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CIMA > Corporate Governance & Controls > Flashcards

Corporate Governance & Controls Flashcards

1
Q

Agent

A

A person who manages something on behalf of a principal

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2
Q

Principals

A

Shareholders

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3
Q

Fiduciary duty

A

Director’s legal duty to act solely in the interest of the shareholders

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4
Q

Examples of agency costs

A

Bonuses, incentive schemes, audit costs

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5
Q

Two types of board structures

A

Unitary

Two tier

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6
Q

NEDs

A

Non Executive Directors

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7
Q

What is the audit comittee a response to?

A

Criticisms of the relationship between directors and auditors

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8
Q

Who sits in an audit committee?

A

Non executive directors (NEDs)

One of which has recent relevant financial experience

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9
Q

How often does the audit committee meet?

A

3 times a year (at least) and once with the auditors without the directors

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10
Q

Responsibilites of the audit committee

A

Review financial statements/interim reports/audit reports
Review internal financial controls/risk managmenent systems
Discuss signif matters arising from audit
Review audit programme & findings
Appointment/removal of auditors
Set audit fees
Whistleblowing system

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11
Q

Role of the remuneration committee

A

To have an appropriate reward policy that attracts, retains and motivates directors to achieve long terms interests of shareholders

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12
Q

Objectives of the remuneration committee

A

To be independent - external advice or consultants
To have a clear policy that is understood and supported by shareholders
Performance packages aligned w/ long term shareholders interests w/ challenging targets
Clear reporting - bird’s-eye view of policy payments and rationale behind them

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13
Q

Examples of profit seeking organisations

A

Sole traders
Partnerships
Limited Liability companies

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14
Q

3 party relationship

A 
Practitioner (Auditor) 
            |
Intended user 
            |
Responsible Party (Directors)
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15
Q

Assurance engagement

A

Where a practitioner expresses a conclusion to enhance the confidence of the outcome of the evaluation

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16
Q

Examples of assurence engagements

A 
Statutory/external audit
Fraud investigations
Due diligence
Internal controls assessment 
Business plan/projection reviews
Environmental audits
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17
Q

Error of commission

A

Wrong account but correct type (expense etc)

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18
Q

Error of principle

A

Entered into wrong type of account, affects p&l

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19
Q

Purpose of an audit

A

To enhance the degree of confidence in the financial statement

20
Q

Objectives of an auditor

A

Obtain reasonable assurance that statements are free from material misstatement (due to fraud or error)
Express an opinion whether they are prepared in accordance to framework
Report on the fin statement

21
Q

What is the need for external audit?

A

Directors may have incentives to manipulate financial statements/show false performance
Required by law in most developed countries - publicly quoted and large companies

22
Q

Benefits of an audit

A

Improved quality/reliability = increased credibility, reputation
Valuable to management
Less management bias, fraud and error
Poor controls may be highlighted by the auditor

23
Q

Limitations of an audit

A

FIRED

F - Financial statements include subjective estimates/other judgemental matters
I - Internal controls may be relied on / have own limitations
R - Representations may be only evidence in some areas
E - Evidence is persuasive not conclusive
D - Doesn’t test all transactions

24
Q

What rights do auditors have?

A

Access to accounting records, information and explanations as necessary
To know of and attend/speak at shareholder meetings
Rights relating to their removal/resignation, retirement

25
Q

Fair presentation or true and fair

A

Financial statements fairly reflect the financial position of the organisation.
They are free of material misstatements from negligence/manipulation.
Assumes no significant errors
Based on the materiality convention

26
Q

Materiality convention and the auditor

A

Samples selected based on where the greatest risk of material misstatement lies

27
Q

What is controls testing? What else may be required?

A

Assessing the reliability of accounting systems, procedures and controls
OK = some reliance

If areas of doubt/risk/items of a material nature = substantive testing. Detailed testing of transactions or balances

28
Q

Audit risk

A

Risk the auditor comes to an incorrect opinion

29
Q

Inherent risk

A

The susceptibility of a transaction, account balance or disclosure to material misstatement irrespective of the internal controls in place

Can be considered at industry level, entity level or balance level (isolated to one balance)

30
Q

Control risk

A

Risk that material misstatement won’t be prevented, detected or corrected by accounting and internal control systems

31
Q

Detection risk

A

Risk that auditors procedures won’t detect a misstatement in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes

32
Q

Engagement letter contents

A

Scope of audit
Responsibilities of auditor/management
Identification of applicable financial reporting framework
Reference to the expected form and content of any reports to be issued

33
Q

Analytical review

A

Compares actuals vs budget or expected

Helps to understand the business and changes within it, and to identify potential risk areas for other audit procedures

34
Q

Sarbanes-Oxley

A

2002
Rules based approach
Only applies in the US

35
Q

Statement of opinion

A
36
Q

Unmodified report

A

No matters to draw attention to

37
Q

Unmodified opinion

A

Conclusion that the financial statements are prepared, in material respects, in accordance with the applicable financial reporting framework

38
Q

Audit Firm Governance Code

A 
Jan 2010 (FRC & ICAEW)
Leadership
Values
Independent Non-Executives
Operations
Reporting
Dialogue
39
Q

Contents of unmodified audit report

A 
Title and addressee
Introductory paragraph
Management's responsibilities
Auditor's responsibilities
Opinion
Other reporting responsibilities
Signature, date and address
40
Q

IASB (International Accounting Standards Board) - Six Qualitative characteristics of useful information

A

Fundamental:

Relevance
Faithful representation

Enhancing:
Understandability
Verifiability
Comparability
Timeliness
41
Q

CIMAs professional development cycle

A 
Define
Assess
Design
Act
Reflect
Evaluate
42
Q

Court implied terms

A

An unspoken term within the interaction between the two parties

‘To clean the car but also to take care of it’

43
Q

Stages of audit

A 
Auditor appointed
Terms agreed
Planning
Evidence gathering
Review
Opinion is formed
Report is published
44
Q

Emphasis of matter

A

Something which doesn’t affect the opinion of the audit but is highlighted just in case

45
Q

Who is bound by the articles of association?

A

The company & the shareholders

46
Q

Skimming

A

Intercepting funds before they can be recorded in a company’s accounting records

47
Q

TRUE OR FALSE: An accountant is not obliged to evaluate threats that might compromise ethical principles if he has no actual knowledge of the problem

A

FALSE - An accountant is responsible for what they know and what they can be reasonably expected to know.

CIMA (5 decks)

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