Chapter 1 : Intro to Audit and Corporate Governance

Question 1

Stakeholder

Answer 1

Any individual or group of individuals who can affect and get affected by the operations of the business

Question 2

Shareholder

Answer 2

Anyone who owns a stake in the company and is not involved in the daily operations of the business

Question 3

Directors/Management

Answer 3

• Full time employees
• Receive PRP and salary
• Involved in running the business on a daily basis

Question 4

2 kinds of Auditors

Answer 4

-External auditors
&
-Internal auditors

Question 5

External auditor

Answer 5

• Group of people independent of any financial and personal interest in the company
• Their job is to give assurance and to audit the F.S

Question 6

Internal auditor

Answer 6

• Full time employees of the company
• Their job is to evaluate 3 things ; Company’s internal controls, compliance with corporate governance and accounting processes.

Question 7

Objective of External audit

Answer 7

-To express an opinion about 3 items :
# Whether the F.S has been prepared in a true and fair view
# Whether the F.S are free from any material misstatements due to error and fraud
# Whether the F.S are prepared according to all rules and regualations.

Question 8

Why (external) auditors audit F.S ?

Answer 8

• To increase the confidence of users of F.S

- To reduce risk of fraud and error

Question 9

Define TRUE

Answer 9

• Information is factual and conforms with a reality in which there are no factual errors
• Information has been completely and correctly transferred from original entries and books to the F.S
• Information prepared complies with all accounting standards and the relevant law.

Question 10

Define FAIR

Answer 10

Information is: - 
# clear 
# Impartial
# unbiased

Question 11

What is Assurance ?

Answer 11

• It is a process of evaluating the subject matter which is the responsibility of the another party against a criteria to express a conclusion to the intended user of that subject matter.

Question 12

Types of Assurance

Answer 12

• Reasonable assurance (positive)
  &
• Limited assurance (negative)

Question 13

Difference between positive and negative asssurance

Answer 13

Positive assurance Negative assurance
- highly extensive and detailed - Less detailed and exte
procedures carried out -nsive proedures carri-
-ed out.
#Our opinion is : the F.S are #Our opinion is : Nothin-
presented truly and fairly in all -g has come to our att-
material aspects -ention to suggest th-
-at the F.S is incorrect.

Question 14

Examples of positive assurance

Answer 14

-Audit engagement

Question 15

examples of negative assurance

Answer 15

• Reviewing engagements
• Review of F.S and interim F.S
• Review of company’s compliance with corporate governance
• Review of company’s cashflow forecast.

Question 16

Why not absolute assurance ?

Answer 16

We can't give absolute assurance because: -
# Audit is done on a sampling basis - each sample represents the entire population.
#It is time-consuming and inefficient
# Does not provides users of F.S with timely info.

Question 17

3 types of relations between shareholder and mgmt.

Answer 17

# Agency theory
# Stewardship theory
# Accountability

Question 18

Expectation gap

Answer 18

• Gap between what public believes auditors are responsible for and what auditors themselves believe they are responsible for

Question 19

3 kinds of expectation gap

Answer 19

# Liablity gap
#Performance gap
#Standards gap

Question 20

Elements of assurance

Answer 20

C - Criteria
R- Report
E- Evidence
S- Subject matter
T- Tri party engagement

Question 21

Parties in a tri party engagement

Answer 21

# Intended user
#Practioner
# Responsible party

Question 22

Rights of an auditor

Answer 22

• gains complete access to all of the company’s books, records and vouchers
• Right to attend and be heard at any meeting….
• Right to receive all information and explanations they deem necessary in the performance of their duties.
• Right to receive all notices and communications relating to any meeting….

Question 23

Who can appoint auditors

Answer 23

# Shareholders 
#Directors/ mgmt.

Question 24

When does mgmt. appoint auditors

Answer 24

# First year of business
# to fill a casual vacancy

Question 25

Who can remove auditors

Answer 25

- only SH with a majority vote in a AGM

Question 26

What are the requirements to fulfill before auditor is removed or resigns ?

Answer 26

``` # A special notice must be sent before 28 days to the auditor and the members # auditors submit a SOC to explain their side of the story which must be distributed amongst all members # If no explanation to give , then submit a SONC # Yet, submit a SOC whether there is story or no story to explain when resigning ```

Question 27

Who can audit

Answer 27

Anyone from RSB + RQB

Question 28

How to issue ISAs ?

Answer 28

S1 : Establish a project task force to come up with draft standards. S2: Make the draft standards open to public for comment. S3 : Make the exposure draft stds. available on the IAASB website and distrubute them for comments for 120 days S4: If the comments are vald and necessary, then revise the stds. S5: the revsed stds. are made official with 2/3 of the member's approval.

Question 29

Define Corporate governance

Answer 29

- A set of policies and procedures used to determine how a comapany should be directed and controlled.

Question 30

Who have to follow corporate governance ?

Answer 30

- PLC are mandatorily req. to follow CG but can either comply or explain their reason behind not following CG. - Not mandatory for non-listed clients

Question 31

Executive directors

Answer 31

- Full-time employees - Receive PRP and salary - Involved in daily running of the business

Question 32

Non-executive directors

Answer 32

- Part-time employees - Independent of the company - They receive fixed fee - They exist to scrutinise company's affairs

Question 33

Basics of UK Corporate Governance Code

Answer 33

``` L - Leadership E - effectiveness A- Accountability R- Remuneration R - Relations with shareholders ```

Question 34

Audit committee

Answer 34

``` # Main committee # Consists of independent NEDs only ```

Question 35

Composition of audit committee

Answer 35

- At least it should consist of 3 NEDs with one of them having recent and relevant financial experience.

Question 36

types of committees within CG

Answer 36

``` there are 4 kinds of committees # Audit committee # Nominations committee # Risk committee # Remuneartion committee ```

Question 37

Functions of the audit committee

Answer 37

``` # To monitor the prep. of the F.S # Make recommendations on removal and approval of external auditors # Review arrangements for whistleblowing # To provide I.A dept. greater independence from mgmt. # To monitor and review external auditors' independence and effectiveness of the audit process. # To review the need for an I.A dept annually and make recommendations to the board. # To review the effectiveness and efficiency of internal controls ```

Question 38

Benefits of an audit committee

Answer 38

``` #They enhance the confidence of the users of the F.S and the shareholders. #They provide external auditor with greater independence by being an additional line of reporting. #They increase the independence of I.A by having then report to the audit committee : NEDs : Independent. #They can exert influence over areas where I.A dept.'s ecommendations are not being implemented. ```

Question 39

Limitations of Audit committee

Answer 39

``` #EDs perceive them as a threat to their authority. #They are expensive #THEY CREATE BUREACRACY IN THE ORGANISATION. # Difficulty arises is selecting the most sufficient and capable NEDs # They are part-time employees so having a lot of info delivered to them at once will make their job difficult. ```