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Chapter 3 - CORPORATE GOVERNANCE means by which a company is controlled…
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FUNCTIONS
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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').
ADVANTAGES/BENEFITS
It provides the internal audit department with an independent reporting mechanism compared to reporting to the directors who may wish to hide or amend unfavourable internal audit reports.
The audit committee will assist the internal auditor by ensuring that recommendations in internal audit reports are actioned.
Shareholder and public confidence in published financial information is enhanced because it has been reviewed by an independent committee.
The committee helps the directors fulfill any obligations under corporate governance to implement and maintain an appropriate system of internal control within the company.
The committee should assist in providing better communication between the directors, external auditors and management arranging meetings with the external auditor.
Strengthens the independence of company's external auditor by providing a clear reporting structure and separate appointment mechanism from the board.
LIMITATIONS
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additional cost in terms, at least, of time involved.
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OBJECTIVES
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.
Communication with TCWG
IMPORTANT -to oversee the financial reporting process, thus reducing the risks of material misstatement in the f/s
Example : Management letter
Matters to be communicated by auditors to TCWG:
- The auditor's responsibilities in relation to the f/s audit (think auditors are the one to revise errors found)
- Planned scope and timing of audit
- An overview of the planned scope and timing of the audit
- Significant findings from the audit
Significant findings from the audit :
- the auditor's views about significant qualitative,(inc. a/c policies, a/c estimates and disclosures)
- Significant difficulties encountered during the audit
- Significant matter arising from the audit that were discussed
4.any circumstances that affect the form and content of the auditor's report -modifications to the auditor's report
-material uncertainty related to going concern
-key audit matters
-the inclusion of an Emphasis of Matter or Other Matter paragraph
- Any other significant matter that, in the auditor's professional judgement
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Segregation of Roles
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Non executive directors
Non-executive directors are usually employed on a part-time basis and do not take part in the routine executive management of the company.Their role is as follows.
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Provision of experience, insight and contacts to assist the board.
Membership of sub-committees as independent, knowledgeable parties.
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Board of Directors
=should set procedures of IC and regularly monitor
=involves assessing the risk, designed and ensure those risks are avoided
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INTERNAL CONTROLS
Recommendations :
- Defined process for the effectiveness of internal control
- Review the regular reports on internal controls
- Consider key risks and how they have been managed
- Check the adequacy of monitoring
- Consider the adequacy of monitoring
- Conduct an annual assessment of the risks and the effectiveness of internal control
- Make a statement on this process in the annual report
Good internal controls and risk management helps :
- reduce the risk that f/s contains error
- to ensure reliability of reporting and compliance with laws
- safeguarding the company's assets
- helping to prevent and detect fraud
- safeguarding the shareholders' investment
OECD Framework
6 principles
- Effective corporate governance
- Shareholders right's of ownership
- Fair treatment for shareholders
- Stakeholders' roles and rights
- Disclosure and transparency
- Responsibilities of board
TCWG -the person or organisation, responsible for overseeing the strategic direction of the entity and obliged accountability of the entity.
INTERNAL AUDITOR provide assurance that :- systems operated are effective
-internal controls are effective
-laid down procedures are being followed
-financial and other information produced is sound and reliable
EXTERNAL AUDITOR reviews the statement made concerning the internal control in the annual report for consistencies and to ensure appear true and are not in conflict with the audited statement
EFFECTIVENESS
:check: Recommend half of the board contains NEDs to secure that it exercises the objective judgement
:check:Set up sub-committees of the board to deal with specific issues
:check:The board and its committees (NEDs) should be independent and have the appropriate balance of skills and experience
:check: 1 of the NEDs should be appointed as the senior independent director who will be available to shareholders to raise concerns
:check:Appointment of new directors to the board should be a formal, rigorous and transparent, disclosure
:check: All directors should allocate sufficient time to the company to discharge their responsibilities effectively
:check: All directors should receive induction (orientation) on joining the board and should regularly update and refresh their skills and knowledge
:check: The board should be supplied in timely manner with information in a form and of quality appropriate to enable it to discharge its duties
:check:The Board should undertake a formal and rigorous annual evaluation of its own performance and that its committees and individual directors
:check: Directors often required to retire from the board and seek re-election once every 3 years
:check: The directors of large listed companies should also be subject to annual re-election
ACCOUNTABILITY
:check: Executive directors' remuneration should be designed to promote the long term success of the company. Performance-related elements should be transparent, stretching and rigorously applied
:check: There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding their own remuneration
RELATIONS WITH SHAREHOLDERS
:check: There should be a dialogue with shareholders based on mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place
:check:The board should use the AGM to communicate with investors and to encourage their participation