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Corporate Governance > Chapter 7 - Reporting To Shareholders And External Audit > Flashcards

Chapter 7 - Reporting To Shareholders And External Audit Flashcards

1
Q

In what ways might financial statements be misleading to shareholders and other investors?

A
  • fraudulent misrepresentation of the company’s affairs (lying)
  • accounting policies might present the accounts more favourable than they really are (bending the truth)
  • the complexity of the accounts can make them difficult to understand. (confusing the truth)
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2
Q

What is meant by “window dressing” of financial statements?

A

Using accounting methods to hide the true state of affairs in a company.

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3
Q

What are “bond credit ratings”?

A

A scheme used by bond investors to assess the creditworthiness of companies in which they invest.

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4
Q

What does the UK Code state about the transparency of the annual report and accounts?

A

The board should present a fair, balanced and understandable view of the position and performance of the company.

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5
Q

What does the UK Code state about the transparency of the annual report and accounts?

A

The board should present a fair, balanced and understandable view of the position and performance of the company.

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6
Q

What are 4 methods of windows dressing the accounts?

A

The company may:

  • claim profits earlier than it should
  • taking debts off the balance sheet
  • disguise loans as income
  • overvalue assets
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7
Q

What were the facts in the 2002 WorldCom accounting fraud?

A

WorldCom incurred costs of $3.6bn that it accounted as capital expenditure, thereby reporting the money as “assets” instead of as what it really was - losses.

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8
Q

What does “business model” mean?

A

The basis on which the company generates or preserves value over time.

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9
Q

What is a going concern statement?

A

Directors must make a statement in the annual report and accounts that they believe the company will continue to trade for the next 12 months.

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10
Q

What is the purpose of external audit?

A

To make sure, as far as reasonable possible, that the financial statements are objective and can be relied upon.

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11
Q

Who is responsible for detecting fraud or errors in financial statements?

A

The board of directors, using the company’s system of internal control. The auditor is not responsible.

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12
Q

Who is responsible for detecting fraudulent activity within the company, by some of its employees or others?

A

The board of directors.

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13
Q

What are the responsibilities of the external auditors with regard to the financial statements of a company?

A

Give an expert and independent view on:

  • whether financial statements are fair and true
  • whether financial statements comply with the relevant laws
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14
Q

What types of audit opinion might be given in an audit report?

A

Modified or unmodified

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15
Q

What is the significance of a modified audit report?

A

The professional accounts have stated that the shareholders cannot trust the information given to them by directors. The quality of corporate governance could hardly be lower.

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16
Q

When is an auditor liable for breach of duty?

A

CA 2006:

  • knowingly causing an audit report to include misleading, false or deceptive content
  • knowingly causing an audit report to omit a statement required by the CA.
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17
Q

When is an auditor liable for breach of duty?

A

CA 2006:

  • knowingly causing an audit report to include misleading, false or deceptive content
  • knowingly causing an audit report to omit a statement required by the CA.
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18
Q

What are the three types of modified audit opinion?

A
  • qualified opinion (there is a single outstanding matter)
  • adverse opinion (there are material misstatements in the report)
  • disclaimer of opinion (the auditor has been unable to achieve the necessary information to give an opinion
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19
Q

Give examples of non-audit work for a company by auditors.

A
  • taxation consultancy
  • internal audit systems
  • valuation services
  • remuneration consultancy
20
Q

What are five categories of threats to auditor independence?

A 
1 Self-interest threat
2 Self-review threat
3. Advocacy threat
4 Familiarity threat
5 Intimidation threat
21
Q

What is the difference between audit firm rotation and partner rotation?

A

The first is rotation of the audit firm doing the work, the second is rotation of partners within a single firm.

22
Q

Why is it essential that auditors remain independent?

A

To ensure that their professional opinion on the accounts can be trusted.

23
Q

What is self-interest threat?

A

The auditor wishes to protect their income stream from a particular company.

24
Q

What is self-review threat?

A

The auditor is reviewing his own work that has been carried out for a company in a non-audit capacity.

25
Q

What is advocacy threat?

A

The auditor has previously given his formal support to the company on an issue (e.g. issuance of shares), and is therefore not independent.

26
Q

What is familiarity threat?

A

The auditor is over-familiar with a company’s staff, and therefore is inclined to be over-trusting.

27
Q

What is intimidation threat?

A

A bullying executive may coerce an auditor in favourable reporting.

28
Q

According to the UK Code, how frequently must FTSE350 companies re-tender for audit ?

A

Every ten years.

29
Q

Who should be the members of the audit committee?

A

UK Code:

  • at least three members (2 for smaller than FTSE350)
  • all members should be independent NEDs
  • the company chairman should not be a member (FTSE350)
  • non-FTSE350 chairman may be members, as long as they were considered independent on appointment.
  • at least one member with recent and relevant financial experience.
30
Q

What is the legal requirement for audit committees in the UK?

A

2008 EU Statutory Audit Directive

31
Q

According to the FRC Guidance, what should be the responsibilities of the audit committee on:
- audit committee meetings?

A
  • no fewer than 3 per year
  • sufficient time in between audit and board meetings to allow work arising from audit committee meetings to be completed.
  • only the members and chairman may attend
  • meet the external and internal auditors at least once annually.
32
Q

According to the FRC Guidance, what should be the responsibilities of the audit committee on:
- financial reporting?

A

Committee should review the significant financial reporting issues and judgements made with the statement, having regard to any matters communicated by the auditors.

33
Q

According to the FRC Guidance, what should be the responsibilities of the audit committee on:
- provision of non-audit services by external auditors?

A
  • committee is responsible for approving non-audit services
  • set a formal policy specifying the specific types of work for which the committee is pre-approved.
  • if non-audit services are provided, the annual report should explain how auditor objectivity is safeguarded.
34
Q

According to the FRC Guidance, what should be the responsibilities of the audit committee on:
- review of the annual audit?

A
  • committee should assess the effectiveness of the audit at the end of each cycle
35
Q

What are the provisions of the UK Code with regard to the appointment, reappointment and removal of the external auditors?

A

The audit committee is responsible maintaining the company’s relationship with external auditors. The committee has responsibility to make a recommendation to the board on the appointment, reappointment or removal of the auditors.

36
Q

What measures might an audit committee take to monitor the independence of the external auditors on a regular basis?

A
  • audit committee should asses independence annually
  • monitor the proportion of fees from audit vs non-audit work
  • seek annually from the firm information on policies and procedures for maintaining indepedence
37
Q

What measures might an audit committee take to monitor the independence of the external auditors on a regular basis?

A
  • audit committee should asses independence annually
  • monitor the proportion of fees from audit vs non-audit work
  • seek annually from the firm information on policies and procedures for maintaining independence.
38
Q

In UK law, which companies must publish an annual strategic report?

A

All companies, except those with a small companies exemption.

39
Q

What should be the contents of an annual strategic report for a quoted company?

A
  • main trends and factors likely to affect the future development, performance and position of the company’s business.
  • information, including company policies on environmental matters, employees, and social, community and human rights issues
40
Q

What are the three sources of corporate governance disclosure requirements?

A

UK Code
FCA Disclosure & Transparency Rules
FCA Listing Rules

41
Q

Which law requires companies to publish an annual strategic report?

A

CA 2006 (Strategic Report and Directors’ Report) Regulations 2013

42
Q

What 2 matters must the strategic report contain?

A
  • a fair review of the company’s business

- a description of the principal risks and uncertainties facing the company

43
Q

What is the name of the FRC best practice guidance on strategic reports?

A

FRC Guidance 2014 on the Strategic Report

44
Q

What is a safe-harbour provision for directors?

A

A director can only be liable for an incorrect annual report statement if he knew it was untrue, or was acting recklessly.

This protects directors from making impossible future predictions.

45
Q

What is a safe-harbour provision for directors?

A

A director can only be liable for an incorrect annual report statement if he knew it was untrue, or was acting recklessly.

This protects directors from making impossible future predictions.

46
Q

What is the IIRC?

A

The International Integrated Reporting Council

47
Q

What is the goal of the IIRC?

A

To encourage international integrated reporting by companies, combining all elements of reporting into a single report.

Corporate Governance (24 decks)

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