articles Flashcards
acca code of ethics
The ACCA Code of Ethics and Conduct outlines five fundamental principles for members:
Integrity: Be honest and straightforward in all professional dealings.
Objectivity: Avoid bias, conflicts of interest, or undue influence.
Professional Competence and
Due Care: Maintain and apply professional knowledge and
skills diligently.
Confidentiality: Respect and protect confidential information unless legally required to disclose.
Professional Behavior: Comply with laws and regulations, avoiding actions that discredit the profession.
what is corporate governance
Corporate governance is the system by which organisations are directed and controlled.
It encompasses the relationship between the board of directors, shareholders and other stakeholders, and the effects on corporate strategy and performance.
Corporate governance is important because it looks at how these decision makers act, how they can or should be monitored, and how they can be held to account for their decisions and actions.
“comply or explain” approach to corporate governnce
Under this approach the regulatory authority issues a set of principles with which company directors of listed companies are expected to comply. In many jurisdictions disclosures are required in the financial statements to demonstrate compliance. Non-compliance is not expected, but in its event, the facts of the non-compliance must be clearly disclosed and explained.
main principles of UK corporate governance code (not in syllabus)
Leadership
Effectiveness
Accountability
Remuneration
Relations with Shareholders
leadership
The board should lead and control the company’s operations.
Roles and responsibilities should be clearly divided to prevent undue concentration of power.
Non-executive directors should challenge and contribute to strategy.
There should be a balance of executive and non-executive directors to prevent dominance by a small group.
effectiveness
The board and its committees should possess a balanced mix of skills, experience, independence, and knowledge.
Formal procedures should govern the appointment of new directors.
Directors should receive induction and continuously update their skills.
Directors should be re-elected periodically based on performance.
accountability
The board should provide a balanced and understandable assessment of the company’s position and prospects.
Sound risk management and internal control systems should be maintained.
Formal arrangements should be in place for corporate reporting, risk management, and relations with auditors.
remuneration
Director remuneration should attract, retain, and motivate high-quality leadership.
Payments should be reasonable and not excessive.
Executive remuneration should link significantly to corporate and individual performance.
relations with stakeholders
Dialogue with shareholders should be based on mutual understanding of objectives.
The board is responsible for ensuring satisfactory communication with shareholders.
Annual General Meetings should be used to engage with investors and encourage their participation
role of audit committee
-Review of Financial Information:
Monitor the integrity of the company’s financial statements and official announcements.
Specifically review significant financial reporting judgements.
Scrutinize and challenge the finance director and external auditors on contentious financial matters.
-Systems and Controls:
Review the company’s internal financial controls and risk management systems.
If there’s an internal audit function, extend monitoring to include its effectiveness.
Recommend to the board annually on the need for an internal audit function.
Provide explanations in the annual report if there’s no internal audit function.
Fraud Prevention and Detection:
Establish whistleblowing arrangements for employees to report concerns about financial improprieties.
Play a role in fraud prevention and detection related to financial reporting matters.
composition of audit committee
The audit committee should consist of at least three independent non-executive directors.
One member should possess recent and relevant financial experience.
audit committee responsibility in regards to external auditor
-recommend the appointment, reappointment and removal of auditor
-approve fees for audit n non audit services
-agree the terms of engagement
in UK, there is a requirement for FTSE 350 companies to put the external audit out to tender every 10 years.
-annually assess independence, ethics and effectiveness of audit
-report this assessment to board and recommend on reappointment
in annual report they shud include:
-assessment of audit process
-tenure of current auditor
-last tender
-any contractual obligations due to which current auditor was chosen.
-if there r potential objectivity threats, get reassurance from auditor
-seek info anually from auditor abt policies in place to ensure independence
what is the audit committee’s role in regards to the annual audit cycle?
STARTING STAGE
-audit committee must be involved in all stages of audit
in start:
ensure proper plans in place
consider materiality level
resources
audit team composition
audit firm shud have meeting with audit committee and discuss plan and strategy, and be able to demonstrate that standards have been adhered to
AUDIT COMMITTEE ROLE IN AUDIT CYCLE
FIELDWORK STAGE
-review findings with external auditor
-discuss major resolved and unresolved issues that rose during audit
-review key accounting and audit judgements
-review errors identified, obtain explanations from management
-review management’s responsiveness to external auditor’s findings and recommendations
audit committee role during end of audit cycle
-review if auditor has met the agreed audit plan, understand any changes, any new risks and work done to address the risks
-evaluate how well auditor’s respond to queries of audit committee and how they handled key accounting and audit judgements
-get auditor’s feedback from key ppl like FD and CIA
-review and monitor management letter, and monitor whether it’s acted upon
-report to board on effectiveness of external audit process
audit committee’s role in relation to oversight and approval of provision of non audit services
-make a policy regarding external auditor providing non audit services, considering the ethical principles
consider:
-does the firm have relevant experience
-are there safeguards in place for any threats
-nature of non audit services
-fees individual and aggregate
-criteria which govern the compensation of individuals performing the audit
make a formal policy and outline:
-which services are pre approved
-which services require approval
-which services are clearly excluded
what should audit committee do if external auditor wants to provide internal audit services
should consider the effect this may have on the effectiveness of the company’s overall arrangements for internal control and investor perceptions in this regard.
types of auditor liability
-auditor’s are potentially liable for both civil and criminal offenses.
criminal offense: when a govt imposed law is breached
civil offense: disputes between individuals and organisations
criminal may be:
-fraud
-insider trading
-issuing a misleading audit report knowingly or recklessly.
-auditors r also liable to follow companies act, which tells who can be auditor, appointment removal etc
civil:
-contract law: can be sued for not following terms of engagement letter
-law of tort: they can face negligence claims if they breach duty of care to third party, resulting in financial loss
liability owed to client vs liability owed to third party
LOC:
-Contractual relationship
-legal standard: breach of contract
-damages can be seeked
-direct relationship
LOT:
-Duty of care
-legal standard: negligence
-compensation may be asked
-indirect relationship
what is joint and several liability and What are some challenges faced by the audit profession due to joint and several liability?
A principle where any one of multiple culpable parties can be pursued for the entire damages sought by the plaintiff.
problems: Increased cost to the industry, higher insurance premiums, potential for increased audit fees, and barriers to competition.
how can auditors manage liability exposure?
1- manage quality (follow standards, ethics, etc) however there is pressure for reduced fees, sustainability assurance is demanded but that needs upskilling, its a paradox
2- disclaimers of liability in wording of audit report: clearly mention that report is only for use of client. they dont provide absolute protection. if negligence is found, case will be done
critics say this can undermine credibility of audit report
3-liability limitation agreements:
-clauses in terms of engagement that put a cap on amount of compensation that can be sought from auditor
-must be approved by SH annually
4- proportional liability: in negligence cases, only the firms share of liability will be paid.
what is a limited liability agreement
A clause in the engagement terms that caps the amount of compensation an auditor can be liable for, subject to fairness and reasonableness.
auditor liability - impact on competition
Auditor liability is seen as a barrier to entry for mid-tier firms wanting to audit large companies. Proposals in the UK aim to encourage more competition in the audit market, but challenges like resource requirements and liability risks persist.
