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Auditing Theory > Chapter 13 - Corporate Governance and Audits > Flashcards

Chapter 13 - Corporate Governance and Audits Flashcards

1
Q

is the system by which business corporations are directed and controlled. It is a process by which the owners and creditors of an organisation exert control and require accountability of the resources entrusted to the organisation.

A

Corporate governance

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2
Q

is the structure that specifies the distribution of rights and responsibilities among different participants in the corporation such as the board of directors, managers, shareholders and other stakeholders. It is also the structure where company objectives are defined to attain those object and to monitor performance.

A

Corporate governance

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3
Q

can be anyone who is influenced, either directly or indirectly, by the actions of a company.

A

Stakeholders

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4
Q

Owners want accountability on such things as: (5)

A
  1. Financial performance
  2. Financial transparency
  3. Stewardship
  4. Quality of internal controls
  5. Composition of the board of directors and the nature of its activities
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5
Q

refers to financial statements that are clear with full disclosure and that reflect the underlying economics of the company

A

Financial transparency

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6
Q

this pertains to how well the company protects and manages the resources entrusted to it

A

Stewardship

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7
Q

has always had the primary responsibility for the accuracy and completeness of an organisation’s financial statements

A

Management

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8
Q

In some parts if the world, such as Europe, organizations issue ___________________ that delineates the organisation’s contributions to the broader goals of society.

A

triple-bottom-line

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9
Q

In a public corporation, shareholders/owners delegate responsibilities to: (4)

A
  1. Board of Directors
  2. Executive Management
  3. Operational Management
  4. Internal Auditors
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10
Q

In a public corporation, those delegated with responsibilities have accountabilities to stakeholders, namely: (4)

A
  1. Shareholders/Owners
  2. External Auditors
  3. Regulators
  4. Society and Others
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11
Q

Parties involved in corporate governance include: (7)

A
  1. Stockholders
  2. Board of Directors
  3. Management
  4. Audit Committees of the BOD
  5. Regulators
  6. External Auditors
  7. Internal Auditors
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12
Q

Provide effective oversight through election of board members, approval of major initiatives such as buying or selling stock, annual reports on management compensation from the board

A

Stockholders

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13
Q

The major representative of stockholders to ensure that the organisation is run according to the organisation’s charter and that there is proper accountability

A

Board of Directors

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14
Q

The specific activities of BOD include: (6)

A
  1. Selecting management
  2. Reviewing management performance and determining compensation
  3. Declaring dividends
  4. Approving major changes
  5. Approving corporate strategy
  6. Overseeing accountability activities
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15
Q

Broad role involves operations and accountability. Manage the organisation effectively; provide accurate and timely accountability to shareholders and other stakeholders

A

Management

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16
Q

Provide oversight of the internal and external audit function and the process of preparing the annual financial statements and public reports on internal control

A

Audit Committees of the BOD

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17
Q

Specific activities of management include: (5)

A
  1. Formulating strategy and risk management
  2. Implementing effective internal controls
  3. Developing financial and other reports meet public, stakeholder, and regulatory requirements
  4. Managing and reviewing operations
  5. Implementing an effective ethical environment
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18
Q

Specific activities of the audit committee include: (5)

A
  1. Selecting the external audit firm
  2. Approving any non audit work performed by the audit firm
  3. Selecting and/or approving the appointment of the Chief Audit Executive
  4. Reviewing and approving the scope and budget of the internal audit function
  5. Discussing audit findings with internal auditor and external auditor and advising the board on specific actions that should be taken
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19
Q

Regulators involved in corporate governance include: (2)

A
  1. Board of Accountancy

2. Securities and Exchange Commission

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20
Q

Set accounting and auditing standards dictation underlying financial reporting and auditing concepts; set the expectations of audit quality and accounting quality

A

Board of Accountancy

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21
Q

The specific activities of the BOA include: (4)

A
  1. Establishing accounting principles
  2. Establishing auditing standards
  3. Interpreting previously issued standards implementing quality control processes to ensure audit quality
  4. Educating members on audit and accounting requirements
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22
Q

Ensure the accuracy, timeliness, and fairness of public reporting of financial and other information for public companies

A

Securities and Exchange Commission

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23
Q

Specific activities of the SEC include: (4)

A
  1. Reviewing filings with the SEC
  2. Interacting with the FRSC in setting accounting standards
  3. Specifying independence standards required of auditors that report on public financial statements
  4. Identify corporate frauds, investigate causes and suggest remedial actions
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24
Q

Perform audits of company financial statements to ensure that the statements are free of material misstatements including misstatements that may be due to fraud

A

External Auditors

25
Q

Specific activities of the external auditors include: (3)

A
  1. Audits of public company financial statements
  2. Audits of non public company financial statements
    E. Other services such as tax or consulting
26
Q

Perform audits of companies for compliance with company policies and laws, audits to evaluate the efficiency of operations, and periodic evaluation and tests of controls

A

Internal auditors

27
Q

Specific activities of internal auditors include: (2)

A
  1. Reporting results and analyses to management and audit committees
  2. Evaluating internal controls
28
Q

3 corporate governance challenges and failures of stockholders

A
  1. Focused on short-term prices
  2. Failed to perform long-term growth analysis
  3. Abdicated most responsibilities to management and analysts as long as stock price increased
29
Q

5 corporate governance challenges and failures of BOD

A
  1. Inadequate oversight of management
  2. Approval of management compensation plans, particularly stock options that provided perverse incentives, including incentives to manage earnings
  3. Directors often dominated by management
  4. Did not spend sufficient time or have sufficient expertise to perform duties
  5. Continually re-priced stock options when market price declined
30
Q

4 corporate governance challenges and failures of management

A
  1. Earnings management to meet analyst expectations
  2. Fraudulent financial reporting
  3. Using accounting concepts to achieve reporting objectives
  4. Created and environment of greed, rather than one of high ethical conduct
31
Q

2 corporate governance challenges and failures of audit committee of the BOD

A
  1. Similar to board members - did not have expertise or time to provide effective oversight of audit functions
  2. Were not viewed by auditors as the “audit client”; rather, the power to hire and fire the auditors often rested with management
32
Q

2 corporate governance challenges and failures of regulators

A
  1. Inadequate enforcement of existing audit standards
  2. Identified problems but was not granted sufficient resources by Congress or the Administration to deal with the issues
33
Q

4 corporate governance challenges and failures of external auditors

A
  1. Helped companies use accounting concepts to achieve earnings objectives
  2. Promoted personnel based on ability to sell “nonaudit products”
  3. Replaced direct tests of accounting balances with inquiries, risk analysis, and analytics
  4. Failed to uncover basic frauds because fundamental audit procedures were not performed
34
Q

3 corporate governance challenges and failures of internal auditors

A
  1. Focused efforts on “operational audits “ and assumed that financial auditing was addressed by the external audit function
  2. Reported primarily to management with little reporting to the audit committee
  3. In some instances did not have access to the corporate financial accounting records
35
Q

This company covered up financial problems by shifting debt to off-statement of financial position special entities, recognising revenue on impaired assets by selling them to SPEs that they controlled, engaging in round-tripping trades, and numerous related party transactions

A

Enron

36
Q

Trades that eventually found the assets returning to the entity after initially recognising sales and profits

A

Round-tripping trades

37
Q

This company decreased expenses and increased revenues through recording bartered transactions, using restructuring reserves established through acquisitions to decrease expenses and capitalising line costs

A

WorldCom

38
Q

This company enhanced quarterly revenues by “channel stuffing”

A

Lucent

39
Q

Increasing sales at the end of the quarter at amounts greater than customers could actually take. customers were informally given a very large “grace” period in which they could pay for the foods, or return the goods

A

Channel stuffing

40
Q

This company siphoned cash off of subsidiaries through a complex scheme that overstated cash and included the false recording of cash ostensibly held at major banks, understated debt by entering into complex transactions with off-shore subsidiaries in tax-haven places such the Caribbean

A

Parmalat

41
Q

This company recorded fictitious revenue across its 259 clinics and hospitals. Some of the billings actually went to the government for Medicare reimbursement. A wide variety of schemes were used including billing group psychiatric sessions as individual sessions and using adjusting journal entires to both reduce expenses and enhance revenues

A

HealthSouth

42
Q

This company overstated revenue by holding the books open for 20-35 days after the end of the year to record sales from the subsequent period as current period sales

A

Adecco

43
Q

This company misstated operated earnings by categorising a rebate from Intel to this company if the company promised not to buy chips from a competitor. Net income was not misstated, but operating earnings were misstated by a material amount

A

Dell

44
Q

Companies with good corporate governance are less risky to audit. These companies generally have the following characteristics:

A
  1. Are less likely to engage in “financial engineering”
  2. Have a code of conduct that is reinforced by actions of top management
  3. Have independent board members who take their jobs seriously and have sufficient time and resources to perform their work
  4. Take the requirement of good internal control over financial reporting seriously
  5. Make a commitment to financial competencies needed
45
Q

True or False:

Auditors are guarantors of the success or failure of a business strategy.

A

False.

46
Q

Are primarily responsible for the fraud and the resulting third party losses;

A

the people who perpetrate the fraud

Note: owner-managers who are in contact or who actively work in the business might also be responsible

47
Q

True or False

Auditors should be held secondarily responsible if they failed to follow the PSAs when auditing the enterprise and they did not exercise reasonable professional judgement when planning the audit, designing the audit procedures and evaluating the audit findings

A

True.

48
Q

True or False:

A properly executed PSA Audit does not guarantee not provide absolute assurance that the audited financial statements do not contain material error or fraud.

A

True.

49
Q

True or False:

A PSA Audit diminishes the risk of material error or fraud existing in the audited financial statements to a low level.

A

True.

50
Q

True or False:

Auditor must design the audit to uncover material error or fraud should it exist in the financial statements and evaluate the reasonableness of management’s estimates and judgments in preparing the financial statements.

A

True.

51
Q

SEC memorandum no. 6 requires that audit committees for public companies shall be composed of at least how many directors?

A

Three (3)

52
Q

True or False:

The chair of the audit committee for public companies need not be an independent director.

A

False.

53
Q

True or False:

The audit committee shall disallow any non-audit work that will conflict with his duties as an external auditor or may pose a threat to his independence.

A

True.

Note: the non-audit work, if allowed, should be disclosed in the corporation’s annual report

54
Q

True or False:

The Internal Auditor shall functionally report direct to the audit committee.

A

True.

55
Q

10 Principles or Good Corporate Governance and Best Practice Recommendations

A
  1. Lay solid foundations for management and oversight
  2. Structure the board to add value
  3. Promote ethical and responsible decision-making
  4. Safeguarding integrity in financial reporting
  5. Make timely and balanced disclosure
  6. Respect the rights of shareholders
  7. Recognise and mange risk
  8. Encourage enhanced performance
  9. Remunerate fairly and responsibly
  10. Recognise the legitimate interest of stakeholders
56
Q

True or False:

The roles of chairperson and chief executive officer should be exercised by the same individual.

A

False.

57
Q

True or False.

The audit committee should only consist of non-executive directors

A

True.

58
Q

True or False:

The chairperson of the board can also be the chairperson of the audit committee as long as he/she is an independent director.

A

False.

Auditing Theory (3 decks)

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