Parts: When will be tested? No. of lecture class MU week Total split of points: part 1 Corp gov-ce - preparerers of fin statements scope midterm test lecture 1 wk1 Task Points Comments: structure midterm test lecture 1 wk1 presentation of 1 case 20 schedule with cases and dates will be confirmed. Complex case can be presented by two persons and simple case should be presented by one person. IC midterm test lecture 2 wk2 midterm test 20 "will be on Nov 4, 2020. Duration ot test will be confirmed later" part 2 Assurance - assurares of fin statements final exam 60 will be in January 2021. Date and duration will be confirmed later. general midterm test "lecture 2, lecture 3" "wk2, wk3" total 100 Stages of audit part 3 Acceptance of client midterm test lecture 4 wk4 part 4 Planning of audit final exam "lecture 5, lecture 6" "wk5,wk7" part 5 Audit tests final exam "lecture 7, lecture 8" "wk8, wk9" part 6 Audit report final exam "lecture 9, lecture 10" "wk10, wk11" max grade 100 points (A) Note: topics for midterm test will be also included into final exam ##### Sheet/List 2 ##### Part I. Corp gov-ce (CG) - is about how company is managed on day-to-day basis 1 purpose of CG - to direct and control resources owned by investors and intrasted to those charged with gov-ce so that to contribute to creating long-term shareholder value. 2 "why CG is needed? - management, shareholders and government (as major shareholders) have different objectives. Corporate governance is a glue that keeps objectives of these thre parts together. " "objectives of management - to sustain listing on the exchange, to implement best practices in managing of entrasted resources, to attract investments" objectives of shareholders - to have environment within which they can invest with min risk 1 purpose of CG "objectives of government - to create conditions for growth and employment, to attract global invetsments" 2 need for CG 3 scope of CG (see see principles of corporate gove-ce as per Code of corp gov-ce from OECD) 3 scope of CG board of directors aka those charged with governance 4 CG and IC responsibilities of effective board: lead the company strategy set company's values meet regularly issue annual report to uphold the law to safeguard the assets of the organization should ensure that chairman and non-executive directors (NED) meet without executives to consider their performance should ensure that non-executive directors (NED) meet without chairman to consider the perfoamnce of chairman no one person or group should be able to dominate the board "should be of appropriate size, right balance of skills and experience. This includes diversity, including gender." at least of half of the board should be made up of NEDs NED should not be an employee within the last 5 years not have business relationships within the last 3 years be only remunerated with a fee for director duties - no profit share or share options no lcose family ties to the company no cross-directorship any NED who has been on the board for longer than 9 years is assumed to no longer be independent and should be re-appointed annually after this not be a major shareholder advantages and disadvantages of having NEDs in the board advantages provide expertise provide monitoring to curb excessive behavior of executives demonstrate that decisions are made in shareholder's best interests facilitate shareholder representation on the board facilitate compromise and creaet balance on the board disadvantages this will create costs and may slow down decision-making NEDs do not work full time for the company. It is debatable how much they actually know about the company and how much they can add value some NEDs are too willing to accept what executives tell them. types of companies depending on role of board: unitary board - board represents superviosry and management level two-tier board - shareholders and stakeholders who have an active interest in running the company represent superviosory tier and board represensts the management tier committees - report to the board they allow the board to offload responsibility for a particular activity they provide a forum to focus on a limited and distinct tasks they should prvide an epretise in the given area of operation they should provide disclosure to shareholders they prvide assurance to shareholders types of committees: audit committee organization: should consist of at least 3 NEDs (for smaller companies - 2) at least 1 member should have recent and relevant financial experience responsibilities "make recommendations to the board in relation to apointment, re-appointment and removal of external auditor" review and monitor external auditor;s independence and objectivity and effectiveness of audit process review and monitor how external audior recommendations are followed up once statutory audit is over review of company's internal controls review and monitor effectiveness of company's internal audit function "provide advice on whether the annual report and accounts taken as a whole is fair, balanced and undertsndable and prvides the information necessary for shareholders to assess the company’s performance and strategy" to review cases of whistleblowing benefits of audit committee it assists to external auditors => better communication between external auditor and the board it increases confidence in the company's fin controls and reporting mechanisms. it follows up external auditor's recommendations with regard to internal control weaknesses limitations of audit committee it imposes additional costs difficulty in finding members with the right experience at the market audit committee and internal audit department AC should ensure that IAD has direct access to the chairman and that it is accountable to IA review and assess IAD workplan receive periodic reports on the results of IAD work review and monitor management responsiveness to IAD's findings and recommendations meet with head of IAD at least once a year without presence of management risk management committee responsibilities advice the board on an approprate risk strategy for the company monitor company to ensure the risk strategy is embedded and strategy notbeing ignored by certain departments/staf "help to identify major risks, suggest solutions" receive reports from heads of toher departments on their specific risk issues receive report from IAD and assess their recommendations ensure all risk-related disclosures are in Annual report benefits of risk committee independence in decision-making support for board of directors and for AC "if committee works effectively, then:" more predictable cash flows are produced impact of distater is limited "greater confidence among investors, employees, customers, suppliers and partners" phases of risk management identify risks. risks may arie from many sources: impact of new technology or changing competition fraud regulations estimate impact and priority in their tackling develop solutions implement risk strategy "review, adapt and disclose" nomination committee remuneration committee all directors should get induction and training "board, its committies and individual directors should have performance appraisal at least annually" directors should be elected at least every 3 years (for FTSE-350 companies re-election should be every year. significant proportion of remuneration of directors should be performance-based remuneration should consider industry level. "board should insure sound system of controls, the effectiveness of which should be reviewed evety year as part of annual report." "if the board has the audit committee, it should be made up of at least 3 NEDs. Main role of such committee is to liason with internal (i.e. internal audit department) and external auditors on all matters" board should have regular dialogue with shareholders and encourage debate through AGM (annual general meetings) chairman and COE should not be the same person "chairman leads the board, sets agenda for board's meetings ensuring there is enough time forimportant matters" CEO runs the company chairman is key contact for shareholders 4 CG and internal controls "IC - is system of values, rules, procedures and systems (IS) implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud." Controls are designed by risk management committee as response to identified internal and external risks and volnurabilities and which are reviewed regularly by internal audit department and which are tested by external auditors during statutory audit. => Impact of quality of IC on scope of statutory audit if IC are strong (there is low control risk) the auditors can rely on these controls and reduce the amount of detailed (substantive) testing that they do "if IC are weak (there is high control risk), the auditors cannot rely on these controls and they must increase the amount of detailed (substantive) testing that they do. Audit statistics indicate that sample sizes needed should be tripled to compensate for poor internal control" purpose of IC to prevent and detect errors (unintentional or ontentional) to help safeguard the assets (against theft) to ensure the business runs cost efficiently components of IC control environment management attitudes and values staff attitudes and values control procedures application controls general controls comparison authorization reconciliation computer control arithmetical control physical control segregaition of duties risk assessment information systems monitoring of existing controls limitations of IC human error collusion to commit fraud the cost/time to implement the controls may outweight the benefit of following them so the controls are ignored it may be impossible to design a control for one-off transactions e.g. determining a provision for a court case. Controls work best in systems where there is a high volume of routine transactions. IC are designed and implemented within each accounting cycle. For example: "sales cycle - stages, risks emerging at each stage and control procedures to minimize the exisitng and potencila risks " purchases cycle GRNI AP ROTA Bottomline payroll cycle