Chapter 13 - Corporate Governance Flashcards
Corporate governance (major components)
- Strategic direction:
a) business model
b) overall objectives
c) the approach to risk taking
d) the limits of organization conduct - Oversight (internal auditing with focus on risk management and control activities):
a) Risk mgmt activities
b) Internal and external assurance activities
Role of the board
>> Source of overall direction and oversight with fiduciary role (act on the best interest setting high standards of ethics and moral).
>> The most important function of the board’s audit committee is to promote independence of internal and external auditors.
>> One of the primary objectives of the board is oversight of financial reporting processes to ensure their reliability and fairnes.
>> Responsible for overseeing the system of internal control.
Role of mgmt
Establishing and maintaining the system of internal control:
> Define risks to be managed.
> Assign risks to risk owners.
> How risks will be managed. Also defines tone at the top.
- Has overall responsibility for designing, implementing and operating an effective system of internal control.
Role of Internal Audit
>> Consulting and advisory role on system of internal controls evaluating adequacy and effectiveness of internal control.
>> Internal audit cannot SELECT and execute controls.
>> Is also the third line of defense.
1st, 2nd and 3rds line of defense for control for data governance
- Operational Management (not Senior Management)
- The first line of defense for effective management of risk an controls.
- DEVELOPS AND IMPLEMENTS CONTROL AND RISK MGMT PROCESSES.
- Business enabling functions
- Provide the second line of defense
- COMPLIANCE is in this group.
- Ongoing monitoring of control of risk
- Internal auditors
- Third line of defense.
- Evaluate adequacy and effectiveness of controls.
- Have to be independent (cannot select and execute controls) and objective.
FCAP (Foreign Corrupt Practices Act 1977) 2 MAIN POINTS
- Prohibits US firms and individuals (DOMESTIC) whether or not doing business overseas (ALSO ENGAGED IN IN INTERSTATE COMMERCE) to offer or authorize (they should have known) political payment to FOREIGN government officials, except for clerical or ministerial functions as long as the recipient has no discretion in carrying out a governmental function.
- Also, require all CORPORATIONS WHOSE SECURITIES ARE REGISTERED UNDER SECURITY EXCHANGE ACT OF 1934 (all companies listed on stock exchanges) to provide REASONABLE ASSURANCE via A. establishing and maintain internal controls systems B. keeping records that reflect the transactions and dispositions of assets and to maintain a system f internal accounting controls. People can be fined or detained.
Sarbanes-Oaxley Act (Core)
>> Created the PCAOB (Public Company Accounting Oversight Board) which establishes auditing standards for REGISTERED public accounting firms. 1. Requires each member of the audit committee to be an independent member of the board of directors. PLUS: > audit committee must consist of at least 3 fully independent members. > audit committee appoints external auditor which has to report directly to the audit committee.
SO Act (Nonaudit services 201)
>> Audit firm can only execute certain specific activities for the audited firm like TAX services, and only if approved in advance by audit committee.
SO Act (Audit Partner Rotation 203)
>> One audit partner cannot perform function for more than 5 consecutive fiscal years.
SO Act (Report to Audit Committee 204)
>> Report all practices, standads, alternatives treatments, adjusted numbers, mgmt letters.
SO Act ( Internal Control Report 404)
Request mgmt to establish internal control procedures and to include in the annual report on the company the company’s internal control over financing reporting
Include:
- > A statement of mgmts responsibility for internal control
- > Check assessment of the effectiveness of internal control as of the end of the most recent fiscal year.
- > External auditor validation on management assessment of internal control: two audit opinions expresesed: one on internal control and one on the financial statements.
SO Act (Corporate Responsibility of Financial Reports) 302
Officers and signing officers (senior managment included have
>> Attest to the fair and appropriate presentation of financial statements.
>> Review the report and be the guardian of report and policies.
>> Have evaluated the effectiveness of the internal controls 90 days prior to the report.
Flow Charting
>> Does not identify weaknesses or inneficiencies, but is a good step by step overview.
Shapes:
- Diamond: decision nod.
- Circle estirado: starting or ending point.
- Circle: connection between points in the same page.
- Rectangle: computer operation/process
- Inverted equilateral trapezium: manual operation
- Down right indented rectangle: document or report
- Circle with pointed shape on the left: display on video terminal.
- Diagonal rectangle: generalized input for or output when the medium is not identified.
Audit Approaches
o Substantive procedure approach: applies audit resources to large volume transactions and account balances without any particular focus on specified areas of the financial statements. o Balance sheet approach: performed on balance sheet account betting that income statement should be mostly right by transitivity. o System-based approach: assess the effectiveness of internal controls and then to perform substantive procedures primarily on accounts that are least likely to meet system objectives. o Risk-based approach: direct audit resources to appropriate financial statements and assertions based on the auditor’s assessment of the risk of material misstatements. Requires auditors to identify key day to day risks faced by a business.
Audit opinions
o Unmodified opinion: all okay, all matters presented fairly and in tandem with framework. o Qualified opinion: except for the matter described in the basis for qualified opinion, the financial statements are presented fairly in all material respects. The misstatements should be material but not pervasive. o Adverse opinion: adverse opinion is material and pervasive, therefore the financial statements are not presented fairly. o Disclaimer of opinion: auditor has not been able to obtain sufficient appropriate audit evidence, and the possible undetected misstatement are material and pervasive.
