Professional Documents
Culture Documents
Lecture 4
Auditing and Corporate
Governance
Corporate governance
and auditing
A company is governed by its directors on behalf of the shareholders
Corporate governance is the system by which a company is directed
and controlled.
In many countries, rules or guidelines on best practice in corporate
governance have been developed. These are either applied on a voluntary
basis or imposed by law.
An important aspect of corporate governance is the relationship between the
owners of a company (its equity shareholders) and its board of directors
The strength of the relationship between owners and governors depends
largely on the quality of the communication between them. The most
important method of communication is the annual financial statements and
accompanying reports (the report and accounts).
To promote good corporate governance, the financial statements should be
reliable.
This means that the directors should present reliable and relevant information
in the financial statements, and those financial statements should be subject
to independent audit to provide assurance to the shareholders.
Internal controls are divided into three categories for the purpose
of corporate governance:
financial controls
compliance controls (to ensure compliance with laws and
regulations)
operational controls
Examples of financial controls are:
controls that safeguard the assets of the company
controls that ensure that adequate accounting records are
maintained
controls over the preparation and delivery of the annual
financial statements
Although it is the responsibility of management to design and
Systems of corporate
governance (1)
Many countries now have minimum corporate
governance requirements
Typically, they are imposed only on listed
companies
In addition, some public sector organisations are
also showing an increased emphasis on
corporate governance matters
In many countries, including Pakistan, corporate
governance guidelines are based on a
voluntary code of practice rather than
statutory regulation.
Systems of corporate
governance (2)
The six principles set out below were developed by the Organisation for
Economic Co-operation and Development (OECD). They are intended to
provide a general model of a good corporate governance system.
1.
2.
3.
4.
5.
6.
Disadvantages of an audit
committee
The additional cost (and time) involved in having
an audit committee
The creation of a two-tier board of directors:
those directors closely involved in the
preparation of the financial statements and the
annual audit, and those who are not involved
Fear amongst executive directors that the aim of
the audit committee is to catch them out
Placing an excessive burden on those nonexecutive directors who are members of the
audit committee
Communication
ISA 260 sets out guidance for
auditors on the communication of
audit matters with those charged
with governance
The auditor is required to
communicate regarding auditors
responsibilities, the planned scope
and timing of the audit, significant
findings and auditor independence