAS 12 Income Taxes 1996*
IAS 13 Presentation of Current Assets and Current Liabilities Superseded by IAS 39
effective 1 July 1998
IAS 14 Segment Reporting Superseded by IFRS 8 effective 1 January 2009 1997
IAS 15 Information Reflecting the Effects of Changing Prices Withdrawn December 2003
2003
IAS 16 Property, Plant and Equipment 2003*
IAS 17 Leases 2003*
IAS 18 Revenue 1993*
IAS 19 Employee Benefits Superseded by IAS 19 (2011) effective 1 January 2013 1998
IAS 19 Employee Benefits (2011) 2011*
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
1983
IAS 21 The Effects of Changes in Foreign Exchange Rates 2003*
IAS 22 Business Combinations Superseded by IFRS 3 effective 31 March 2004 1998*
IAS 23 Borrowing Costs 2007*

39 ACCT3043 Auditing - UNIT 2

 IAS 24 Related Party Disclosures 2009*
IAS 25 Accounting for Investments Superseded by IAS 39 and IAS 40 effective 2001
IAS 26 Accounting and Reporting by Retirement Benefit Plans 1987
IAS 27 Separate Financial Statements (2011) 2011 IAS 27 Consolidated and Separate
Financial Statements Superseded by IFRS 10, IFRS 12 and IAS 27 (2011) effective
1 January 2013 2003
IAS 28 Investments in Associates and Joint Ventures (2011) 2011 IAS 28 Investments in
Associates Superseded by IAS 28 (2011) and IFRS 12 effective 1 January 2013 2003
IAS 29 Financial Reporting in Hyperinflationary Economies 1989
IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions
Superseded by IFRS 7 effective 1 January 2007 1990
IAS 31 Interests In Joint Ventures Superseded by IFRS 11 and IFRS 12 effective 1
January 2013 2003*
IAS 32 Financial Instruments: Presentation 2003*
IAS 33 Earnings Per Share 2003*
IAS 34 Interim Financial Reporting 1998
IAS 35 Discontinuing Operations Superseded by IFRS 5 effective 1 January 2005 1998
IAS 36 Impairment of Assets 2004*
IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1998
IAS38 Intangible Assets 2004*
IAS 39 Financial Instruments: Recognition and Measurement Superseded by IFRS 9
effective 1 January 2015 2003*
IAS 40 Investment Property 2003*
IAS 41 Agriculture 2001

The IFRS Interpretations Committee

The IFRS Interpretations Committee is the interpretative body of the IASB. The mandate
of the Interpretations Committee is to review on a timely basis widespread accounting
issues that have arisen within the context of current IFRSs and to provide authoritative
guidance (IFRICs) on those issues.

IFRIC Interpretations
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities 2004
IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments 2004
IFRIC 3 Emission Rights Withdrawn June 2005 2004
IFRIC 4 Determining Whether an Arrangement Contains a Lease 2004
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental
Rehabilitation Funds 2004
IFRIC 6 Liabilities Arising from Participating in a Specific Market – Waste Electrical
and Electronic Equipment 2005
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies 2005
IFRIC 8 Scope of IFRS 2 Withdrawn effective 1 January 2010 2006
IFRIC 9 Reassessment of Embedded Derivatives 2006

40 ACCT3043 Auditing - UNIT 2

 IFRIC 10 Interim Financial Reporting and Impairment 2006
IFRIC 11 IFRS 2: Group and Treasury Share Transactions Withdrawn effective 1 January
2010 2006
IFRIC 12 Service Concession Arrangements 2006
IFRIC 13 Customer Loyalty Programmes 2007
IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements
and their Interaction 2007
IFRIC 15 Agreements for the Construction of Real Estate 2008
IFRIC 16 Hedges of a Net Investment in a Foreign Operation 2008
IFRIC 17 Distributions of Non-cash Assets to Owners 2008
IFRIC 18 Transfers of Assets from Customers 2009
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 2009
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 2011

Other pronouncements
Conceptual Framework for Financial Statements 2010
Preface to International Financial Reporting Standards 2002
IFRS for Small and Medium Sized Entities 2009
IFRS Practice Statement Management Commentary 2010

Source: http://www.ifrs.org/The-organisation/Pages/IFRS-Foundation-and-the-IASB.
aspx

Terms of Use: You are reminded to respect and observe the copyright and terms of use
indicated for all of the websites and other resources to which you are being directed
for readings.

Note: For the purpose of this course you are not expected to know all these standards and guidelines
but you should be aware of their existence and the areas they address. Later on the course we will
guide you as to the ones we will be looking at in some detail.

Rules of Professional Conduct

Professional bodies require their members, affiliates and students to behave in an ethical
manner to uphold its value and integrity. In pursuance of this, they prescribe rules for
professional conduct embodied in a Code of Ethics and Conduct. The rules for guiding
behavior are in the form of fundamental principles, specific guidance and explanatory
notes. We will use the ICAJ’s Code of Ethics to look at the areas addressed.

The following is an outline of the contents of the Institute of Chartered Accountants of

Jamaica “Code of Ethics”.

41 ACCT3043 Auditing - UNIT 2

 Part A - Applicable To All Members
SECTION 1 Integrity and Objectivity
SECTION 2 Resolution of Ethical Conflicts
SECTION 3 Professional Competence
SECTION 4 Confidentiality or Professional Organisation(s) Concerned.
SECTION 5 Tax Practice Tax Returns.
SECTION 6 Cross Border Activities
SECTION 7 Publicity
SECTION 8 Second and other Opinions

Part B – Applicable To Members In Public Practice

SECTION 9 Independence
SECTION 10 Professional Competence and Responsibilities Regarding the Use of Non-
Accountants
SECTION 11 Fees and Commissions
SECTION 12 Activities Incompatible with the Practice of Accountancy
SECTION 13 Clients’ Monies
SECTION 14 Relations with Other Members in Public Practice
*SECTION 15 Advertising and Solicitation

Part C – Applicable To Members Not In Public Practice

SECTION 16 Conflict of Loyalties
SECTION 17 Support for Professional Colleagues
SECTION 18 Professional Competence
SECTION 19 Presentation of Information
SECTION 20 Fidelity

Source: http://www.icaj.org/index.php/members/membership/code-of-ethics-bye-
laws

Terms of Use: You are reminded to respect and observe the copyright and terms of use
indicated for all of the websites and other resources to which you are being directed
for readings.

Fundamental Principles
These rules apply to all members and are contained in Section A of the ICAJ’s Code of
Ethics.

The fundamental principles are:

1. Integrity–Integrity implies not merely honesty but fair dealing and truthfulness.
2. Objectivity–The principle of objectivity imposes the obligation on all members as
professional accountants to be fair, intellectually honest and free of conflicts of
interest.

42 ACCT3043 Auditing - UNIT 2

 3. Competence–Members should not portray themselves as having expertise or
experience they do not possess. Professional competence may be divided into
two separate phases: a) Attainment of professional competence and b)
Maintenance of professional competence
4. Professional Conduct–Members are to comply with the relevant laws and
regulations and should avoid any action that discredits the profession
5. Confidentiality–Members have an obligation to respect the confidentiality of
information about a client’s or employer’s affairs acquired in the course of
professional services. The duty of confidentiality continues even after the end
of the relationship between the member and the client or employer.

Source: Auditing by A.H. Millichamp, John Taylor ELBS 9th Edition

ACTIVITY 2.6 •

1. Click on the link below to access the ICAJ’s Code of Ethics and read in full
http://www. icaj.org/index.php/members/membership/code-of-ethics-bye-laws

2. Review the document and used as reference for the following

A. Identify the circumstances in which an auditor may disclose client
information to third parties, then comment on the following situations in the
context of the appropriateness of disclosure on the part of the auditor.
i. The audit manager was issued a summons to appear in a court case involving a
client charged with money laundering
ii. The audit partner was asked to participate in a survey on the salaries of the
management team of its audit clients
iii. The audit partner was asked by the regulators to submit a report on the
incidents of breaches identifled during their recent audit.

B. Identify the issues which can impair the auditor’s independence and offer guidance
on how to act in such circumstances. Comment on the following situations in the
context of the independence of the auditor.
i. The audit manager in charge of the audit assignment of ABC Ltd holds 10,000
$1 ordinary shares in the company which has an issued share capital of
1,000,000 $1 ordinary shares. The audit partner holds no shares.

ii. Brown Chartered Accountants is a small audit flrm. Its largest client is XYZ Ltd. The
audit fee proposed for XYZ Ltd, a private company is $2M. The total fee of the audit
flrm is $14M.

43 ACCT3043 Auditing - UNIT 2

 ACTIVITY 2.6 • CONT’D

iii. The audit senior in charge of the audit of International Commercial Bank has a
personal loan from the bank of $200,000 on which she is currently paying 25%
(the average market rate for similar loans)

iv. The audit partner is responsible for two audit assignments, Apple Ltd and Banana
Ltd. Apple Ltd has recently tendered for a major contract with Banana Ltd. Banana
Ltd has asked the audit partner to advise on the matter and whether or not it would
be a good deal.

Session 2.2 Summary

In this session we examined the regulations govern public accountancy and the practice
of external audit in particular. We outlined the provisions of Auditing Standards and
Guidelines, and requirements for compliance as well as the purpose and role of the Code
of Professional Conduct in the regulation of the accounting/auditing profession.

44 ACCT3043 Auditing - UNIT 2

 References
ICAJ http://www.icaj.org/index.php/about-us/who-we-are/about-us/overview

ICAC
http://www.icac.org.jm/index.php?option=com_content&task=view&id=12&Item
id=26http://www.icaj.org/index.php/members/membership/code-of-ethics-bye-
laws

IFRS
http://www.ifrs.org/The-organisation/Pages/IFRS-Foundation-and-the-IASB.aspx

IFAC http://www.ifac.org/auditing-assurance

IFAC http://www.ifac.org/auditing-assurance/clarity-center/clarified-standards

BPP- ACCA Audit and Assurance Passcards (for exams in 2012)

http://www.icaew.com/en/library/subject-gateways/auditing/knowledge-guide-
to-uk-auditing-standards#standards

ICAJ to be made sole agent of the Public Accountancy Board. Retrieved from
http://jamaica-gleaner.com/gleaner/20010706/business/business2.html

Millichamp, A. H. and Taylor, J. (2008). Auditing (9th Ed.). South Western Educational.

Public Accountancy Act (1970)

http://pab.gov.jm/index.php?option=com_content&view=article&id=59&Item
id=94

45 ACCT3043 Auditing - UNIT 2