Tutorial 2 Flashcards
What is corporate governance?
- the system by which a company is directed and controlled
- involves setting objectives, managing risks and implementing internal controls to safeguard assets and ensure proper reporting
What are management’s responsibilities in corporate governance?
- set up internal controls to manage risk
- safeguard company assets
- maintain proper books and records
- prepare and deliver financial statements
What is the role of the external auditor in corporate governance?
- Provide an independent opinion on financial information
- assess directors’ compliance with governance regulations
- review systems and controls (not responsible for them)
What is the role of the internal auditor in corporate governance?
- Assists management by monitoring controls
- report on the effectiveness of internal systems
What is the role of the audit committee?
- Strengthen auditor independence
- serve as a liaison between auditors and the board
- help executive directors fulfill responsibilities
What non-independence factors affect auditor credibility?
- professional competence and training
- integrity and ethical behaviour
- communication skills
- understanding audit objectives and systems
- Use of techniques like statistical sampling
What are the five threats to auditor independence?
- self-interest
- self-review
- advocacy
- familiarity
- intimidation
How does legislation promote auditor independence?
- bans appointments where the auditor is connected to the company
- requires professional membership and regulation
- provides legal protection against unfair removal
What are examples of legislative threats to independence?
- high fees from one client
- family or personal relationships
- gifts and hospitality
- loans or overdue fees
- non-audit services
What are the objectives of agreeing on audit engagement terms?
- ensure preconditions for audit exist
- confirm a shared understanding between auditor and management
When should an engagement letter be reissued?
change in management, ownership, regulations, audit scope or misunderstandings about audit objectives
What are the main components of an engagement letter?
- audit objective and scope
- auditor and management responsibilites
- financial reporting framework
- format of reports
- disclaimer of limitations
- fee and billing terms
- written confirmation and involvement of others
What did Patisserie Valerie case teach about audit independence?
- repeated ISA failures led to collapse
- auditors were fined and banned
- highlighted the need for scepticism, evidence and proper supervision
- KPMG avoided a conflict by declining to advise on legal action due to links with the other auditor
