Effectiveness of Audit Committee and Auditors' Liability

The assignment discusses the importance of having an audit committee for a company like Juvenal Plc, highlighting its advantages and Bob's roles and responsibilities as a member. It also touches on the process of carrying out audits by audit firms and their adherence to regulations and standards. The effectiveness of audit committees in determining the effectiveness of audits conducted by outside auditors is emphasized.

Audit

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1 Audit committee- functions, advantages and membership.....................................................1
2 Regulations and place to supervise for checking the sufficiency of Audit work carried out
by audit firm................................................................................................................................3
3 Role that the Audit Committee plays to ensure work efficiency of auditors .......................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Audits is one of the crucial part of evaluation of the operations and activities of a firm.
This is a measure to determine the effective application of standards and provisions related with
financial accounting that each organisation must follow. Audit is carried out for every business
irrespective of its size, scope pf operation and type. The books, financial statements and other
legal documents of the entity are being checked under an audit process to see the level of
adherence with legal requirements. In the present report roles, responsibility and benefits of
audit committee is presented to Juvenal Plc. Along with this, regulations that audit firms must
comply with are defined and the role audit committee plays in to assure the effective work
performance of Audit firm is discussed.
MAIN BODY
1 Audit committee- functions, advantages and membership
Functions of Audit Committee:
The primary function of the audit committee is determined as assisting the board of
Directors of Juvenal Plc. The committee oversight the responsibilities of the organisation
regarding the following:
 Accounting and financial reporting,
 Determination and management of the risk related with internal control environment,
 Compliance with laws and legislation; and
 internal and external process of audit.
The committee will perform the following functions related with the operations of
Juvenal Plc:
 To serves as an independent body to evaluate the internal control system of the
organisation.
 Have an independent authority to appoint, retain and fire independent accountants.
 Review and monitor the risk management system of the Juvenal Plc.
 To review the efforts made by accountant in terms of auditing and to check effectiveness
of the internal audit (Beattie, Fearnley and Hines, 2015).
 To facilitates an open and fluent communication amount internal audit team, accountants
and the board of directors.
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 Recommending the board of directors over appointment, reapportionment and firing of
the external auditors of the firm.
 To ensure that internal auditors carry out its activities independently and with objectivity.
 To review that all legal and ethical requirement are fulfilled by the management,
accountants and internal auditors while carrying out their respective functions.
Advantages of Audit committee:
Effective internal control and risk management: one of the role of the committee is to
evaluate the effectiveness of the internal control system of the organisation and if it determines
any lag measures are taken to enhance the potential and reach to its optimal performance level.
Along with this the committee also asses and manage the risk management system of the
business on a regular basis. With this analysis the control and risk system of the firm are
directed towered significant implementation.
Insight into the work efficiency of the external auditor: the committee look into the
audit procedure and result drawn by external auditors to ensure that they had carried out their
work independently (Audit Regulations and Guidance, 2018). The facts are also determined that
audit is done effectively as significant financial practices have been carried out with following
sound business practices.
Increase the trustworthiness of the organisation amount stakeholders:With
compliance of all regulatory framework and legal requirements the stakeholders are given a
message that Firm practices good and sound business policies and no fraudulent activities and
misrepresentations are entertained by the organisation.
Enhancements in management attribute and effectual governance practices: with
regular monitoring and checking the operational performance of the management gets enhanced.
Effective governesses policies are brought in to practices bad this lead to compliance with all
rules and regulations and legal requirements.
Membership of Audit committee:
The composition of Audit committee in an organization can be defined as, it must
consist at least three members. But for small organisation the number is limited to two and they
can be non executive directors of the disorganization (Ahmed Haji, 2015). One of them member
of the committee be a parson with key financial skills and expertise. The committed must be in
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relevance with the sectors in which the company operates. For smaller companies like Juvenal
Plc, the chairmen of the company can be a member of the committee but he/she can not be chair.
2 Regulations and place to supervise for checking the sufficiency of Audit work carried out by
audit firm
All the registered audit firms in the UK are required to follow the procedures, standards
and regulations publishes and made by the regulatory Bodies in this respect. All the activities
and operations of the professional audit firms in the UK are governed by different regulative
assemblies such as ICAEW, ICAI, ISA, ISQC1, RAB etc.
The FRC presents and set the standers for Auditors under UK as auditing and ethical
standards (Brennan and Kirwan, 2015). Each and every organisation carrying of the business as
audit professional are required to be abide by these accounting and ethical standers while
carrying out the audit of the financial statements of the audit clients.
Auditing standards: These are the standards conducting the audit of financial statements which
defines the objectives for the auditors along with requirements and related application and
explanatory material. The international standards on Auditing (IAS) and international standard
on quality control (ISQC) are issued by International Auditing and Assurance standard board
(IAASB). The applicable ISQC and IAS in UK are ISQC (UK) 1 and ISA (UK) 200- 805.
These standards definers the guidelines for quality control for the firms who perform the
auditing, review the financial statement and other related services. Along with this, standards
lays down the overall objective of the independent auditors and how they should conduct an
audit in accordance with IAS(UK). Other terms and conditions explained in theses standards
includes agreeing terms for audit engagements, Audit Documentation, Responsibilities, of
Auditor Relating to Fraud, statutory rights and duty of auditor for reporting to the regulators of
organizations having public interest and financial sector (Auditing Standards, 2018). To
communicate the deficiencies in internal control system, communicating with those who are in-
charge of governance, planning the Audit of financial assessment, identification and assessment
of the risk of the material misstatement by understanding the business and its environment,
evaluations of other misstatement identifies during the audit procedure etc are some other details
which are described in these standards.
Ethical standards:
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The ethical standers are also applicable to those firms and professional who are engaged
in providing auditing services to other businesses. They are requires to meet the overarching
principles and ethical provision (Minnis and Shroff, 2017). Audit firms shall always addresses
the terms and conditions as they have:-
 Established and operated effective precaution when conducting the audit process.
 Implemented, maintained and complied with effective system for evaluation of the
financial statements, internal control and risk management system of the audit client.
 Evaluated the threats and safeguards appropriately when auditing the documents and
statements.
 Stats that independence, objectivity and integrity has been maintained while evaluating
the financial statements.
3 Role that the Audit Committee plays to ensure work efficiency of auditors
The audit committee of an organisation is required essential to look into matters of
company's internal as well as external affairs. It is responsible to check the effectiveness of the
woe done by the external auditors and the mattes which are of significant importance for the
firm. The committee has function of making structure of organisation favorable and ensuring
financial statement are being prepared with due diligence and in accordance with regulatory
standards and provisions (Auditors' Liability and Corporate Fraud in the UK, 2018). The audit
committee is reprehensible to check all these requirements are fulfilled and adhered by the
external auditor. Moreover, it also ensures that audit performed by the auditor is independent
and there was no influence of the broad of director internal auditor and accountants of the firm.
This is necessary as this will leave apart the chances of ambiguity, fraud and misrepresentation.
Independence, and abidance with accounting and audit Standards, are two of the major
sectors where audit committee need to look into affairs of the external auditors. These are tow
matters are specifically highlighted here, because absence on any one of these two, detection of
fraud and misrepresentation in the financial statements can be difficult and till the time they are
recognized, it is too late and harm has already been done (Agyemang-Mintah and Schadewitz,
2018). The audit committee with having a regular check on all matter with more significance
rover these specif section chances of fraud are reduced to very law. Although the risk can not be
restricted at all but the risk of fraudulent and other illegal activities gets limited.
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The fact can not be denied, that in present time most of big scam and financial scandal
are reveals after a huge loss is done and most of them involve the fraudulent activities if
company and their auditors. Here, the audit committee proves to be boon in early detection of
any illegal and fraudulent activities and non compliance with another legal requirements.
This can be stated by taking a real life example of Barclays Bank v Grant Thornton. In
this the company(Grant Thornton), GT entered into a facility agreement with the bank (Barclays
Bank) related with loan facilities (Barclays Bank v Grant Thornton, 2018). The bank went under
administration leaving GT in loss of £45 million. Later, a case was filed by the Bank against
the auditors of GT that they have shown negligence in their production of non statutory audit
report for the company which were provided to third parties and Bank. In particular, the reports
failed to identify the fraud of two employees of the Company, who had allegedly deliberately
misled GT about the true sales and expenses position of the company. The Court held that the
disclaimers included in the reports were sufficient to prevent GT owing a duty of care to the
bank. In this case the decisions was given by the court stating the fact that auditors were
responsible to identify any fraud and misrepresentation the financial statement of the
organisation they owed a care of duty to the other party of contract with their audit client.
Here, it can be stated that, the fraud started with in the organisation if a fact is missed by
the eternal auditors the same could have been identifies by the audit committee (Samaha, Khlif
and Hussainey, 2015). For the given can I the fact can also be established that the auditors
lacked independence while carrying out the audit procedure and they might get influences by the
two of the employees as a major fraud was not revealed on time although, regular monitoring
and inspections of the financial statements were done by the auditors. Hence, this can be stated
that audit committee play a vital role in determination of the work efficiency of the external
auditors.
Suggestion to Bob:
Bob, non executive directors of Juvenal Plc and member of the audit committee is
advised that the decision of forming audit committee will definitely help in the betterment of the
work performance of all the employees as well as the whole business. As discussed above the
committee have roles and responsibility to check the level of diligence and application of all
regulations and accounting standard in reporting the transaction of the Juvenal Plc. This will
make all the employees specially accounting department more vigilant in recording the
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transaction. All the activities will be monitors on regulate basis keeping a check on day to day
operation. Hence, Bob should not worry about having an audit committee.
CONCLUSION
From the above report it can be concluded that formation of Audit committee can result
beneficial for the Juvenal Plc and Bob has been advised over his roles and responsibility as a
member of Audit committee. Advantages of having such committee has been briefed to Bob in
order to establish effectiveness. Furthermore, it can be interpreted from the above report that
the process of carrying out the audits process by audit firm, they need to follow the regulations
and standards issues by ISA and other regulating bodies. The fact has been established by
presenting an example. The Audit committee plays a vital role in determination of the
effectiveness of audit conducted by outside auditors.
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REFERENCES
Books and Journals
Agyemang-Mintah, P. and Schadewitz, H., 2018. Audit committee adoption and firm value:
evidence from UK financial institutions. International Journal of Accounting &
Information Management. 26(1). pp.205-226.
Ahmed Haji, A., 2015. The role of audit committee attributes in intellectual capital disclosures:
Evidence from Malaysia. Managerial Auditing Journal. 30(8/9). pp.756-784.
Beattie, V., Fearnley, S. and Hines, T., 2015. Auditor–client interactions in the changed UK
regulatory environment–a revised grounded theory model. International Journal of
Auditing. 19(1). pp.15-36.
Brennan, N. M. and Kirwan, C. E., 2015. Audit committees: practices, practitioners and praxis
of governance. Accounting, Auditing & Accountability Journal. 28(4). pp.466-493.
Minnis, M. and Shroff, N., 2017. Why regulate private firm disclosure and auditing?. Accounting
and Business Research. 47(5). pp.473-502.
Samaha, K., Khlif, H. and Hussainey, K., 2015. The impact of board and audit committee
characteristics on voluntary disclosure: A meta-analysis. Journal of International
Accounting, Auditing and Taxation. 24. pp.13-28.
Online
Audit Regulations and Guidance. 2018. [online]. Available through
:<https://www.icaew.com/-/media/corporate/files/technical/audit-and-assurance/working-
in-the-regulated-area-of-audit/audit-regulations-and-guidance-effective-01-04-17.ashx?
la=en>.
Auditing Standards. 2018. [online]. Available through :<https://www.frc.org.uk/auditors/audit-
assurance/standards-and-guidance/2016-auditing-standards>.
Barclays Bank v Grant Thornton. 2018. [Pdf]. Available through
:<https://www.clydeco.com/uploads/Files/CC008868_Recent_key_cases_on_accountants_
liabilities_-_update_18-01-16_v6.pdf>.
Auditors' Liability and Corporate Fraud in the UK. 2018. [online]. Available through
:<https://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?
article=1244&context=jbtl>.
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