Corporate Governance, Quality Control, Audit Committes And Internal Audit

Question 1

Corporate governance is

Answer 1

-> the system by which companies are directed and controlled

Question 2

By directors who have a duty of care to

Answer 2

1. Act within their powers
2. Promote the companies success
3. Show independent judgement
4. Show reasonable skill and care
5. Have no conflicts of interest
6. Have no third party benefits
7. Declare any interests

Question 3

Objectives of corporate governance are

Answer 3

1. To ensure the companies assets are used efficiently and productively and in the best interests of it shareholders and other stakeholders
2. To eliminate or mitigate conflicts of interest, particularly those between management and shareholders

Question 4

Shareholders v director v auditor

Answer 4

Shareholders = own the company, appoint the auditor, appoint directors

Directors = manage the company and prepare the financial statements

Auditors = audit the financial statements and report to the shareholders

Question 5

Poor corporate governance

Answer 5

Allow management to abuse their position either by executive executive pay or manipulation of results typo the ultimate detriment of shareholders and other stakeholders

Question 6

Good corporate governance directors

Answer 6

1. Responsible for implementing a sound system of governance

Question 7

Good corporate governance the board

Answer 7

1. Chairman and chief executive should be different people to prevent unfettered power
2. Half board to be non executive directors
3. Be rigorous and transparent nomination process
4. Directors should submit for re election regularly

Question 8

Good corporate governance communication with shareholders

Answer 8

1. Board is responsible for ensuring satisfactory dialog with shareholders
2. AGM should be used to encourage communication with investors

Question 9

Good corporate governance remuneration

Answer 9

1. Directors not paid excessive remuneration
2. Linked to performance of company
3. Directors should nit be responsible for setting their own pay
4. Transparent procedure for setting directors remuneration

Question 10

Good corporate governance internal controls

Answer 10

1. Sound system of internal controls should be maintained
2. An audit committee should be established
   3, if no internal audit function, the need for one should be considered by the directors on an annual basis

Question 11

Corporate governance statement in annual report

Answer 11

1. Material error in the financial statements
   -> the auditor will issue a modified audit opinion if the directors refuse to amend the error
2. A material error in the corporate governance statement
   -> add an emphasis of matter paragraph to report

Question 12

Auditors responsibilities

Answer 12

1. Explain responsibility of directors for preparing financial statements
2. Review and report on system of internal control
3. Review if audit committee of at least 3 non execs has been set up
4. Review of audit committee terms of reference are set out in writing and described in report
5. Review if is a whistle blowing facility
6. Review if audit committee reviews and monitors the internal audit control system

Question 13

Need for Internal audit depends on

Answer 13

1. Scale, diversity, and complexity of activities
2. Number of employees
3. Cost/benefit considerations
4. Desire of senior management to have assurance and advice on risk and control

Question 14

Internal v external audit (IMPORTANT)

Answer 14

Internal
-adds value and improve an organisations operation
-report to board or audit committee
-relating to operations of the organisation
-may be employees of company or outsourced
-internal audit standards

External
-express an opinion on the financial statements “true and fair”
-reports to shareholders
-relating to financial statements and underlying records
-must be independent and appointed by shareholders
-IASs, code of ethics

Question 15

Role of internal auditor

Answer 15

1. Is financial info reliable
2. Are systems operating effectively
3. Are procedures being followed
4. Fraud investigation
5. Compliance with law
6. Value for money

Question 16

Audit committee & internal audit

Answer 16

Should
1. Ensure IA has direct access to the board chair and to the audit committee
2. Review and asses the annual internal audit work plan
3. Receive reports on the results of internal audit work
4. If no internal audit function in place, review need for one annually

Question 17

Quality management IAS 220

Answer 17

Quality must be managed at the engagement level to obtain reasonable assurance that
1. The audit has been conducted in compliance with professional standards and applicable legal and regulatory requirements
2. The auditors report issued is appropriate in the circumstances

Question 18

Definitions for audit qualify management

Answer 18

1. Engagement partner = partner responsible for the audit engagement, performance and report
2. Engagements quality review = provides an objective evaluation, before signing the report, of any significant judgements and conclusions
3. Engagement quality reviewer = someone not part of the engagement team, either experience and authority to objectively evaluate the significant judgement and conclusions
4. Engagement team = all partner and staff performing the engagement, plus anyone engaged to do audit work
5. Public interest entity (PIE) = business that is of significant public focus because of the nature of the business, the size, or the number of employees (750 employees and £750 million)

Question 19

Components of a quality management system,

Answer 19

EP has specific responsibility for the following components of quality management
1. Leadership
2. Ethical requirements
3. Acceptance and continuance
4. Engagement resources
5. Engagement performance
6. Monitoring and remediation

Question 20

Quality management during engagement

Answer 20

1. Direction
   - maintaining a questioning mins and exerting professional scepticism
   - fulfilling relevant ethical requirements
   - perform audit procedures
   - understanding the nature, timing, and extent of planned audit procedures
2. Supervision
   - monitoring progress of audit
   - addressing issues arising
   - identify matters for consultation
   - providing on the job training to team members
3. Review
   - work performed in accordance with professional standards
   - appropriate consultations have taken place
   - work performed supports the conclusions reached
   - evidence obtained is sufficient and appropriate to support the auditors work

Question 21

Hot and cold reviews (IMPORTANT)

Answer 21

Hot = high risk, take place before the audit report is singed off
Cold = reviews after completion. Will not affect the audit for the year being reviewed, but they will help maintain or improve quality standards in the future

-> both designed to assist in the quality management process and should form part of a robust quality management review
-> quality management of individual audits is important to help minimise the risk of the auditor getting the audit opinion wrong

Question 22

Consequences if sometime thing goes wrong (IMPORTANT)

Answer 22

1. Auditor may be sued for professional negligence
2. Fines or prosecution may result
3. Disciplinary proceeds by own professional body and FRC
4. Reputation of firm may suffer