ASSESSMENT 1

Auditing in Context

ID - 21378484
Content
Introduction.......................................................................................................................................2
Corporate Governance......................................................................................................................2
Corporate governance face by Elmhurst Ltd. weaknesses and recommendations...............2
Part A.................................................................................................................................................2
Parte B...............................................................................................................................................3
Conculsion.........................................................................................................................................5
Reference..........................................................................................................................................6
 Corporate Governance report review of Elmhurst Ltd.

Introduction
In this report I will discuss the corporate governance deficiencies facing Elmhurst Ltd, but at
the same time I will offer my recommendations to address weaknesses in order to respect
the principles of corporate governance. Also, within this framework I will discuss the ethical
threats affecting the independence of the audit of Dnny and Co partners of Elmhurst Ltd.

Corporate Governance
Governance is the term used to describe the role of persons entrusted with the supervision,
control, and direction of an entity.
In this function of legality, various bodies have the role that have responsibility for corporate
governance, and these are:

 Board of Director
 Audit Committee
 Other spervisory committes
One of the Benefits of good corporate governance and most direct is for unmanaged
shareholders, and a final benefit is the more efficient allocation of capital for its most
productive uses.

Corporate governance face by Elmhurst Ltd. weaknesses and

recommendations

Part A

Weakness

Bobby Brow was currently president, but a year ago he was chief executive. thing is wrong
because the president should be an independent non-executive director, that's why he can't
have previously been the chief executive.

As importance and responsibility, the roles of President and Executive Director are
significant, in conclusion this prevents too much power that is in the hands of a person.

This board consists of five CEOs and only three non-executive directors.

This leads to an imbalance, because there needs to be an appropriate balance between

CEOs and non-executive directors, in which to ensure that the board takes the right and
objective decisions, being in the interest of the interested parties of the company, also no
person or group of people has mastered the decision-making process of the board.

Bobby Brow targets his close friend by calling him a non-executive director, he has
experience in the oil and gas industry.
The role of non-executive director brings benefit and valuable experience in a company, but
he must exercise independent decisions on the entire board. This person being a close
friend of Bobby Brow it follows that he may not be independent. Although, apart from being
chief executive, he has no relevant experience of the insurance industry and this is a moot
reason for adding value to Elmhurst Ltd.

Recommendation

Bobby Brow should take over his former executive role because this will fill the current
vacancy and an independent non-executive director should be hired to take up the role of
president.

Non-executive directors should occupy at least half of the board. The Council of Elmhurst
Ltd. must also consider recruiting and appointing one to two non-executive directors.

In the board of directors of Elmhurst Ltd. only independent non-executive directors but also
with relevant experience and competences should be appointed.

Weakness

The financial director shall determine the remuneration of the directors. However, no director
should be involved in setting his own remuneration, because this leads to the establishment
of excessive levels of remuneration.

All directors remuneration remains in the form of a yearly bonus offer. Nonetheless, the pay
needs to motivate the directors to concentrate on the long-lasting growth of the business.
Annual targets can motivate short-term strategles as opposed to increasing shareholder
wealth.
In addition, non-executive directors' pay should not be based on conference company
targets as their pay should be independent of exactly how the company does.

Recommendation

To establish the levels of remuneration there should be a fair but also transparent policy.
Non-executive directors are the ones who make decisions to decide on the remuneration of
CEOs. And for the remuneration of non-executives should decide the CEO and the
president.

The remuneration of CEOs should be restructured in order to be able to include a significant

proportion that targets many long-term performances.

For the services of non-executives, they should be paid an annual fee, which is not related to
the way they perform in compania Elmhurst Ltd.

Parte B

Weakness
The financial director of Elmhurst has actually asked the interaction partner of Danny and
Co to participate in conference with possible investors. This stands for and advocacy threat
as the audit company might be regarded as advertising financial investment in Elmhurst and
also this intimidates neutrality.
As a result of the raising extra capital , Elmhurst has actually asked for Danny and Co to
generate the financial statement. This stand for a self-review risk , as Elmhurst is presently
not a detailed bussiness, after that Danny ad Co are allowed to generate the financial
statement and likewise investigate them.
However, Elmhurst is seeking a listing and also as a result these financial statement will be
important to the potential investors and also this raises audit risk.
The assistant finance director of Elmhurst has joined Danny and Co as a partener and also
has been recommended as the testimonial partener.
This reprezent a self-review risk, as he was in a position to influence the financial statement
whilst working at Elmhurst; if hei s the review partener there could be a risk of him reviewing
his very own job.
Elmhurst has several prospective assurance assignments available as well as Danny and
Co wish to be appointed to these.
There is prospective self- interest threat as these assurance fees along with the external
audit fee could reperezent a significant propotion pf Danny and Co fee earnings.
Elmhurst has actually implied to Danny and Co that they must complete the audit quickly
and also with minimal question/issues if they wish to obtain the assurance projects.
This produces an intimidations threat on the team as they may really feel pressure toc ut
corners as well as not elevate problems, and also this can compromise the objectivity of the
audit team.
The finanace director has actually provided the group 7 night cruise holiday, this represent a
self-interest threat as the acceptance of items and services, unless insignificant in value, is
not allowed.
Recommendation
The engagement partner should politely decline this request from Elmhurst, as it represents
to great a threat to independence.
Ideally, Danny and Co should not undertake the preparation of the financial statement due
to the imminent listing, this would probably reprezent a high risk
If Danny and Co they will produce the financial statement, then separate team should
undertake each assignment and the audit team should not be part of the accounts
preparation process.
As well this partner must not be involved in the audit of Elmhurst for a priod of a least two
years, an alternative review partner should be appointed.
The firm should assess whether assignments along with the audit fee would represent more
than 15% of gross practice income for two consecutive years. These assurance assignment
will only arise if the company obtain its listing and hence will be a public interst comapny.
If the recurring fees are likely to exceed 15% of annual practice income then additional
consideration should be given as to whether these assignments should be sought by the
firm.
The engagement parntner should politely inform the finance direcor that team will undertake
the audit in accordance with all relevant issues and their own quality control procedures.this
means that audit take as long as is necessary to obtain sufficient, appropriate evidence to
form and opinion. If any residual concerns remain or the intimidation threat continues then
Danny and Co may need to considering resigning from the engagement.
As it unlikely that a 7 night cruise holidays for the whole team has an insignificant value,
then this offer should be politely declined.
Elmhurst Ltd. currently have an audit committee. Audit boards take on an important function
because they aid the directors to satisfy their obligation of accountability when it come to
maintaining an appropriate connection with the firm's auditor. As a result of a busy
schedule, the finance director has actually likewise asked for Danny & Co Partners to
produce financial statements for the present year.
Weakness
The finance director is a member of the audit committee. The audit committee should be
made up entirely of independent NEDs. The role of the committee is to maintain objectivity
with regards to financial reporting; this is difficult if the finance director is a member of the
committee as the finance director will be responsible for the preparation of the financial
statements.

Recommendation
The audit committee must be comprised of independent NEDs only; therefore the finance
director should resign from the committee.
Also the auditor is obliged to list the components of the financial statements that have been
audited, such as: the financial position situation, the profit or loss situation (the revenue
statement), the cash flow statement, the summary of significant accounting policies and
other explanatory information are detailed in the explanatory notes to the financial
statements. Also an auditor must carry out his audit in accordance with all ISAs (United
Kingdom and Ireland) unable to apply only one, they are obliged to state that all ISAs (United
Kingdom and Ireland) follow.

Conculsion

The roles of corporate governance are - decision-making, responsibility for measurement,

reporting and transparency, as well as monitoring involving systems and feedback, as well
as decisions require relevant and reliable information..
One reason for the failures of corporate governance is that no system of governance,
however well it is designed, will be able to fully prevent greedy and dishonest people from
putting their personal interests ahead of the interests of the companies they manage. But to
improve corporate governance can take steps to reduce the opportunities for accounting
fraud.
Reference

AARF: 1997, Audit Committees: Best Practice Guide, Australia: Australian Accounting Research
Foundation, Australian Institute of Company Directors and Institute of internal Auditors.

Abbott, L.J. and S. Parker: 2000, “Auditor selection and audit committee characteristics”,  Auditing: A
Journal of Practice & Theory 19(2): 47–66.

Adams, M.: 1997, “Determinants of Audit Committee Formation in the Life Insurance Industry: New
Zealand Evidence”, Journal of Business Research  38(2): 123–129.

Apostolou, B.: 1990, The role of Internal Auditor Communication with the Audit Committee”,  Internal
Auditing Fall  6(2): 35–42

Beasley, M.S.: 1996, “Board of Director Composition and Financial Statement Fraud”, Accounting
Review  71(4): 443–465.

Bell, T., F. Morris, I. Solomon, and H. Thomas: 1997,  Auditing Organizations Through a Strategic-
Systems Lens, Montvale, NJ: KPMG Peat Marwick LLP.

Carcello, J.V. and T.L. Neal: 2000, “Audit Committee Composition and Auditor
Reporting”, Accounting Review 75(4): 453–467.

Collier, P.: 1993, “Factors affecting the formation of audit committees in major UK listed
companies”, Accounting and Business Research  23(91A): 421–430

DeZoort, F.T.: 1998, “An Analysis of Experience Effects on Audit Committee Members' Oversight
Judgments”,  Accounting Organizations and Society  23(1): 1–21.

Gwilliam, D. and M. Kilcommins: 1998, “The Impact of Audit Firm Size and Audit Committee on
Perceptions of Auditor Independence and Financial Statement Reliability in Ireland”, Irish Accounting
Review  5(1): 23–56.