Session 9

[Acid]

Q : You are a qualified chartered certified accountant in charge of the internal audit department of Kaybees , a rapidly expanding company .Turnover has increased by about 20% p.a. for the last five years , to the current level of $50million.Net profits are also high , with an acceptable return being provided for the four shareholders.

The Internal audit department was established last year to assist the board of directors in their control of the company and to prepare for a possible listing on the stock exchange.The Managing Director is keen to follow the principles of good corporate governance with respect to internal audit.Hoeever he is also aware that the other board members do not have the complete knowledge of corporate governance or detailed knowledge of International Auditing Standards.

You are required :

a)Explain how the internal audit department can assit the board of directors in fulfilling their obligations under the principle of good corporate governance .

(10 marks)

b)Explain the advantages and disadvantages to Kaybees of an audit committee.

(10 marks)

[Annie]

HI Acid,

I have got a long weekend. I'll answer on monday

Annie

[Annie]

HI,

According to the organisation for economic co-operation and development there are six principles which cover the key areas of corporate governance.

1.Basis for an effective corporate governance framework:
The framework should be transparent & promote efficient markets. There should be clearly division of responsibilities among different staff members.

2. Ownership rights:
The shareholders rights should be protected as they are the owners of the entity

3. Equitable treatment of shareholders
The corporate governace should ensure that all the shareholders, minority, foreign shareholdes should obtain effective redress for violdation of their rights.

4. Stakeholders
rights of the stakeholders should be protected

5. Discolsure & transperancuy
There is should be adequate and timely disclosures of material matters

6. Responsibilities of the board
Strategic guidance should be givens as to the boards accountability to the company and the shareholders.

The board of directors have to monitor mangerial perforamnce, oversee a organisations operations , relevant laws and regulations, specify tuypes and degrees of risk acceptable and ensure integrity or organisations accounting and financial reporting systems.

To assist the board of directors to achieve these objectives ant the other principles OECD recommends organisations to implement internal audit system. An internal audit department is considered a best practice for all organisations in terms of good corporate governace.

The internal audit system includes:

independent structure where the internal auditors directly report to the board of directors or their audit committee
The internal audit temas has qualified personnel who are professionally qualified and have the expertise
The internal audit team also can provide suffiecint staff to carry out an effective audit.
The internal audit can assess the quality of doucmentation
A internal auditor has regular reporting system
Periodic review keeps the directors update and they can control a situation immediately.

I will write about the audit committtee later.

Annie

[Annie]

HI,

Here comes the rest of the answer

Audit committees are mainly formed to assist the managment in preparing and publishing the financial reports and statements and establishing and supervising the internal controls and a continuous risk assessment of the systems.

The audit committee ensures that all legal and regulatory requirements are met with so Kaybees delegate its responsibilities on to the audit committee. An audit committte would supervise the internal and external auditors, check their integrity towards the organisation. It acts like an agent between the managemnet and the internal and external auditors.

The committee is free and independent to provide an independent oversight on the accounting and financial reportin and the work assessment of both the auditors. The audit committee has the expereince and expertise to evaluate a auditors work.

The audit committee supervises the work of the external audit like
deciding the scope of teh audit and all the matters that an external auditor is expected to report
The matters of concern raised by the management, is taken to the external auditors for investigation
If there are any difference in the managements expectation of a audit report and the external auditors report then, resolving the difference.
Observing the performance of the external auditor.

The audit committee supervises the work of the internal auditor as well

The organisations risk assessment procedures are verified at regular intervals
The internal accounting and financial controls of the organisation are tested
Ensures assets are safeguarded
The internal reportings are done timely
supervise the internal auditors work


The disadvantages of an audit committee are:

They do not have the authority to appoint or dismiss the auditors
They do not possess much technical expertise and knowledge as compared to the auditors that they are supervising
Audit committtee can prove to be an added cost to the organisation

Annie

[Vivienne]

Corporate gorvernance refers to the way companies are run and controlled.it includes issues of accountability as well as management and organisation.it has become important in the recent time because of the collapse of big companies like Enron and Worldcom.all listed companies are now expected to conform to it.

one of the objectives of good corporate gorvanance is to ensure that the needs of all stakeholders are met as far as possible and internal audit procedures meet the needs of the shareholders.internal auditors are appointed by management to help it with assurance on the financial records

internal audit is part of the overral control enviroment that management puts in place to acces the controls.internal auditros have all the time to work on the statements and therefore the details for any fraud.for example if one of the officers is not following the tendering procedures the internal audit can detect this and report to the audit committee.if the internal audit is functioning properly then this is part of good gorvernance as recognised by international codes on coporate gorvernance.

b) an audit committee is one that is set up comprising of directors and non executive directors.its set up to view the cos operations independently and able to communicate with the outsiders.its objectives is to assist the directors in meeting their responsibilities in respect of financial reporting.

The advantages to kaybees of having an audit committee are.
i)An audit committee is part of the good gorvernance policy and since kaybees is perparing for a possible listing on the stock exchange it has to follow this requirement.

ii)Since it is said that the other board members do not have a complete knowledge of corporate governance an audit committee is going to help them understand.

iii)Kaybees co is expanding rapidly and its turnover has incressed to about 20%,the audit committee will help management to improve the quality of their financial statements as it checks the internal functions.

Disadvantages
i)the audit committee is composed of non executive and executive directors who are outsiders ,these maybe having acces to kaybees confidential information.
ii)it is an additional cost to kaybees like paying allowances to non executive directors and maybe time involving
iii)it is seen as management wathdog and sometimes may not receive corporation from other employees

[sash_lar]

a) Corporate Governance deals with matters such as:
Proper system of risk management
Proper system of internal control
Proper accountability and audit

Proper system of risk management
Risk management is the responsibility of management however Internal Audit can assist management by:
Providing assurance services on the adequacy and effectiveness of an area
Recommending ways to reduce or dispel some risk in the company
Suggesting method of identifying risk
There are different risks and Internal Audit can assist management in alleviating or reducing these risks by identifying the risk, assessing the risk and suggesting ways of dealing with risk.
The following are suggestions on how risk may be tackled with the assistance of Internal Auditors.
Accepting the risk and finding methods of lowering the risk or lessen the impact.
Reduce the risk, by recommending that controls be put in place.
Avoid the risk by not engaging in the process as the risk may be greater than the benefits.
Transfer the risk through insurance or indemnity agreements.

Proper system of internal control
Internal Audit can provide advice on the design and implementation of operational control, however Internal Audit should not be apart of the control mechanism as their objectivity may be impaired.
An Internal Auditor’s role is to assess whether the controls in place or to be implemented is adequate and cost effective. The adequacy of the resources will also be part of the review of the adequacy of the controls
Detail report of the review and recommendation is given to the board with the aim of improving the system of controls.

Proper accountability and audit
Accountability, Internal Audit can be asked to investigate any fraud suspected. The audit will be geared towards finding whether there were lack of controls or identifying the non-adherence to control in place, thereby finding the responsible persons to give account for what took place.
An audit is required yearly under Corporate Governance as a means of assisting the adequacy of the controls in place and the adherence to established procedure. This review should be documented fo0r verification purposes. Internal Audit assists in this perspective as all assignment undertaking documents the controls and the adequacy of the controls. Internal Audit work, if adequate, also assist External audit and therefore reduce their scope of work.

b) One of the key criteria that are required of an audit engagement is independence. Usual internal auditors report to management and the thought is that internal audit cannot be objective as there is no independence. Corporate Governance requires that where ever possible there should be an audit committee so that the matter of independence can be address. The Audit Committee’s mandate is to ensure effectiveness of assurance engagement of auditors. This is done by the Audit Committee being the body o review assignment, hire and fire auditors, ensure that auditors are competent an their work is up to standard.

Advantages of the Audit Committee
The committee provides independence to internal auditors as the auditors report to the committee, not to management.
The committee acts as a supervisory body to both management and auditors
Set standards for auditors
The committee may provide guidance the audit team based on their knowledge of the industry.

Disadvantages of the Audit Committee
The members of the committee may not be competent to perform their role as management may chose members based a likeability and not competence.
The committee may not be frequent enough to have a meaningful impact on the organization.
The committee may not have enough members to be independent of management.
The committee may not have sufficient knowledge of the business to provide guidance to the auditors.