Corporate Governance Chapter 3

Corporate Governance

• Key directors are subject to re-election by shareholders at least every three years.
• Separation of roles is crucial, specifically between the chairman and CEO to improve governance.
• Primary aspects include audit committees, risk management, nominations, and remuneration.

Audit Committees

• Composed of three non-executives, at least one member must have financial expertise.
• Responsibilities include monitoring the external auditor's independence and effectiveness.
• Develop policies regarding the engagement of external auditors for non-audit services.
• Promote confidence in the integrity of published financial statements and handle whistleblower reports.

Risk Management

• Materiality is judged based on professional discretion, unique company circumstances, and user information needs.
• Common benchmarks for assessing materiality:
  • ½ to 1% of revenue
  • 5 to 10% of profit before tax
  • 1 to 2% of assets
• It is advised to continuously reassess materiality during audits due to emerging information or risks.

Audit Risks

• Sampling risk involves the possibility that conclusions from a sample may not represent the entire population.
• Audit risks include risks of material misstatement and detection risks.
• Inherent and control risks are outside an auditor’s control but can inform detection risk adjustments.

Audit Planning

• Effective planning ensures focus on significant areas, identification of potential issues, and efficient organization of audit engagements.
• Timetable must be established alongside risk assessments and team assignments.
• It emphasizes the efficiency and effectiveness in evidence gathering while considering the potential impact of fraud.

Gathering Audit Evidence

• Types of evidence include:
  • Inspection: Provides evidence of existence and valuation through physical examination.
  • Observation: Verifies procedure effectiveness.
  • Enquiry: Gathered through questioning, corroborated by other evidence.
  • Confirmation: Involves obtaining confirmations from third parties.
  • Recalculation: Checks accuracy in calculations.
  • Reperformance: Reassesses management procedures.
  • Analytical Procedures: Identifies unusual trends or variances requiring further investigation.

Management Assertions

• Management must ensure financial statements present a true and fair view.
• Assertions are made for each financial statement item regarding accuracy, completeness, and valuation.

Audit Sampling

• Statistically, sampling is preferred over testing all items due to cost and efficiency.
• Statistical sampling involves random selection, while non-statistical sampling relies on auditor judgment for item selection.
• It is not suitable for small populations where the entire population can be audited directly.

Evaluating Sample Results

• Auditors must document each procedure performed on selected samples and the conclusions drawn.
• Errors in samples can be projected across the whole population to evaluate financial statement accuracy.