COURSE OUTLINE

 Week 01 – Introduction to Assurance

 Week 02 – Rules & Regulations
 Week 03 – Assignment, Ethics & acceptance
 Week 04 – Quiz, Risk
 Week 05 – Planning
 Week 06 – Assignment, Evidence
 Week 07 – Quiz, Systems & Control
 Week 08 - Mid-term Examination
 Week 09 - Procedures
 Week 10 - Assignment, Completion & Review
 Week 11 - Quiz, Reporting
 Week 12 - Corporate governance
o Week 13 - Assignment, Internal audit
o Week 14 – Quiz, Summary of ISAs & IFRS
o Week 15 – Project Presentation
o Week 16 - Final Examination
What is corporate governance

• Corporate governance is the means by which a company is

operated and controlled. The aim of corporate governance
initiatives is to ensure that companies are run well in the
interests of their shareholders and the wider community

• In response to major accounting scandals (e.g. Enron),

regulators sought to change the rules surrounding the
governance of companies, particularly publically owned ones

• In the US the Sarbanes Oxley Act (2002) introduced a set of

rigorous corporate governance laws and at the same time the
UK Corporate Governance Code introduced a set of best
practice corporate governance initiatives into the UK
The Corporate Governance Code

Leadership

• Each company should have an effective board who take collective

responsibility for the long term success of the company.

• There should be clear division of responsibilities between running

the board and the running of the company.

• No one should have unfetters powers of decision.

• The chairman should lead the board and ensure it is effective.

• Nonexecutive directors should constructively challenge and help

develop strategy.
The Corporate Governance Code

Effectiveness

• The board should have the appropriate balance of skills,

experience, independence and knowledge of the company.

• Appointment of directors should be made through a formal,

transparent and rigorous process.

• Directors should allocate sufficient time to discharge their

responsibilities.
The Corporate Governance Code

• The board should be supplied with timely information in an

appropriate form and quality.

• The board should undertake formal and rigorous evaluation of its

performance and that of its committees and individual directors.

• All directors should be submitted for reelection at regular

intervals subject to satisfactory performance.
The Corporate Governance Code

Accountability

• The board should present a balance and understandable

assessment of the company's position and prospects.

• The board is responsible for determining the nature and extent

of the significant risks it is willing to take in achieving its
strategic objectives.

• The board should establish formal and transparent

arrangements for applying principles for maintaining an
appropriate relationship with the company's auditor.
The Corporate Governance Code

Remuneration

• Levels of remuneration should be sufficient to attract, retain

and motivate directors of the quality required but should not
pay more than necessary.

• A significant proportion of the executive directors

remuneration should be performance related. (Company
performance and that of the individual director).

• The board should establish formal and transparent procedures

for developing the policy for executive directors remuneration.

• No director should be involved in setting his own pay.

The Corporate Governance Code

Relations with shareholders

• There should be dialogue with shareholders based on a

mutual understanding of objectives.

• The board as a whole has responsibility for ensuring

satisfactory dialogue with shareholders takes place.

• The board should use the AGM to communicate with

investors and encourage their participation.
Corporate governance in action

Segregation of roles
The roles of the Chairman and chief executive officer (CEO)
should be held by two separate people to avoid concentration of
power. The chairman should preferably be independent to
enhance effectiveness.

Board composition
The board should comprise of a balance of executive directors
and nonexecutive directors. The executives run the company on a
day to day basis. The nonexecutive directors monitor the
executive directors and contribute to the overall strategy and
direction of the organisation.
Corporate governance in action

Audit committee
The audit committee will take responsibility for financial reporting
and internal control matters

Remuneration committee
The role of the remuneration committee is to set the remuneration
packages for the executive directors. This is to ensure that they are
not paid excessive amounts but are paid fairly for their role. The
committee will be comprised of nonexecutive directors. Advantages:
• Decisions are based on agreement of several people, reducing the risk of
bribes from directors in return for a higher package.
• No director is involved in setting his own pay.
• Performance related elements will be included to avoid the risk that
directors are rewarded for poor performance
Corporate governance in action

Nomination committee
The role of the nomination committee is to decide on appointments
of executive directors. This is to ensure the best person for the job is
recruited. The committee will be comprised of nonexecutive
directors. Advantages:
• Reduces the risk of 'jobs for the boys'. Executive directors might appoint
other directors who they are friends with or used to work with but wouldn't
necessarily be the person with the skills required.
• Reduces the risk of improperly affecting board decisions. Executives might
appoint people to the board they know they will vote in favour of the same
decisions as them and can therefore influence board decisions which may
not be in the best interests of the company
Corporate governance in action

Risk committee
The risk committee will be responsible for assessing the risks of the
company and decising on the appropriate risk management approach.

Audit Committees
An audit committee is a committee consisting of nonexecutive
directors which is able to view a company’s affairs in a detached and
independent way and liaise effectively between the main board of
directors and the external auditors.
Corporate governance in action

Best practice for listed companies:

• The company should have an audit committee of at least three

nonexecutive directors (or, in the case of smaller companies, two).

• At least one member of the audit committee should have recent

and relevant financial experience.
Corporate governance in action

The objectives of the audit committee

• Increasing public confidence in the credibility and objectivity of published

financial information (including unaudited interim statements).

• Assisting directors (particularly executive directors) in meeting their

responsibilities in respect of financial reporting.

• Strengthening the independent position of a company’s external auditor

by providing an additional channel of communication.
Corporate governance in action

The function of the audit committee

• Monitoring the integrity of the financial statements.

• Reviewing the company’s internal financial controls.

• Monitoring and reviewing the effectiveness of the internal

audit function.

• If no internal audit function is in place, they should consider

annually whether there is a need for one and make a
recommendation to the board. The reasons for there being
no IA function should be explained in the annual report.
Corporate governance in action

• Making recommendations in relation to the appointment and

removal of the external auditor and their remuneration.

• Reviewing and monitoring the external auditor’s independence

and objectivity and the effectiveness of the audit process.

• Developing and implementing policy on the engagement of the

external auditor to supply non-audit services.

• Reviewing arrangements for confidential reporting by employees

and investigation of possible improprieties (‘whistleblowing’).
Corporate governance in action

Benefits:

• Improved credibility of the financial statements, through an

impartial review of the financial statements, and discussion of
significant issues with the external auditors.

• Increased public confidence in the audit opinion, as the audit

committee will monitor the independence of the external
auditors.

• Stronger control environment, as the audit committee help to

create a culture of compliance and control.
Corporate governance in action

• The internal audit function will report to the audit committee

increasing their independence and adding weight to their
recommendations.

• The skills, knowledge and experience (and independence) of the

audit committee members can be an invaluable resource for a
business.

• It may be easier and cheaper to arrange finance, as the presence

of an audit committee can give a perception of good corporate
governance
Corporate governance in action

• The internal audit function will report to the audit committee

increasing their independence and adding weight to their
recommendations.

• The skills, knowledge and experience (and independence) of the

audit committee members can be an invaluable resource for a
business.

• It may be easier and cheaper to arrange finance, as the presence of

an audit committee can give a perception of good corporate
governance

• It would be less burdensome to meet listing requirements if an audit

committee (which is usually a listing requirement) is already
established.
Corporate governance in action

Problems:

• Difficulties recruiting the right nonexecutive directors who have

relevant skills, experience and sufficient time to become effective
members of the committee.

• The cost. Nonexecutive directors are normally remunerated, and

their fees can be quite expensive.
Risk management

Risk management in practice

• Risks can arise from many sources and be of various natures, e.g.
operational, financial, legal.

• Companies need mechanisms in place to identify and then assess

those risks. In so doing companies can rank risks in terms of
their relative importance by scoring them with regard to their
likelihood and potential impact. This could take the form of a
‘risk map’.

• Once identified and assessed, the company must decide on

appropriate ways to manage those risks.
Risk management

Risk management can involve:

• Transferring the risk to another party e.g. by taking out insurance

or outsourcing part of the business.

• Avoiding the risk by ceasing the risky activity.

• Reducing the risk by implementing effective controls.

• Accepting the risk and bearing the cost and consequence if the
risk happens. This may be likely for risks which are deemed low
in terms of probability or impact on the company
Risk management

Internal controls and risk management

One way of minimising risk is to incorporate internal controls into a

company’s systems and procedures.

Director's responsibilities in respect of risk

It is the director's responsibility to implement internal controls and

monitor their application and effectiveness.

The risks considered by management are numerous. They come from

both external environmental sources and internal, operational ones. The
main aim of risk management is to protect the business from
unforeseen circumstances that could negatively impact the profitability
of the company and stop it achieving its strategic goals.
Auditor's responsibilities in respect of risk

Auditors are not responsible for the design and implementation of

their clients' control systems. Auditors have to assess the
effectiveness of controls for reducing the risk of material
misstatement of the financial statements. They incorporate this into
their overall audit risk assessment,

which allows them to design their further audit procedures. In

addition to this auditors are required, in accordance with ISA 265, to
report significant deficiencies in client controls and any significant
risks identified during the audit to those charged with governance.