Ch 1- Regulatory Environment

Question 1

Corporate governance

Answer 1

System by which organisations are directed and controlled.
Looks at decision makers, how they should act, how they should be monitored, and how they can be held to account.

Question 2

Advantages and disadvantages of Audit committee

Answer 2

Advantages:
-Increased public confidence
-Stronger controls
-Easier to meet listing req’s as audit committee is required

Drawbacks:
-Hard to recruit NED’s in timely manner
-Fear of policing management
-NED’s may be overburdened with detail
-NEDs are expensive

Question 3

General notes

Answer 3

-Chair in post no more than 9 years
-All directors subject to annual re-election
-Chair & CEO should not be the same person
-Looks at internal/external controls

Question 4

Committees

Answer 4

All of the below must have at least 3 independent NED’s (+1 with fin experience for Audit)
-Audit Committee- Decides whether or not to adopt going concern basis (identifies uncertainties)
-Nominations committee - To appoint board directors
-Remuneration committee- Established remuneration procedures

Question 5

5 principles of corporate governance

Answer 5

(LEARR)
Leadership-Effective board which leads the company (long term success)
Effectiveness- Skills, experience and knowledge (regular re-elections)
Accountability-board are accountable for internal controls and risk mgmt.
Remuneration-Fair/balanced to attract talent. (Offering bonus’s for performance)
Relations with shareholders- Board use AGM to interact with shareholders

Question 6

Roles of audit committee

Answer 6

Review financial info-committee should scrutinise all financial info and question/be ready to challenge finance director and external auditors on any matters arising.
Systems & controls-internal controls, systems and risks (need internal audit?)
Fraud prevention & detection- make whistleblowing arrangements
External auditors- Committee ensure upkeep of independence & objectivity.
Annual consideration for reappointment of auditor, confirming compliance auditors responsibility to rotate partner etc.

In summary, the audit committee carefully monitors the conduct of the audit, and plays an important part in ensuring the quality and rigour of the external audit of the financial statements.

Question 7

Audit committee (consideration of auditors providing non-audit services)

Answer 7

Audit committee’s objective should be to ensure that the provision of such services does not impair the external auditor’s independence or objectivity.

The audit committee should consider:
-are skills/experience of auditor most suitable supplier for the non-audit service
-safeguards to eliminate/reduce threat objectivity/independence (non-audit)
-the fees incurred, or to be incurred, for non-audit services
-criteria which govern the compensation of the individuals performing the audit.

One of the non-audit services specifically referred to in the Guidance on Audit Committees is the provision of internal audit by the external auditor.
If external auditor is being considered to undertake aspects of the internal audit function, the audit committee should consider the effect this may have on the effectiveness of the company’s overall arrangements for internal control and investor perceptions in this regard.