The United Kingdom Regulatory Structure for Auditing

Subject: Economics
Type: Expository Essay
Pages: 5
Word count: 1312
Topics: Finance, Government

With regards to finance and accounting PwC (2017, p. 1) defines an objective, independent and systematic examination and evaluation of an organisation’s financial statements to ensure that the records accurately represent the transactions they claim to represent. Ideally, an audit can be conducted a statutory or external auditor working independently to investigate cost sheets and statement to ensure they are free of fraud and misstatements or to investigate financial reporting (Goncharov et al 2014, p. 211; Naser et al 2016, p. 346). On the other hand, internal auditors are employees of the organisations they audit which are typically government agencies, non-profit entities and publicly traded companies (Beattie et al2013, p. 59; Dedman et al 2014, p. 14; Yee et al 2017, p. 148). Their key function is to inform key stakeholders, the board and managers on the efficacy of internal systems and accuracy of books (Aad et al 2015, p. 83). This paper will explore the nature and role of external audit within a professional competitive environment. It will also discuss the current regulatory environment for auditing with a focus on the laws, rules, codes and structure of government environment.

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First-party audits are performed internally to measure an organisation’s weaknesses and strengths against not only external, mandatory (imposed) or voluntary (adopted) standards but also against its own methods and procedures (Aad et al 2014, p. 2895; Allam et al 2017, p. 12). Second-party audits are external and conducted by contracted organisations on a customer’s behalf or by the customer themselves (Neuburger et al 2015, p. 686). Since second-party audits provide contractual direction from customers to suppliers, they are subjected to the provisions of contract law and are more formal relative to first-party audits (Naser et al 2014, p. 69). Third-party audits are carried out by audit organisations that are not only independent of the supplier-customer relationship but also any form of conflict of interest. Therefore, a critical nature of third-party auditors and their audits is independence (Fox et al 2013, p. 88; Lenz et al 2014, p. 127). Further, third-party audits can also lead to recognition, license approval, registration and certification. However, there may also be negative consequences such as fines, citations or penalties issued by interested parties or the third-party auditors in their own capacity (Chambers, & Odar 2015, p. 38; Jafari et al 2017, p. 252).

The underlying nature and role of external audit is to promote corporate governance in an environment of good business practices in the entire economy (Chamber 2014, p. 218; Jamjoom et al 2015, p. 10). External audits ensure that organisations are able to pursue and achieve their corporate objectives by helping them align finance and accounting practices with legal and ethical provisions (Button et al 2015, p. 102; McKee 2015, p. 222). External audits facilitate the monitoring and supervision as well as detection of irregular activities. When external auditors perform audits on private companies, they are instrumental in eliminating biases with regards to the state of the financials of the company (Al-Shaer et al 2017, p. 14; Eadie et al 2015, p. 8547). Audits ideally scrutinise material errors in the records of the specific object they are investigating and provide stakeholders with a sense of accurateness on the state of the subject they are auditing. Consequently, such audits enable stakeholders arrive at more informed and better decisions. As PwC (2017, p. 1) explains, audits conducted by third parties present opinions that are honest and do not affect the daily operations and working relationships within an organisation.

Most companies have annual external audits while larger enterprises may have them monthly (Crawford & Power 2015, p. 9; Reid et al 2015, p. 53). Further, audits are legal requirements for other companies owing to the compelling incentives to deliberately misstate financial information with the intention of committing fraud (Hay 2013, p. 166; Kouaib & Jarboui 2014, p. 80). In that context, external auditors are used by publicly traded companies as an instrumental resource to appraise the efficiency of internal controls on financial information. On one hand, the expectations of good corporate governance are clearly understood and sustained vial proactive regulatory oversight (Aguilera et al 2015, p. 484; Elshandidy & Neri 2015, p. 334). On the other hand, however, the structure and oversight role of the government particularly with regards to small and medium enterprises (SMEs) remains ambiguous (George et al 2014, p. 238).

Section 2 of the Audit Regulations and Guidance published by the ICAEW and effective from 1st April 2017 outlines the eligibility conditions and how to apply to become a Registered Auditor. Regulation 2.02, specifically, sets out seven conditions that a potential Registered Auditor must comply with.


2.02- The Registration Committee may register a firm only if satisfied that:
athe firm is fit and proper to be appointed as a Registered Auditor
bthe firm has professional indemnity insurance or other appropriate

arrangements as required either by the PII Regulations, or in the case of a firm which is an employee of an Auditor General under the Act, has the benefit of a statutory indemnity

cthe firm has appointed an audit compliance principal whose name has been given to the registering institute
deach responsible individual has been designated in accordance with

regulation 4.01

eif the firm is a sole practice, the sole practitioner is a responsible

individual and the audit compliance principal (and if not a member of an institute or a member of the Association of Chartered Certified

Accountants is an audit affiliate of the registering institute)

fthe firm satisfies any other eligibility criteria set by a competent authority or in legislation
gif the firm is not a sole practice, the firm meets the additional

requirements of regulation 2.03

Table 1: Regulation 2.02 of the Audit Regulations and Guidance (exactly as produced)

Source: ICAEW ( 

It is imperative to note that to qualify for registration an applicant must meet all the seven requirements. However, it must also be noted that the phrase “fit and proper” is not explicitly explained yet its usage in section (a) is a fundamental condition. An applicant aware of any condition that may affect the condition of being fit and proper, whether or not such condition concerns audit work, must inform the Registration Committee in confidence. Such information, though, does not imply that the application will automatically be rejected by the committee.

In order for an applicant to be fit and proper, they must be in compliance with the fundamental ethical provisions as outlined in the Code of Ethics. Summarily, the applicant must:

  • Conduct themselves with integrity in business and professional relationships
  • Conduct themselves professionally by remaining compliant with applicable regulations, rules and laws
  • Remain objective in business and professional decisions
  • Respect the discretion of information obtained through professional interactions
  • Pledge to accept offers only for work they are qualified and competent to do (ICEAW 2017, p. 28).
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  The International Standards on Auditing, UK (ISAs UK) consist of objectives for auditors as well as requirements, related application and instructive material and are effective for audits relating to financial statements starting on an after 17th June 2016. The ISA (UK) 220 Revised June 2016 deals with specific auditor responsibilities with regards to procedures of quality control for audits of financial statements. In particular, they point towards the need of auditing standards to closely examine an entity as well as its environment with emphasis on the controls that the entity has implemented. The Generally Accepted Auditing Standards (GAAS) are a description of both formal and informal rules recognised as the basis on which auditors perform their work (Alzeban & Gwilliam 2014, p. 86; Sury et al 2016, p. 34). Such standards can both be written or unwritten and include legal judgements in cases that involve auditors, legislation and pronouncements from standard-setting or professional bodies (Alwardat et al 2015, p. 210).

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