Corporate Governance and Auditing

Audit committee relationship with others • Audit Committee Board of Directors • Works with other committees, assists board by bringing specialization and expertise in the areas

of financial reporting, internal controls, risk management, and audit activities.

• Audit Committee Management • Asks appropriate questions pertaining to the company’s corporate governance structure, internal

controls, financial reporting, audit activities, risk assessment, codes of ethics, and whistleblower programs. Management should provide sufficient information.

• Audit Committee External Auditors • Directly responsible for hiring, compensating, and firing external auditors, as well as overseeing

their work. External auditors are held ultimately accountable to the audit committee and should submit their reports of the audit on ICFR and the audit of financial reporting to management via the audit committee.

• Audit Committee Internal Auditor • Should be responsible for hiring, overseeing, compensating, and firing the head of the internal

audit department (CAE), and internal auditors should report their audit findings directly to the audit committee, being ultimately accountable to that committee.

Defining Audit The independent examination of any entity ,

whether profit oriented or not and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.

Auditing is the process by which a competent independent person objectively obtains and evaluates evidence regarding assertions about an economic activity or event for the purpose of forming an opinion about and reporting on the degree to which the assertion conforms to an identical set of standards.

By A.C FERNANDO (ICAI)

Objectives of an Audit (1) The objectives of an audit of financial

statements is to enable an auditor to express an opinion on financial statements which are prepared within a framework of recognized accounting polices and practices and relevant statutory requirements.

Reduce opportunities for accounting fraud.

Objectives of an Audit (2) To express an expert opinion on the

fairness with which financial statements present, in all material respects, a company’s financial position, results of operations, and cash flows in conformity with GAAP.

To be able to express such an opinion, the auditor must examine the financial statements and supporting records using sound auditing techniques.

FSI Seminar on Corporate Governance for Banks

20 June 2006

Role of Auditors Corporate governance involves decision

making, accountability, and monitoring.1. Decision require relevant and reliable

information.2. Accountability involves measuring, reporting,

and transparency.3. Monitoring involves system and feedback. Auditors primary role is to check whether the

financial information given to investors is reliable.

Types of AuditThere are three types of Audit.1. Financial statement audit2. Compliance audit3. Operational audit

Financial statement audit An audit of financial statements is

conducted to determine whether the overall financial statements are stated in accordance with specified criteria.

The financial statements commonly audited are balance sheet, the income statement, the cash flow statement of stockholders responsibility.

Compliance audit The purpose of compliance audit is to

determine whether the audited is following specific procedures, rules or regulation set down by some higher competent authority.

Operational audit An operational audit is a review of any

part of an organization's operating procedures and methods for the purpose of evaluating effectiveness and efficiency.

Auditor An auditor is defined as a person

appointed by a company to perform an audit.

He is required to certify that the accounts produced by his client companies have been prepared in accordance with normal accounting standards and represents a true and fair view of the company.

Types of Auditors There are three types of auditors 1. Internal auditors2. Independent auditors3. Government auditors

Internal auditors Internal auditors are employed by the

organization for which they perform audits. Their responsibilities vary and may include

financial statement audits, compliance audits and operational audits.

Internal auditors must have no operating involvement in activities they audit.

An organization may have a small or very large internal audit staff.

Independent auditors Independent auditors are usually

referred to as CPA ( certified public accountants ) firm.

The opinion of an independent auditor about financial statements makes the statements more credible to such users as investors, bankers, labor unions, government agencies and the general public.

Government auditors Government auditors work in various

local, state and federal or central government agencies performing financial, compliance and operational audits.

Local state governments, for example employ auditors to verify that businesses collect and emit sales taxes and excise duties as required by law.

Duties of an AuditorThe duties of an auditor are Whether loans and advance made by the

company on the basis of security have been properly secured.

Whether transaction of the company which are represented merely by book entries are not prejudicial to the investment of the company.

Whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company.

Duties of an Auditor Whether loans and advances made by the

company have been shown as deposits. Whether personal expenses have been

charged to revenue account in other words, the auditors is responsible for.

Verifying that the statements of accounts are drawn up on the basis of the books of business.

Verifying that the statements of accounts drown up on the basis of book exhibit a true and fair state of affairs of the buiness.

Responsibilities of AuditorsAn auditor has the following

responsibilities He is responsible for forming and

expressing his opinion on the financial statements. He assesses the reliability and sufficiency of the information contained in the underlying accounting records and other source data by making a study and evaluation of accounting system and internal controls.

Responsibilities of Auditors He determines whether the relevant

information is properly disclosed in the financial statements by comparing the financial statements with the underlying accounting records and other source data to see whether they properly summaries the transaction and events recorded.

Responsibilities of Auditors He has to ensure that his work involves of

judgment, e.g., in deciding the extent of audit procedures and in assessing the reasonableness of the judgments and estimates made by management in preparing the financial statements.

He is not expected to perform duties which fall outside the scope of his competence e.g., the professional skill required of an auditor does not include that of a technical expert for determining physical condition of certain assets.

Responsibilities of an Audit Firm 1) Professional requirements: personnel

in the firm are adhere to the principles of independence, integrity, objectivity, confidentiality and professional behaviour.

2) Skills and competence: the firm is to be staffed by personnel who have attained and maintained the technical standards and professional competence required to enable them to carry out their responsibilities with due care.

Responsibilities of an Audit Firm 3) Assignment: audit work is to be assigned to

personnel who have the degree of technical training and proficiency required in the circumstance.

4) Delegation: There has to be sufficient direction, supervision and review of work at all levels to provide reasonable assurance that the work performed meets appropriate standards of quality.

5) Consultation: whenever necessary, consultation within or outside the firm is to occur with those who have appropriate expertise.

Audit CommitteeAn audit committee is the committee

comprising independent directors. It is responsible for appointment, fixing of fees and oversight of the work of independent auditors. The committee is also responsible for establishing, reviewing the procedures for the receipt, treatment of account, internal control and audit complaints. All the committee emphasized more on the formation of audit committee, but the proposed size of the committee differed from one to the other.

Audit Committee The audit committee should review the

following information.1) Financial statements and draft audit reports,

including quarterly / half yearly information.2) Management discussion and analysis of

conditions and the results of operations.3) Report relating to compliance with laws and

risk management.4) Management letters /letters of internal control

weakness issued by statutory and internal auditors.

5) Records of related pay transactions.

Audit committee relationship with others • Audit Committee Board of Directors • Works with other committees, assists board by bringing specialization and expertise in the areas

of financial reporting, internal controls, risk management, and audit activities.

• Audit Committee Management • Asks appropriate questions pertaining to the company’s corporate governance structure, internal

controls, financial reporting, audit activities, risk assessment, codes of ethics, and whistleblower programs. Management should provide sufficient information.

• Audit Committee External Auditors • Directly responsible for hiring, compensating, and firing external auditors, as well as overseeing

their work. External auditors are held ultimately accountable to the audit committee and should submit their reports of the audit on ICFR and the audit of financial reporting to management via the audit committee.

• Audit Committee Internal Auditor • Should be responsible for hiring, overseeing, compensating, and firing the head of the internal

audit department (CAE), and internal auditors should report their audit findings directly to the audit committee, being ultimately accountable to that committee.

Conclusion The board of directors, the audit

committee or the senior management, internal auditors, form the foundation on which effective corporate governance has to be built.

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