Week 7 Flashcards
(12 cards)
What is corporate governance and how does it relate to financial reporting?
- The system by which companies are directed and controlled
- Agency theory: directors to be monitored and controlled to ensure they act in the best interest of investors, this is the foundation of corporate governance
What is the ‘comply or explain’ / code of best practice approach to corporate governance?
Set of principles as a framework with which directors are expected to comply. If the reasons for any non-compliance are fully disclosed and explained, the directors are not in breach of the Code
What is the rules-based / legisaltive approach to corporate governance?
Strict rules which are enshrined in law and which must be complied with. Non-compliance is a breach of law,
What are the advantages of the ‘comply and explain’ / code of best practice approach?
- Flexible - some parts of the regulations may be irrelevant to a company
- Cheaper and less time consuming for companies to implement the relevant portions of a code
- Attracts people to serve on the board of companies - under the legislative approach it can be hard to recruit board members as they are fearful of the consequences of any non-compliance
- Easy to amend - it is less time consuming to change a code of best practice than a piece of legislation
Can you describe and explain the sections of the UK Corporate Governance Code?
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration
What is the role of the audit committee?
- Monitoring the integrity of the financial statements and any formal announcements relating to financial performance
- Reviewing internal financial controls and unless there is a separate board risk committee, reviewing the company’s internal control and risk management systems
- Monitoring and reviewing the effectiveness of the internal audit function
- Making recommendations to the board in relation to the appointment, re-appointment and removal of the external auditor and approve the remuneration and terms of engagement of the auditor
- Reviewing the auditor’s independence and objectivity
- Developing and implementing the non-audit services policy
What is the role of internal audit
- Tests of control
- Fraud investigations
- Compliance with regulations
- IT audits
- Risk assessment
What are internal controls?
- Facilitate effective operation by enabling it to respond in an appropriate manner to significant business, operational, financial, compliance and other risks to achieve its objectives. This includes safeguarding of assets and ensuring that liabilities are identified and managed
- Ensure the quality of internal and external reporting, which in turn requires the maintenance of proper records and processes that generate a flow of timely, relevant and reliable information from both internal and external sources
- Ensure compliance with applicable laws and regulations and also with internal policies’
- E.g authorisation and approval of documents
How does the agency theory relate to external auditors?
- Agency theory: directors to to be monitored and controlled to ensure they act in the best interest of investors => external auditors report to the shareholders
What are the important principles in audit work?
- True and fair (opinion given to shareholders):
Not legally refined
True-factual accuracy (have they followed IFRS)
Fairness - free from bias - Materiality:
Ability of figure to influence users; by size materiality thresholds (%), nature (anything to do with the directors) - Sampling:
Auditors do not test 100% of the balances - Reasonable assurance:
NOT A GUARANTEE (as directors have prepared the statements)
HIGH level of assurance
What are the responsibilities of the external auditor?
- Provide an opinion on whether the FS give a true and fair view
- Report to the shareholders
- Work limitied to verifying the truth and fairness of FS
- Appointed by shareholders and hence independent from the company
What are the different types of audit opinion?
- Unmodified opinion: if FS are free from material misstatement i.e they are true and fair
- Modified opinion: if FS are not free from material misstatement
