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ToTCOOP+i O3 o4 unit-3_final_version_en

Training for Board of directors in the agri-food cooperatives: Unit 3 - Risk Management

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ToTCOOP+i O3 o4 unit-3_final_version_en

  1. 1. House Keeping  Health & Safety  Security  Classroom agreement  Breaks  Trainer Introduction Turn Off Mobile Phones
  3. 3. Programme Overview 1. Programme Introductions 2. Introduction to Terminology 3. Financial Risk 4. Solvency & Liquidity 5. Credit / Counterparty Risk 6. Cashflow Risk 7. Financing 8. Reckless Trading 9. Internal Audit
  4. 4. Programme Introduction
  5. 5. Risk Management Ice-Breaker
  6. 6. ABC of ME You have been hired by the Creative Classroom Company to illustrate a poster to help children learn their ABCs. By happy coincidence, you and your first name are the subject of the poster! 1. First, take a piece of flipchart paper and write your name vertically down the left side. 2. Next, choose a word that starts with each letter of your name. The words should describe something about you. Write those words horizontally across the paper, using the letters of your name as the first letter of each descriptive word. 3. After you have listed your words, draw an accompanying picture to illustrate each. 4. When you are finished, tape your poster to the wall.
  8. 8. Risk Management What do you want to get from today?
  9. 9. Financial Risk Management Aims: The aim of this module is to enable learners to:  be able to analyse the sources of financial risk as well as the importance of implementing effective financial risk management procedures in business entities.  Learners will also learn to how to mitigate financial risks using a variety of financial derivatives. Objectives: by the end of this module, learners will be able to:  Analyse how futures and forward markets operate and be able to calculate theoretical forward and futures prices and values  Analyse and apply a variety of hedging and trading strategies using options.  Evaluate hedging strategies using forwards, futures, options and swaps to hedge identified financial risks in currencies, interest rates, commodities and shares and to evaluate the outcomes of these strategies  Evaluate the need for sound financial risk management policies and procedures in organisations and to make ethical decisions
  10. 10. Financial Risk Management Programme Outline:  Terminology  What is Financial Risk Management - FRM  Sources of Financial Risk  Stages of FRM  Solvency  Liquidity  Credit  Cash Flow  Financing  Reckless Trading  Internal Audit
  11. 11. Introduction to Terminology
  12. 12. Introduction to terminology Derivatives A derivative security is a financial contract whose value is derived from an underlying asset e.g. A stock options value depends upon the value of a stock on which the option is written A futures contract’s value depends on the “spot price” (price for buying now) Financial Risk Management
  13. 13. Introduction to terminology Forward contract A forward is an agreement between a buyer (“long”) and a seller (“short”) to trade: A specified quantity of an asset At a specified price (forward/delivery price) At a specified time (maturity/delivery date) and place Financial Risk Management
  14. 14. Introduction to terminology Options A call option is an option to buy a certain asset by a certain date for a certain price (the strike price). A put option is an option to sell a certain asset by a certain date for a certain price (the strike price) Warrants Warrants are options that are issued (or written) by a corporation or a financial institution. Financial Risk Management
  15. 15. Introduction to terminology Swaps A swap is a contract between 2 counterparties to exchange a series of cash payments A swap is used when a party wants to hedge some risks or transform the nature of some cash flows, e.g. an interest rate swap which transforms a floating rate risk to a fixed rate risk Facilitated by a swap dealer who then finds an offsetting swap. Financial Risk Management
  16. 16. Financial Risk
  17. 17. Financial risk is a broad category of risk directly related to money. It includes risks in areas such as investments, assets, securities, markets, credit, business operations and the economy. Financial Risk
  18. 18. Financial risk is the probability that some event will cause an undesirable outcome on the financial health of your business. Financial Risk
  19. 19. Three main sources of Financial Risk  Arising from exposure to changes in market prices, such as interest rates, exchange rates, and commodity prices.  Arising from the actions of and transactions with other organisations, such as vendors, customers, and counterparties in derivatives transactions  Resulting from internal actions or failures of the organisation, particularly people, processes and systems Financial Risk
  20. 20.  Process to deal with the uncertainties resulting from financial markets  Involves assessing the financial risks facing an organisation and developing management strategies in line with business objectives.  Strategies for financial risk management often involve derivatives What is Financial Risk Management?
  21. 21.  Financial Risk Management is an Ongoing process Stages in Financial Risk Management include: Financial Risk  Identify and prioritise financial risks  Determine appropriate level of risk tolerance  Implement risk management strategy in line with business policy and objectives  Measure, report, monitor and refine as needed.
  22. 22. Financial Risk Examples of Financial Risk include
  23. 23. In Groups of 3-4 Draw pictures of your interpretation of what financial risk management and your role as a director is about. No words. Only pictures allowed. Report to the larger group. Pick a spokesperson. Group Exercise 1 – 10 minutes
  24. 24. Run Break Timer – 15 minutes
  25. 25. Solvency & Liquidity
  26. 26. Solvency, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term financial commitments and to accomplish long-term expansion and growth. A solvent organisation is one that owns more than it owes, in other words, it has a positive net worth and a manageable debt load. Solvency
  27. 27. Solvency ratios, also called leverage ratios, measure a organisation’s ability to sustain operations indefinitely by comparing debt levels with equity, assets, and earnings. In other words, solvency ratios identify going concern issues and a organisations ability to pay its bills in the long term. Better solvency ratios indicate a more creditworthy and financially sound organisation in the long-term. Solvency Ratio’s
  28. 28. Liquidity risk is a financial risk that for a certain period of time that financial asset or commodity cannot be traded quickly enough in the current market without impacting the market price. It implies that you pay/receive inappropriate amount for assets It may mean you are going to have cash flow problems Liquidity Risk
  29. 29. Solvency and liquidity are both terms that refer to an organisation’s state of financial health, but with some notable differences. Solvency vs Liquidity Solvency refers to an organisation's capacity to meet its long-term financial commitments A solvent organisation is one that owns more than it owes; in other words, it has a positive net worth and a manageable debt load Liquidity refers to an organisation’s ability to pay short-term obligations; the term also refers to its capability to sell assets quickly to raise cash. an organisation with adequate liquidity may have enough cash available to pay its bills, but it may be heading for financial disaster down the road. Solvency and liquidity are equally important, and healthy organisations are both solvent and possess adequate liquidity.
  30. 30. Credit / Counterparty Risk
  31. 31. The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Also simply known as “bad debt” Credit Risk can take three forms: 1. Default Risk 2. Downgrade Risk 3. Settlement Risk Credit or Counterparty Risk
  32. 32. Default Risk Exposure to loss due to non-payment by a borrower of a financial obligation when it becomes payable Downgrade Risk The risk that a bond price will decline due to a downgrade in its credit rating. Settlement Risk The risk that a borrower delays in settling a financial obligation within a given contract period Credit or Counterparty Risk
  33. 33. Cash Flow
  34. 34. Cash Flow
  35. 35. Why do Organisations Fail?  Not Profitable? Cash Flow Actually, it’s  The Lack of Cash Flow – not Profit  Profit is Key, but does not guarantee success.
  36. 36.  Transactions which increase the cash position of the entity are called as inflows of cash.  Transactions which decrease the cash position as outflows of cash. Cash Flow
  37. 37. Why the need for a Cash Flow Statement?  For to highlighting the cash generated from operating activities .  For to planning the repayment of loan schedule and replacement of fixed assets, etc.  For to the projection of future investing and financing plans of the enterprise.  For to efficient and effective management of cash.
  38. 38. Why the need for a Cash Flow Statement? The statement of cash flow shows three main categories of cash inflows and cash outflows, namely: Operating Activities Investing Activities Financing Activities
  39. 39.  Cash sale  Cash received from debtors  Cash received from commission and fees  Royalty and other revenues Cash Inflow & Outflow - Operating Activities  Cash purchase  Payment to creditors  Cash operating expenses  Payment of wages CASH INFLOW CASH OUTFLOW
  40. 40.  Cash sale of plant and machinery, land and Building, furniture, goodwill  Cash sale of investments made in the shares and debentures of other companies  Cash receipts from collecting the Principal amount of loans made to third parties. Cash Inflow & Outflow - Investing Activities  Purchase of fixed assets i.e. land, Building, furniture, machinery etc  Purchase of Intangible assets i.e. goodwill, trade mark etc.  Purchase of shares and debentures  Purchase of Government Bonds  Loan made to third parties CASH INFLOW CASH OUTFLOW
  41. 41.  Issue of Equity and preference share capital for cash only.  Issue of Debentures, Bonds and long-term note for cash only Cash Inflow & Outflow - Financing Activities  Payment of dividends to shareholders  Redemption or repayment of loans i.e. debentures and bonds  Redemption of preference share capital  Buy back of equity shares. CASH INFLOW CASH OUTFLOW
  42. 42. Cash Flow The Primary Role of Strategic Governance 1. What activities/projects is the organization currently funding? 2. What value are these investments returning? 3. What alternative investments could generate higher value?
  43. 43. Run Break Timer – 60 minutes
  44. 44. What’s in your Wallet  Directions: “Pick a coin from your wallet. Look at the date. I’d like you to think on one thing that happened that year that impacted your financial situation (good or bad!) .  Then, we’ll go around the table and ask you to share briefly your year.” Welcome Back
  45. 45. A = 1 B = 2 C = 3 D = 4 E = 5 F = 6 G = 7 H = 8 I = 9 J = 10 K = 11 L = 12 M = 13 N = 14 O = 15 P = 16 Q = 17 R = 18 S = 19 T = 20 U = 21 V = 22 W = 23 X = 24 Y = 25 Z = 26
  46. 46. Financing
  47. 47.  Is the act of providing funds for business activities  simply put, it is the act of bringing money into an organisation.  Businesses can be financed in a number of ways Financing
  48. 48. There are two main types of financing  Debt  Equity Financing
  49. 49.  Debt must be paid back, but it is often cheaper than raising capital due to tax considerations.  Equity does not need to be paid back, but it relinquishes ownership to the shareholder  Most organisations use a combination of both to finance their Business activities Financing
  50. 50.  Debt financing is a simple concept wherein you borrow money from banks, lenders or other financial institutions with the promise of paying back the borrowed amount, plus the agreed interest at a later date.  Equity financing involves bringing in investors or partners who provide capital in exchange for a share in the ownership of the business.  These partners generally invest because they believe in the business idea & expect to make profits out of it when the business becomes successful.
  51. 51.  Businesses generally use a combination of both these sources of finance depending on the industry & their risk appetite.  For more riskier businesses, equity financing is considered more viable.  For the traditional & stable businesses, debt is considered more suitable. Financing
  52. 52. Reckless Trading
  53. 53.  Reckless trading is where a director is knowingly a party to the carrying on of any business of the company in a reckless manner.  The most common occurrence of reckless trading is where it can be shown that the directors have permitted the company to incur liabilities without having reasonable grounds to believe that those debts would be paid. Reckless Trading
  54. 54.  Reckless trading can lead to personal liability for directors.  Failure to keep proper books of account is another offence that can lead to personal liability However  if the director can show that he/she took reasonable steps or appointed another competent and reliable person to keep the company accounts he/she can avoid liability. Reckless Trading
  55. 55. Run Break Timer – 15 minutes
  56. 56. Internal Audit
  57. 57. The audit committee assists the board of directors fulfil its corporate governance and overseeing responsibilities in relation to an entity's financial reporting, internal control system, risk management system and internal and external audit functions. Role of Internal Audit
  58. 58. Audit Committees What is an Audit Committee?  An audit committee is a committee of directors which may be required by law or otherwise to regularly assess the validity of the Co-operative’s financial and other reporting arrangements, as well as overseeing its internal and external audit processes.  The Committee may also have further responsibilities assigned to it by the Board of Directors .  However at all times, the ultimate responsibility for ensuring that the Co-operative complies with its legal requirements remains with the full Board.
  59. 59. Audit Committees What is the value of an Audit Committee?  An audit committee helps to minimise financial, operational and compliance risks for the Co-operative.  It independently scrutinises the financial and other information made available to the Board of Directors and assists the Board in determining the validity of a Co- operative’s financial statements and in enhancing the quality of financial reporting.  It also monitors the ongoing value of the external audit in the interests of shareholders in particular and keeps under review the performance of any internal audit function within the Co-operative.
  60. 60. Audit Committees Are we required to establish and Audit Committee?  Not necessarily.  In most jurisdictions, the statutory requirement to establish an Audit Committee only applies to Public companies or “large” private companies, not Co-operatives.  However, the Audit Committee is an important structure to aid Co-operative Boards to manage financial and other risks more effectively.
  61. 61. Financial Risk Management and the Role of the Audit Committee  Audit Committee is a sub-Committee Delegated a function but not a responsibility All directors equally responsible  Best practice - every board should what is best suited for its particular circumstances.  Arrangements - proportionate to the task, vary according to size, complexity and risk profile
  62. 62. The Audit Committee  Has a particular role, act independently, ensure proper financial reporting and internal controls  An open and transparent working relationship with a high level of mutual respect are essential.  Must be prepared to take a robust stand  to provide information freely to listen to their views and to talk through the issues openly
  63. 63. The Audit Committee  Management is obliged to properly inform committee  The board should ensure full cooperation from directors and staff, all information to be provided  Executive board members (if they exist) – duty to provide all the information
  64. 64. The Audit Committee  Core functions: expressed in terms of ‘oversight’, ‘assessment’ and ‘review’ of a particular function.  It is not the duty to carry out functions that properly belong to others To do so could undermine the responsibility of others  Should be satisfied that proper systems and allocation of responsibilities are in place – they should not seek to do the monitoring themselves.
  65. 65. The Audit Committee However,  the high-level oversight function may lead to detailed work. Must intervene if there are signs that something may be seriously amiss. For example, committee not satisfied with explanation provided, may need to seek independent advice
  66. 66. The Audit Committee Have wide-ranging, time-consuming and sometimes intensive work to do. Companies need to make the necessary resources available. Including suitable payment to committee members themselves. They bear significant responsibility and time commitment to the job. Induction and training should be provided to members as required
  67. 67. Establishment and terms of reference  The committee should have at least three (suggested) members.  Main role and responsibilities should be set out in written terms of reference and should include:  to monitor the integrity of the financial statements, including any formal announcements, and review significant financial reporting judgements;  to review the internal financial controls and, the company’s internal control and risk management systems (if no separate committee);  to monitor and review the effectiveness of the internal audit function;  to make recommendations to the board, for approval in general meeting, in relation to the appointment of the external auditor, the remuneration and terms of engagement;  to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process;  to develop and implement policy on the engagement of the external auditor to supply non-audit services; and  to report to the board on how it has discharged its responsibilities.
  68. 68. Terms of Reference  The Board of Directors should prepare and approve written terms of reference outlining the audit committee’s role.  These terms of reference should be available for information at the Annual General Meeting and reviewed annually by the Board.  The terms of reference should specify how to discharge its responsibilities, and outline the programme of meetings.  The audit committee should, at least annually, meet the external and internal auditors, without management being present, to discuss issues arising from the audit.
  69. 69. Membership and Appointment  The board should establish an audit committee of at least three independent non-executive directors.  In smaller companies the company chairman may be a member of, but not chair.  At least one member of the committee must have recent and relevant financial experience.  Appointments should be made by the board on the recommendation of the nomination committee, in consultation with the audit committee chairman.  Appointments - up to three years, (may be extended, with a cap), members must continue to be independent.
  70. 70. Meetings of the Audit Committee (1)  The chairman and company secretary, decide the frequency and timing of meetings. The number of meetings depends on the role and responsibilities Recommended at least three meetings per year,  Only the chairman and members entitled be present at the meeting. Non-members may attend for a particular meeting or a particular agenda item – if agreed by committee It is to be expected that the external audit lead partner and finance director will be invited regularly to attend. Others may be invited to attend.
  71. 71. Meetings of the Audit Committee (2)  Sufficient time should be allocated for the meeting. A sufficient interval should be allowed between audit committee meetings and main board meetings to allow any work arising from the audit committee meeting to be carried out and reported to the board as appropriate.  The committee should, at least annually, meet the external and internal auditors, without management, to discuss matters relating to its remit and any issues arising from the audit.  Formal meetings of the audit committee are the heart of its work. However, they will rarely be sufficient. The chairman and committee members, may wish to keep in touch on a continuing basis with the key people involved in the company’s governance.
  72. 72. Resources  Sufficient resources should be provided  Access to the services of the company secretariat on all audit committee matters including: assisting the chairman in planning the audit committee’s work, drawing up meeting agendas, maintenance of minutes, drafting of material about its activities for the annual report, collection and distribution of information and provision of any necessary practical support.  Company secretary – issues information and papers in timely manner  Funds available if / when independent advice is required
  73. 73. Skills, experience and training  Desirable that committee member with recent and relevant financial experience has a financial qualification.  Level of financial literacy among the other members will vary.  Provide induction programme for new members. Outlining the role, terms of reference and expected time commitment, an overview of the co-operative’s business model and strategy, etc.  On-going and timely training should be provided. It may include, for example, understanding financial statements, applicable accounting standards and recommended practice; the regulatory framework for the co-operative’s business; the role of internal and external auditing and risk management.  Training may take various forms, including attendance at formal courses and conferences, internal company talks and seminars, and briefings by external advisers.
  74. 74. Relationship with the Board  The Board decides the role of the audit committee  The committee undertakes tasks on behalf of board, results reported to and considered by the board.  The terms of reference – tailored for individual co-operative  Review annually; terms of reference, committees own effectiveness and recommendations made to the board.  Committee reports to the board - how it discharged its responsibilities, including:  significant issues considered and addressed regarding the financial statements;  Assessment & recommendation - external audit / auditor; and  Any other issues.  Disagreements: between audit committee and the board, allow adequate time for discussion, with view to resolving the matter.
  75. 75. Role and responsibilities Financial Reporting (1)  Financial Statements : Committee reviews and reports to the board on, significant financial reporting issues and judgements made  It is management’s, not the audit committee’s, responsibility to prepare complete and accurate financial statements  Committee should consider significant accounting policies, any changes to them and any significant estimates and judgements. Management should outline the methods used
  76. 76. Role and responsibilities Financial Reporting (2) Considering the external auditor’s view, the committee must consider whether appropriate accounting policies, estimates and judgements have been made. The committee should review the clarity and completeness of disclosures made. Where, the committee is not satisfied with any aspect of the proposed financial reporting, their views expressed to board.
  77. 77. Role and responsibilities Whistleblowing (Protected Disclosures)  The committee - review process which staff may raise concerns  Objective – ensure arrangements are in place for the proportionate and independent investigation and for appropriate follow- up action.
  78. 78. Role and responsibilities Internal controls and risk management systems  Review the co-operative’s internal financial controls and risk management systems (if no separate committee)  Management responsible;  the identification, assessment, management and monitoring of risk,  for developing, operating and monitoring the system of internal control and  for providing assurance to the board that it has done so.  The audit committee* receives reports from management on effectiveness of the systems and conclusions of testing carried out.  The audit committee* reviews and approves the statements in the annual report on internal control and the management of risk. *unless it is expressly dealt with by the Board or a Risk Committee
  79. 79. Role and responsibilities The Internal Audit Process Monitor and review the effectiveness of internal audit function If no internal audit function, review annually is it required, recommendation to the board, absence explained The need will vary depending on specific factors including the scale, diversity and complexity of activities and cost/benefit considerations. An adequately resourced internal audit function may provide such assurance and advice. Other functions within the co-operative may also provide assurance and advice covering specialist areas.
  80. 80. Role and responsibilities The Internal Audit Process When assessing the need for an internal audit function, consider any changes to trends, co- operative’s activities, markets or other external environment factors, which have increased / may increase risks faced by the co-operative. If no internal audit function, management must apply other monitoring processes to ensure the system of internal control is functioning as intended. The audit committee - assesses whether such processes provide sufficient and objective assurance.
  81. 81. Role and responsibilities The Internal Audit Process  Review and approve the function’s remit, considering complementary roles (internal/external audit functions)  Ensure necessary resources and access to information is provided to carry out its function  The audit committee should approve the appointment or termination of the head of internal audit
  82. 82. Role and responsibilities The Review of the work the committee should: Internal auditor - direct access - board chairman /audit committee, accountable to audit committee; review / assess the annual internal audit work plan; receive results periodically from internal auditors review and monitor management’s responsiveness to findings and recommendations; Annual meeting with head of internal audit without management; and monitor / assess the role and effectiveness of the internal audit function - risk management system.
  83. 83. Role and responsibilities The External audit process Audit committee is the body responsible for overseeing the company’s relations with the external auditor.
  84. 84. Role and responsibilities Appointment and tendering Committee’s primary responsibility, recommendation of appointment, reappointment, removal external auditors If the board does not accept the recommendation, statement in annual report outlining why views differ Committee’s recommendation - based on objective assessments. If new appointees considered - tendering process
  85. 85. Role and responsibilities  Committee annually assess external auditors, and report to the board on, their qualification, expertise and resources, and independence of and effectiveness of the audit process, recommendation to shareholders external auditor be reappointed.  Assessment should cover all aspects of the audit service provided by the audit firm.
  86. 86. Annual audit cycle At start of cycle, committee ensures appropriate audit plan in place Committee considers whether work plan appears consistent with the scope of the audit engagement. Committee – reviews the findings with external auditors. Review should: discuss any major issues that arose (resolved/unresolved); review key accounting and audit judgements; and review levels of errors identified – obtain explanations
  87. 87. Annual audit cycle Committee: review audit representation letters Committee: consider information provided is complete and appropriate. On-going monitoring process, committee review management letter – including management’s responsiveness to findings and recommendations.
  88. 88. Annual audit cycle At end of cycle, committee assess the effectiveness. Committee should: review – did auditor meet agreed audit plan, reasons for any changes obtained; consider the robustness and perceptiveness of the auditors; obtain feedback; conduct from key people involved; review and monitor content of management letter, any recommendations have they been acted upon, if not reasons why; and report to the board; effectiveness - external audit process.
  89. 89. Annual audit cycle  Committee assess independence and objectivity of the external auditor annually, considering relevant laws, regulation and professional requirements, including non- audit services. Relationships review ensure auditor’s independence and objectivity.  Committee seek reassurance that the auditors and their staff are independent and objective. Obtain from the audit firm, annually, information about policies and processes for maintaining independence.  Committee develop and recommend policy to board regarding non-audit services. Policy reviewed regularly. Provision of services should not impair the external auditor’s independence or objectivity.
  90. 90. Communications with Members  Terms of reference of the audit committee, including its role and the authority should be available. Annual report section outlines the work of the committee in discharging those responsibilities.  The audit committee section should include, inter alia: a summary of the role of the audit committee; the names and experience level of all members during the period; the number of audit committee meetings; the significant issues considered in relation to the financial statements and how these issues were addressed; Explanation of the assessment; effectiveness of the external audit process, approach taken to the appointment or reappointment external auditor, and length of tenure current audit firm, any contractual obligations restricting choice; and Non-audit services, how auditor’s objectivity and independence is safeguarded.
  91. 91. Challenging questions for members of Audit Committees to ask Self-assessment of committee effectiveness  Have recent developments created a need for a review of the work of the audit committee?  Are the audit committee’s terms of reference appropriate?  Is the role of the committee vis-à-vis the board sufficiently clear?  How does the audit committee benchmark against others?  Is the committee’s membership sufficiently independent with appropriate experience and expertise?  Do steps need to be taken to avoid audit committee overload?  What should be on the audit committee’s agenda for the coming year?  Does the audit committee meet often enough and at the right times of the year?  Does the audit committee understand and concur with the significant risks facing the Co- operative?  Is the audit committee properly informed on a timely basis of relevant matters by management and the auditors?  Does the audit committee utilise internal and external audit effectively?  Do changes need to be made to how the audit committee reports to the board as a whole?
  92. 92. Challenging questions for members of Audit Committees to ask Financial and wider reporting issues  Could the directors be accused of manipulating the figures and disclosures in published information?  Are there any aspects of the financial reporting which could attract the attention of the Financial authorities?  What is the overall quality of the Co-operative’s financial reporting, including its reported earnings?  Are there areas where revenue or earnings recognition could be pushed too far?  Can the overall level of prudence be questioned?  Are the accounting estimates fair and reasonable?  If any significant changes are being made to accounting policies, are they likely to be challenged?  Can the going concern statement be supported?
  93. 93. Challenging questions for members of Audit Committees to ask External audit  Is the audit more than just a mere compliance exercise?  Is management putting undue pressure on the auditors to limit their work?  Does the audit ‘home in’ on the issues that really matter?  Is there sufficient audit coverage across the company or group?  What safeguards are there over threats to the auditors’ independences?  Why aren’t unadjusted misstatements in the draft financial statements detected by the auditors being corrected?  Is there a risk of the financial statements being qualified by the external auditors?  Do the external auditors communicate adequately with the audit committee?  Is the external audit partner and his or her firm delivering what they promise?  What recommendation should be made to the board about the audit appointment?
  94. 94. Challenging questions for members of Audit Committees to ask Risk management and internal control  To what extent should the audit committee be involved in reviewing the effectiveness of internal control?  Does the system of internal reporting give early warning of matters that are going wrong?  Is responsibility for each of the Co-operative’s significant risks sufficiently owned by a member of the executive team?  To what extent is there a need to raise the awareness of those at more junior levels to the importance of risk management?
  95. 95. Challenging questions for members of Audit Committees to ask Internal audit  Where there is no internal audit function, should the audit committee recommend to the board that such a function be established?  Can the audit committee do more to support an existing internal audit function?  What are the reporting lines for internal audit and does the function have effective terms of reference?  Does the scope of internal audit work address the significant risks?  Is the internal audit function adequately resourced?  What are the areas of the company about which internal audit function has concern? Including potential problem areas?
  96. 96. Challenging questions for members of Audit Committees to ask Fraud and ethics  Does the company have the right ‘tone at the top’?  Do circumstances exist that could increase the potential for fraud?  Are effective anti-fraud policies and procedures in place and operating efficiently?  Have arrangements been established to deal with situations of suspected or actual fraud?  Are inappropriate shortcuts being taken which could ultimately damage the Co-operative’s reputation?  Is there a code of corporate conducts and is it distributed to all employees?  How are breaches in the Co-operative’s code of corporate conduct dealt with?  Do any irregularities that have come to the audit committee’s attention indicate more widespread actual or potential problems?
  97. 97. Challenging questions for members of Audit Committees to ask New economy issues  Has a proper analysis been prepared of the risks associated with e-business activities?  What has been done to establish internet security and anti-fraud controls?  Have the legal, regulatory and tax implications of e-business been properly considered?  Can the back office systems cope with the demands of web architecture and of the e- business strategy?  What steps are being taken to ensure that joint venture partners adhere to proper conduct and control standards?  What procedures have been put in place to obtain assurance about the integrity of processes that have been outsourced?  Are the accounting practices for e-business appropriate?  Does the going concern basis for the preparation of the financial statements remain appropriate?  What controls exist over the reporting of financial information on the company’s website?
  98. 98. Questions Financial Risk Management