Chapter 1 : Intro to Audit and Corporate Governance Flashcards
Stakeholder
Any individual or group of individuals who can affect and get affected by the operations of the business
Shareholder
Anyone who owns a stake in the company and is not involved in the daily operations of the business
Directors/Management
- Full time employees
- Receive PRP and salary
- Involved in running the business on a daily basis
2 kinds of Auditors
-External auditors
&
-Internal auditors
External auditor
- Group of people independent of any financial and personal interest in the company
- Their job is to give assurance and to audit the F.S
Internal auditor
- Full time employees of the company
- Their job is to evaluate 3 things ; Company’s internal controls, compliance with corporate governance and accounting processes.
Objective of External audit
-To express an opinion about 3 items : # Whether the F.S has been prepared in a true and fair view # Whether the F.S are free from any material misstatements due to error and fraud # Whether the F.S are prepared according to all rules and regualations.
Why (external) auditors audit F.S ?
- To increase the confidence of users of F.S
- To reduce risk of fraud and error
Define TRUE
- Information is factual and conforms with a reality in which there are no factual errors
- Information has been completely and correctly transferred from original entries and books to the F.S
- Information prepared complies with all accounting standards and the relevant law.
Define FAIR
Information is: - # clear # Impartial # unbiased
What is Assurance ?
- It is a process of evaluating the subject matter which is the responsibility of the another party against a criteria to express a conclusion to the intended user of that subject matter.
Types of Assurance
- Reasonable assurance (positive)
& - Limited assurance (negative)
Difference between positive and negative asssurance
Positive assurance Negative assurance
- highly extensive and detailed - Less detailed and exte
procedures carried out -nsive proedures carri-
-ed out.
#Our opinion is : the F.S are #Our opinion is : Nothin-
presented truly and fairly in all -g has come to our att-
material aspects -ention to suggest th-
-at the F.S is incorrect.
Examples of positive assurance
-Audit engagement
examples of negative assurance
- Reviewing engagements
- Review of F.S and interim F.S
- Review of company’s compliance with corporate governance
- Review of company’s cashflow forecast.
Why not absolute assurance ?
We can't give absolute assurance because: - # Audit is done on a sampling basis - each sample represents the entire population. #It is time-consuming and inefficient # Does not provides users of F.S with timely info.
3 types of relations between shareholder and mgmt.
# Agency theory # Stewardship theory # Accountability
Expectation gap
- Gap between what public believes auditors are responsible for and what auditors themselves believe they are responsible for
3 kinds of expectation gap
# Liablity gap #Performance gap #Standards gap
Elements of assurance
C - Criteria R- Report E- Evidence S- Subject matter T- Tri party engagement
Parties in a tri party engagement
# Intended user #Practioner # Responsible party
Rights of an auditor
- gains complete access to all of the company’s books, records and vouchers
- Right to attend and be heard at any meeting….
- Right to receive all information and explanations they deem necessary in the performance of their duties.
- Right to receive all notices and communications relating to any meeting….
Who can appoint auditors
# Shareholders #Directors/ mgmt.
When does mgmt. appoint auditors
# First year of business # to fill a casual vacancy
Who can remove auditors
- only SH with a majority vote in a AGM
What are the requirements to fulfill before auditor is removed or resigns ?
# A special notice must be sent before 28 days to the auditor and the members # auditors submit a SOC to explain their side of the story which must be distributed amongst all members # If no explanation to give , then submit a SONC # Yet, submit a SOC whether there is story or no story to explain when resigning
Who can audit
Anyone from RSB + RQB
How to issue ISAs ?
S1 : Establish a project task force to come up with draft standards.
S2: Make the draft standards open to public for comment.
S3 : Make the exposure draft stds. available on the IAASB website and distrubute them for comments for 120 days
S4: If the comments are vald and necessary, then revise the stds.
S5: the revsed stds. are made official with 2/3 of the member’s approval.
Define Corporate governance
- A set of policies and procedures used to determine how a comapany should be directed and controlled.
Who have to follow corporate governance ?
- PLC are mandatorily req. to follow CG but can either comply or explain their reason behind not following CG.
- Not mandatory for non-listed clients
Executive directors
- Full-time employees
- Receive PRP and salary
- Involved in daily running of the business
Non-executive directors
- Part-time employees
- Independent of the company
- They receive fixed fee
- They exist to scrutinise company’s affairs
Basics of UK Corporate Governance Code
L - Leadership E - effectiveness A- Accountability R- Remuneration R - Relations with shareholders
Audit committee
# Main committee # Consists of independent NEDs only
Composition of audit committee
- At least it should consist of 3 NEDs with one of them having recent and relevant financial experience.
types of committees within CG
there are 4 kinds of committees # Audit committee # Nominations committee # Risk committee # Remuneartion committee
Functions of the audit committee
# To monitor the prep. of the F.S # Make recommendations on removal and approval of external auditors # Review arrangements for whistleblowing # To provide I.A dept. greater independence from mgmt. # To monitor and review external auditors' independence and effectiveness of the audit process. # To review the need for an I.A dept annually and make recommendations to the board. # To review the effectiveness and efficiency of internal controls
Benefits of an audit committee
#They enhance the confidence of the users of the F.S and the shareholders. #They provide external auditor with greater independence by being an additional line of reporting. #They increase the independence of I.A by having then report to the audit committee : NEDs : Independent. #They can exert influence over areas where I.A dept.'s ecommendations are not being implemented.
Limitations of Audit committee
#EDs perceive them as a threat to their authority. #They are expensive #THEY CREATE BUREACRACY IN THE ORGANISATION. # Difficulty arises is selecting the most sufficient and capable NEDs # They are part-time employees so having a lot of info delivered to them at once will make their job difficult.
