Corporate Governance and Auditing Essentials
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Questions and Answers

What is one of the roles of an external auditor in corporate governance related to financial statements manipulation?

Recommend penalties and provide recommendations to curb reoccurrence.

What is one of the key roles external auditors play in corporate crisis management?

  • Reviewing marketing campaigns
  • Assessing internal controls and deficiencies (correct)
  • Improving product development
  • Assessing competitor strategies

    • True or False: External auditors assist in fostering a good relationship with regulators.

    True

    What is the main objective of corporate governance?

    <p>Enhancing business prosperity</p> Signup and view all the answers

    Define a shareholder.

    <p>Someone who owns shares of a company and expects a higher return on investment.</p> Signup and view all the answers

    The board of directors is responsible for overseeing the management of a company.

    <p>True</p> Signup and view all the answers

    The ___________ plays a key facilitating role in corporate governance.

    <p>independent auditor</p> Signup and view all the answers

    Match the stakeholder with the correct description:

    <p>Internal Stakeholder = Employee, Auditor External Stakeholder = Customer, Suppliers, Users</p> Signup and view all the answers

    What is one major concern related to corporate failure due to company culture?

    <p>questionable risk-taking</p> Signup and view all the answers

    Which factor can lead to corporate failure due to environmental economic instability?

    <p>Income instability</p> Signup and view all the answers

    Good corporate governance does not involve promoting ethics and values within the organization.

    <p>False</p> Signup and view all the answers

    Boards of members need to ensure the company comply with legislation, financial regulation, and codes of practices to balance compliance monitoring with driving ____________ performance.

    <p>corporate</p> Signup and view all the answers

    Match the responsibilities with the role in corporate governance:

    <p>Strategic planning = Conducted by management and monitored by the board Human resources management = Selecting, compensating, and monitoring performance of key personnel Internal control assurance = Reviewing the adequacy and integrity of accounting and financial reporting system</p> Signup and view all the answers

    What is one of the benefits provided by an audit committee?

    <p>Creating a comprehensive ethics and compliance program</p> Signup and view all the answers

    The audit committee must consist of at least 3 members with a majority being non-executive directors.

    <p>True</p> Signup and view all the answers

    What is the term used to refer to controls designed, implemented, and maintained by group management over group financial reporting?

    <p>Group-wide control</p> Signup and view all the answers

    An audit committee chairperson should be an independent non-executive ___________.

    <p>director</p> Signup and view all the answers

    What factors should the external auditor consider before determining if internal auditors can provide direct assistance?

    <p>Policies for hiring and training internal auditors</p> Signup and view all the answers

    What activities are not expected to be assigned to internal auditors providing direct assistance?

    <p>Assessing risks of material misstatements, evaluating tests performed, evaluating accounting estimates, evaluating adequacy of disclosures in financial statements</p> Signup and view all the answers

    The higher the assessed risk of material misstatement, the less work can be assigned to internal auditors.

    <p>True</p> Signup and view all the answers

    According to ISA 610 (Revised 2013), what procedures can internal auditors not carry out?

    <p>Procedures involving significant judgment, procedures related to high assessed risks, decisions made in accordance with ISA 610, work already reported to management</p> Signup and view all the answers

    What are some limitations of scope that other auditors may face?

    <p>Language, culture, differences in accounting and auditing conventions, legislations</p> Signup and view all the answers

    What should the principal auditor consider when planning to use the work of another auditor?

    <p>All of the above</p> Signup and view all the answers

    The principal auditor should inform the other auditor about the accounting, auditing, and reporting requirements.

    <p>True</p> Signup and view all the answers

    The _ _ stage process in group audit involves gathering evidence on the components, auditing the consolidation, and issuing the group audit opinion.

    <p>three</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Principal Auditor = Responsibility for reporting on the financial statements of an entity which includes financial information audited by another auditor Other Auditor = Responsible for reporting on the financial information of a component that is included in the financial statements audited by the principal auditor</p> Signup and view all the answers

    What must the group audit team or component auditor perform if a component is deemed significant?

    <p>Perform one or more of: An audit of the financial information of the component using component materiality, an audit of specific account balances, transactions or disclosure relating to significant risks of material misstatement, specific audit procedures relating to likely significant risks of material misstatement.</p> Signup and view all the answers

    What should the group auditor do if further audit work is deemed necessary on the financial statements of a component?

    <p>Determine the nature of the work necessary and decide whether it should be carried out by the group auditor or the component auditor.</p> Signup and view all the answers

    What are some types of audit procedures performed on the consolidation process?

    <p>All of the above</p> Signup and view all the answers

    A joint audit is when only one audit firm is appointed to provide an audit opinion on a set of financial statements.

    <p>False</p> Signup and view all the answers

    What does ISA 600 require with regards to the group engagement partner?

    <p>Formally assess whether it is appropriate to act as group auditor each year and resign if lacking necessary professional skills.</p> Signup and view all the answers

    What are some factors the auditor should consider before relying on the work of an expert?

    <p>All of the above</p> Signup and view all the answers

    What should the auditor do if they determine that the work of the auditor's expert is not adequate for the auditor's purposes?

    <p>Agree with the expert on the nature and extent of further work to be performed by the expert, or perform additional audit procedures appropriate to the circumstances.</p> Signup and view all the answers

    Audit sampling is defined as the selection and evaluation of less than 100% of the items in a population of audit relevance to provide a __________ basis for conclusions about the population.

    <p>reasonable</p> Signup and view all the answers

    The auditor should obtain 100% examination of all items in a population during audit sampling.

    <p>False</p> Signup and view all the answers

    How can sampling risk be reduced or controlled?

    <p>By increasing the sampling size, adjusting sample size, and using an appropriate method of selecting sample items from the populations.</p> Signup and view all the answers

    In which situations does sampling risk arise?

    <p>Both a and b</p> Signup and view all the answers

    What are the types of sampling risk?

    <p>All of the above</p> Signup and view all the answers

    The purpose of a test of control is to determine if internal controls can detect or prevent risks of material misstatements.

    <p>True</p> Signup and view all the answers

    Study Notes

    Definition of Corporate Governance

    • Corporate governance is a process and structure to direct and manage business and affairs of the company towards enhancing business prosperity and corporate accountability.
    • The ultimate objective is to realize long-term shareholder value and take into account the interest of other stakeholders.

    Key Players in Corporate Governance

    • There are 3 key players in a corporation: The Board of Directors (BOD), management, and shareholders.
    • Other stakeholders include audit committee, regulators, internal audit, external auditors, employees, customers, suppliers, and users.

    Roles and Responsibilities of Key Players

    Board of Directors (BOD)

    • Responsible for creating, following, and improving corporate strategy, long-term plans, risk policy, budgeting, and financial planning.
    • Oversees potential emerges, acquisitions, and capital expenditures.
    • Elects and replaces the CEO, guides and monitors CEO activities.
    • Identifies and eliminates potential conflicts of interest and misuse of corporate assets.

    Audit Committee

    • Assists the BOD in discharging their duties relating to company management and internal control, accounting policies, and financial reporting.
    • Provides a line of communication between the BOD and auditors.

    Shareholders

    • Have the responsibility to make considered use of their votes.

    Management

    • Accountable to the BOD.

    Internal and External Auditors

    • Monitor the performance or outcomes and operations of the company.

    Principles of Corporate Governance

    Principle 1: Providing the Foundation for a Corporate Governance Framework

    • Establishes the corporate governance framework in accordance with current legal and socioeconomic systems.
    • Ensures transparency and encourages companies to perform efficiently.

    Principle 2: The Rights of Shareholders

    • Guarantees the methods of ownership protection, transfer of shares, and informed decision-making.
    • Ensures shareholders have a right to participate in the general meeting and vote on key decisions.

    Principle 3: The Equal Treatment of Shareholders

    • Protects minority shareholders from controlling shareholders' dominance.
    • Ensures clear voting procedures and prevents misuse of the system.

    Principle 4: The Rights of Stakeholders

    • Protects stakeholders' rights by law and provides access to required information.
    • Ensures stakeholders have a clear procedure for communication and reporting to the BOD.

    Principle 5: Transparency

    • Provides transparency and accessibility to information on company performance, goals, interests, risks, and concerns.
    • Requires an annual audit by an independent and competent auditor.

    Principle 6: The Responsibilities of the Board

    • Ensures the BOD performs in the best interest of the company and shareholders.
    • The BOD is responsible for creating, following, and improving corporate strategy, long-term plans, risk policy, budgeting, and financial planning.

    Core Principles of Corporate Governance

    Transparency

    • Ensures openness, willing to provide clear and accurate information to stakeholders.
    • Ensures timely and accurate disclosure of material matters concerning the organization.

    Independence

    • Prohibits conflict of interest and ensures independence in procedures and structures.
    • Minimizes conflict of interest to ensure fairness and accountability.

    Accountability

    • Ensures decision-makers are accountable for their actions and conduct.
    • Encourages transparency and fairness in decision-making and reporting.

    Responsibility

    • Ensures directors are liable for their performance to stakeholders.
    • Encourages fairness and accountability in the treatment of all stakeholders.

    Fairness

    • Ensures equal treatment of all shareholders, regardless of the size of their holdings.
    • Ensures fairness in the treatment of all stakeholders, including employees, communities, and public officials.

    Social Responsibility

    • Encourages awareness and response to social concerns.
    • Ensures companies respond to social issues and contribute to the well-being of stakeholders.

    Benefits of Corporate Governance

    • Maintains investors' confidence, which supports further growth.
    • Ensures corporate success and economic growth.

    Risk Factors behind Corporate Failure

    • Lack of board effectiveness
    • Unhealthy company culture
    • Information glass ceiling
    • Socio-cultural factors
    • Income instability
    • Absence of manpower training and development policy
    • Capital inadequacy### Continuous Monitoring and Stewardship
    • Boards have a moral and statutory obligation to add value to company assets by contributing to strategic planning, risk management, human resources management, communication policy, and internal control assurance.
    • Directors must act in the best interest of the company, with care and diligence, and avoid conflicts of interest.

    Roles of External Auditors

    • Primary role: form an opinion on the financial statements and report to shareholders.
    • Responsibilities:
      • Inspect financial statements to catch errors, misstatements, and fraud.
      • Perform audits on systems, operations, and accounts.
      • Report audit findings and recommend improvements.
      • Ensure financial statements are a true and fair account of past financial performance and current financial position.
      • Issue an audit opinion on the financial statements.
      • Evaluate internal control and identify weaknesses.

    Audit Committee

    • Definition: a group of non-executive directors set up by the board of directors to ensure good corporate governance.
    • Roles:
      • Ensure financial statements are understandable and reliable.
      • Establish a thorough risk management process and effective internal controls.
      • Review policies, particularly in areas such as ethics, conflict of interest, and fraud.
      • Review litigation and regulatory proceedings.
      • Select and implement a direct reporting relationship with the external auditor.
      • Establish communication with the internal auditor and review audit findings.

    Roles of Audit Committee

    • Oversight of financial reporting:
      • Review quarterly results and year-end financial statements prior to approval by the board.
      • Focus on changes in accounting policies, significant and unusual events, and compliance with accounting standards.
    • Review of conflict of interest situations and related party transactions:
      • Identify and report on related party transactions and conflict of interest situations.
      • Ensure transactions are not prejudicial to the interests of the company or its non-major/substantial shareholders.
    • Assessment of internal control environment:
      • Determine whether management has implemented effective and adequate internal controls.
      • Ensure internal controls are embedded in the company's operations and respond to evolving business risks.
    • Evaluation of internal audit:
      • Ensure the internal audit function is independent of management.
      • Decide on the appointment, removal, and remuneration of internal audit personnel.
      • Review the internal audit function's objectives, strategies, and scope.

    Auditor's Roles in Corporate Governance

    • Communicate audit matters of governance interest with those charged with governance.
    • Ensure good internal control and risk management policies are established by management.
    • Establish measures to detect misstatement in financial statements.
    • Ensure independence in performing the audit.
    • Ensure quality audit work and adhere to auditing standards.
    • Reduce the expectation gap through communication, education, and professional development.

    Challenges and Weaknesses of Audit Committee

    • Maintaining internal control over financial reporting, disclosure controls, and procedures.
    • Ensuring the organization has the talent and resources to maintain quality financial reporting.
    • Increasing the cost of the company.
    • Decreasing the number of independent directors.
    • Difficulty in selecting sufficient non-executive directors with the necessary competence in auditing matters.

    Benefits of Audit Committee

    • Provides actionable insights to oversee and improve financial practices and reporting.
    • Creates and maintains an effective anti-fraud program.
    • Enhances the internal audit function.
    • Oversees the organization's external audit.
    • Strengthens credibility with stakeholders.

    Composition/Requirement of Audit Committee Members

    • The committee shall be composed of directors of the company and appointed by the board.
    • Should consist of at least 3 members, with a majority of non-executive directors (independent directors).
    • The chairperson shall be an independent non-executive director.
    • Members shall not have any family relationship with the executive director of the company or related companies.
    • At least one member of the audit committee must be a member of MIA or have relevant qualifying experience.

    Term of Reference of Audit Committee

    • Membership of the audit committee must be in accordance with the composition requirements.
    • The audit committee shall review and assess the organization's internal control and risk management systems.
    • The audit committee shall review the organization's financial statements and report to the board.### Audit Committee
    • The Audit Committee shall meet at least twice a year and hold additional meetings as deemed necessary.
    • The Company Secretary acts as the secretary of the Audit Committee and is responsible for drawing up the agenda, circulating it to members, and recording minutes.
    • The minutes of the meeting are properly kept and distributed to each Audit Committee member and the Board of Directors (BOD).
    • A quorum consists of a simple majority of Committee members.
    • The chairman reports to the BOD after each meeting.

    Authority/Power of Audit Committee

    • The Audit Committee has the authority to investigate any matter within its terms of reference.
    • It has the resources required to perform its duties.
    • It has full and unrestricted access to any information pertaining to the Company and the Group.
    • It has direct communication channels with external and internal auditors.
    • It has the right to obtain independent professional or other advice as necessary.
    • It has the right to invite other Directors and/or management of the Company to attend any particular Audit Committee meeting.

    Issues Associated with Audit Committee

    • Interference in executive decisions on operational matters can undermine the authority of the BOD.
    • To overcome this, the Audit Committee should have clear terms and responsibilities, and communication between all parties should be made in a timely and professional manner.
    • The Audit Committee may be seen as "window dressing" to comply with the Bursa Malaysia Listing Requirement.
    • To overcome this, the Audit Committee must be and be seen to be independent, with authority given to back up their responsibilities, and the BOD must give full support to the Committee, including financial and administrative resources.
    • The full BOD may be distanced from financial matters and the external auditor.
    • To overcome this, the BOD must require an oral and written report on all activities of the Committee, and may even call the auditors to attend meetings.
    • Audit Committee members may increase their exposure to possible additional liability.

    Group Audit

    • Definition: Group audit is the audit of group financial statements.
    • Group engagement partner: The partner or other person responsible for the group audit engagement and its performance, and for the auditor's report on the group financial statements.
    • Group engagement team: Partners and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence.
    • Component auditors: Members of the group engagement team may perform work on the financial information of a component for the group audit at the request of the group engagement team.

    Objective of Group Auditor

    • To determine whether to act as the auditor of the group financial statements.
    • To communicate clearly with component auditors about the scope and timing of their work on financial information related to components and their findings.
    • To obtain sufficient appropriate audit evidence regarding the financial information of the components and the consolidation process.

    Requirements for Group Auditor

    • Obtaining sufficient appropriate audit evidence regarding the components and the consolidation process.
    • The group auditor is responsible for providing the audit opinion on the group financial statements.
    • The group auditor cannot simply rely on another auditor's opinion on the financial statements of a company and assume that the figures taken from the company's financial statements into the consolidated financial statements are appropriate.

    Stages of Group Audit

    • Stage 1: Gathering evidence on the components.
    • Stage 2: Auditing the consolidation process.
    • Stage 3: Issuing the group audit opinion.

    Joint Auditing

    • A joint audit is when two audit firms are appointed to jointly provide an audit opinion on a set of financial statements.
    • The main benefit of this type of arrangement is that when a new component is acquired by the group, it is advantageous to keep the subsidiary's existing audit firm, which will have built up considerable knowledge and experience of the business of the component.

    Group Engagement Partner

    • Requirements: The group engagement partner must formally assess whether it is appropriate to act as group auditor each year.
    • The group engagement partner has the right to access the accounting and other records of the company and any subsidiary of the company.
    • The group engagement partner has the right to require information and explanations from any component auditor or officer of the parent company and the officer of the related company.

    Factors to Consider in Accepting the Appointment as Group Engagement Partner

    • Materiality of the portion of the financial statements which the Group Engagement Partner audits.
    • The Group Engagement Partner's knowledge of the business of the component.
    • Risk of material misstatement in the financial statement of the component.
    • The extent of the additional audit procedures by the group engagement partner.
    • Competence of component auditors.

    Factors to Consider in Relying on the Work of Component Auditors

    • Whether the component auditor complies with the ethical requirements and standards relevant to the group audit.
    • The component auditor's professional competence.
    • Whether the group engagement partner will be able to be involved in the work of the component auditor to the extent necessary to obtain sufficient appropriate audit evidence.
    • Whether the component auditor operates in a regulatory environment that actively oversees auditors.
    • Scope of work of the component auditor.

    Using the Work of Component Auditors

    • The group engagement partner needs to check the existence of proper documentation of audit work carried out by the component auditor.
    • The group engagement partner needs to check the adequacy of the audit programmes.
    • The group engagement partner needs to check the scope of work covered by the component auditor.
    • The group engagement partner needs to check whether appropriate test of control and substantive procedures have been performed.
    • The group engagement partner needs to check whether adequate audit evidence is obtained.
    • The group engagement partner needs to check whether work carried out by the engagement team is being adequately reviewed.

    Scope of Work for Group Engagement Partner

    • The scope of work of the group engagement partner depends on the scope of work of the component auditor.
    • The scope of work of the group engagement partner depends on any problems encountered in the past.
    • The scope of work of the group engagement partner depends on any significant changes of component condition, business, and profitability.
    • The scope of work of the group engagement partner depends on the inherent risk assessment of subsidiaries.
    • The scope of work of the group engagement partner depends on the materiality of components compared to the group as a whole.

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    Test your knowledge on the roles and objectives of corporate governance, external auditors, and their relationships with regulators and stakeholders. Topics include financial statement manipulation, crisis management, and shareholder rights.

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