Internal Control, Audit and Assurance
What the exam tests
Audit and assurance questions test the differences between statutory, internal, secretarial, cost and forensic audit; auditor independence and rotation; audit committee oversight; and the meaning of reasonable assurance.
Core rules and concepts
- Statutory audit: s.139 appointment for five years; s.141 disqualifications; s.143 powers and duties; the auditor reports whether accounts give a true and fair view. Rotation: s.139(2) limits an individual auditor to five consecutive years and an audit firm to ten years, with a five-year cooling-off, for listed companies and prescribed classes.
- Audit committee: s.177 and LODR Regulation 18; at least three directors, majority independent, independent chair, and at least one member with financial and accounting expertise. It oversees financial reporting, internal controls, internal audit, auditor independence and related-party transactions.
- Internal audit: s.138 and the Companies (Accounts) Rules; a management function that appraises risk and controls; reports to the audit committee; not a statutory audit.
- Secretarial audit: s.204, Form MR-3, for listed companies and prescribed classes; the practising company secretary reports on compliance with the Act, rules, secretarial standards and listed-entity regulations. LODR Regulation 24A adds the annual secretarial compliance report.
- Other audits: cost audit (s.148), tax audit (Income-tax Act), GST audit, forensic audit.
- Assurance concepts: materiality, audit evidence, risk-based sampling, going concern, key audit matters (SA 701), modified opinions (SA 705), emphasis of matter (SA 706).
- Independence: no prohibited services, no self-review, no undue dependence on one client.
Worked example
An audit firm has audited a listed company for eight consecutive years. It may continue for two more years to complete the ten-year limit, then must rotate out for five years. The company cannot reappoint the same firm by shareholder resolution to exceed ten years; the ceiling is statutory. Planning should begin early because the incoming auditor needs time for opening balances and communications under the Standards on Auditing.
Traps that cost marks
- Treating secretarial audit as a substitute for statutory audit.
- Saying internal audit is independent assurance for shareholders.
- Forgetting the five-year cooling-off after rotation.
- Confusing a qualified opinion with an adverse opinion.