Corporate Governance & Controls

Question 1

Agent

Answer 1

A person who manages something on behalf of a principal

Question 2

Principals

Answer 2

Shareholders

Question 3

Fiduciary duty

Answer 3

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

Question 4

Examples of agency costs

Answer 4

Bonuses, incentive schemes, audit costs

Question 5

Two types of board structures

Answer 5

Unitary

Two tier

Question 6

NEDs

Answer 6

Non Executive Directors

Question 7

What is the audit comittee a response to?

Answer 7

Criticisms of the relationship between directors and auditors

Question 8

Who sits in an audit committee?

Answer 8

Non executive directors (NEDs)

One of which has recent relevant financial experience

Question 9

How often does the audit committee meet?

Answer 9

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

Question 10

Responsibilites of the audit committee

Answer 10

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

Question 11

Role of the remuneration committee

Answer 11

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

Question 12

Objectives of the remuneration committee

Answer 12

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

Question 13

Examples of profit seeking organisations

Answer 13

Sole traders
Partnerships
Limited Liability companies

Question 14

3 party relationship

Answer 14

Practitioner (Auditor) 
            |
Intended user 
            |
Responsible Party (Directors)

Question 15

Assurance engagement

Answer 15

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

Question 16

Examples of assurence engagements

Answer 16

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

Question 17

Error of commission

Answer 17

Wrong account but correct type (expense etc)

Question 18

Error of principle

Answer 18

Entered into wrong type of account, affects p&l

Question 19

Purpose of an audit

Answer 19

To enhance the degree of confidence in the financial statement

Question 20

Objectives of an auditor

Answer 20

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

Question 21

What is the need for external audit?

Answer 21

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

Question 22

Benefits of an audit

Answer 22

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

Question 23

Limitations of an audit

Answer 23

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

Question 24

What rights do auditors have?

Answer 24

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

Question 25

Fair presentation or true and fair

Answer 25

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

Question 26

Materiality convention and the auditor

Answer 26

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

Question 27

What is controls testing? What else may be required?

Answer 27

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

Question 28

Audit risk

Answer 28

Risk the auditor comes to an incorrect opinion

Question 29

Inherent risk

Answer 29

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)

Question 30

Control risk

Answer 30

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

Question 31

Detection risk

Answer 31

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

Question 32

Engagement letter contents

Answer 32

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

Question 33

Analytical review

Answer 33

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

Question 34

Sarbanes-Oxley

Answer 34

2002 Rules based approach Only applies in the US

Question 35

Statement of opinion

Question 36

Unmodified report

Answer 36

No matters to draw attention to

Question 37

Unmodified opinion

Answer 37

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

Question 38

Audit Firm Governance Code

Answer 38

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

Question 39

Contents of unmodified audit report

Answer 39

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

Question 40

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

Answer 40

Fundamental: Relevance Faithful representation ``` Enhancing: Understandability Verifiability Comparability Timeliness ```

Question 41

CIMAs professional development cycle

Answer 41

``` Define Assess Design Act Reflect Evaluate ```

Question 42

Court implied terms

Answer 42

An unspoken term within the interaction between the two parties 'To clean the car but also to take care of it'

Question 43

Stages of audit

Answer 43

``` Auditor appointed Terms agreed Planning Evidence gathering Review Opinion is formed Report is published ```

Question 44

Emphasis of matter

Answer 44

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

Question 45

Who is bound by the articles of association?

Answer 45

The company & the shareholders

Question 46

Skimming

Answer 46

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

Question 47

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

Answer 47

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