Comprehensive audit committee training emac

E
M
A
C
ELSAM MANAGEMENT CONSULTANTS
AUDIT COMMITTEE TRAINING
By: Sako Mayrick
Dar Es Salaam
www.elsamconsult.com 1

E
M
A
C
Welcoming Remarks
 Who are we?
 Elsam Management Consultants (EMAC) is
a pool of professional consultants in
management disciplines established as a
limited liability company since 2006
 Core Functions are: Recruitment, Training
and Consultancies
 More details: www.elsamconsult.com

E
M
A
C
Welcoming Remarks
 Introduction of facilitators
 Self introduction to others on your team
 Recap- Share something on personal
experience in Risk Management and high
level expectations of this training
 Pick 1-Identify a risk-discuss it as both a
threat and an opportunity
 Report to the a large group pick a
spokesperson

E
M
A
C
AUDIT COMMITTEES
ROLE AND RESPONSIBILITIES

E
M
A
C
Contents
1. Introduction
2. Audit Committee Issues
3. Financial Management
4. Operations Management
5. External and Internal Audit
6. Other Considerations and Reporting

E
M
A
C
Part I
Introduction & Overview

E
M
A
C
Introduction
 Audit Committee is a part of governance of entity
 Governance is the system by which organizations
are directed and controlled.
 It includes rules and procedures for making
decision on corporate affairs to ensure success
while maintaining the right balance with
stakeholder’s interest.
 Audit Committee is one of the major pillars of
governance system in public companies

E
M
A
C
Entity Governance Structure
What is the entity Governance?
Discussions

E
M
A
C
Role of Audit Committee
 General
 Oversight of financial reporting
 Risk management
 Internal control
 Compliance
 Ethics
 Management
 Internal audit
 Management, the board and the audit
committee all play critical roles in entity’s tone
at the top

Role of Audit Committee
CORPORATE GOVERNANCE COMPACT
• TO OVERSEE & REPORT TO BOT NOT TO MANAGE
• TO SUPPORT/ADVISE MANAGEMENT NOT TO STIFLE OPERATIONAL PERFORMANCE
• TO HAVE MEANINGFUL, RELEVANT AND
TRANSPARENT INFORMATION
NOT TO HAVE INFORMATION OVERLOAD
• TO THINK, JUDGE AND ACT ON
SIGNIFICANT GOVERNANCE/RISK
ISSUES
NOT TO BE TOO PROCESS - DRIVEN
• TO ENSURE CONFORMANCE FOR
GOVERNANCE AND BETTER
PERFORMANCE
NOT TO BE INDIFFERENT TO RESULTS
INTERNAL AUDIT
EXTERNAL AUDIT
AUDIT COMMITTEE
BOARD OF TRUSTEES

Corporate Governance Model
Effective
Governance

E
M
A
C
What is an audit committee?
 It is established with aim of enhancing
confidence in the integrity of entity process
and procedure relating to internal controls
and corporate reporting including financial
reporting
 It provides an independent re-assurance to
the board through its monitoring and
oversight roles

E
M
A
C
Case Study I
Video Presentation on audit committees

E
M
A
C
Responsibilities of Audit
Committees
 Monitor integrity of financial statements of entity
 Review the Entity’s internal control system and Risk
Management Systems
 Unless a separate Committee exists
 Monitor and review of entity’s internal audit function
 Recommend to the board in relations to the appointment
of external auditor
 Approves remuneration
 Approves terms of engagement
 Monitoring the effectiveness of the external auditor’s
performance and their independence and objectivity
 Develop and implement policy on the engagement of the
external auditor to supply non-audit services

E
M
A
C
Responsibilities of AC …
 It is not a replacement for the Board
 It is a committee of the board and
therefore subordinate to the Board
 It must be given written terms of reference
for audit committee.
 The Terms of Reference must be reviewed
annually
 The Board must review annually the
effectiveness of audit committee

E
M
A
C
Audit Committees in Public Sector
 Sections 28-35 of the Public Finance Regulation, 2001 as revised in
2010 give explanation regarding the Audit Committee and Internal
Audit Service Unit
 There shall be in each Ministry Department, Agency or Region a
Committee to be known as the Audit Committee.
 Composition
 Senior members of MDA nominated by AO
 One from outside an organisation
 Total number no more than 5 not less than 3
 One member must have experience of accounting and auditing
 CAG to be informed of all meetings and have right to be represented to
the meetings
 What are the legal and regulatory framework of Audit Committees?
 Discussions
Sako Mayrick Apt Financial Consultants

E
M
A
C
Charting the course
An audit committee charter is a blueprint
for its operation and should address:
 Processes
 Procedures
 Responsibilities

E
M
A
C
Charting the course
 Sample audit Committee Charter
 Introduction
 Authority and independence
 Role
 Duties and Responsibilities
 Risk Management
 Internal Control
 Internal audit
 External Audit
 Compliance
 Reporting
 Membership and meetings (Chair, Secretary, ethical practices,meeting and
attendance), quorum, agenda)
 Relationships (Internal Audit, External audit, other executive management)
 Evaluation of Committee activities
 Review of the charter
 Approval of the charter

E
M
A
C
Case study 2
Roles and Responsibilities Audit
Committees
a. What do you think to be the critical
role of Audit Committee at Entity
b. Do you think there is a gap?
c. What should be done?

E
M
A
C
Part II
Audit Committee Issues

E
M
A
C
Audit Committee Issues
 Financial accuracy
 Risk Management
 Control Assessment
 External Audit Oversight
 Effective use of internal audit
 Objectivity
 Reporting structure
 Risk management
 Staffing
 Priotization
 Adding value

E
M
A
C
Best Practices in AC
 Should comprise of Independent non-executive
directors
 Chairman of the company should not be an audit
committee member
 But may attend the committee meeting as invited guest
 At least one member of the AC should have
significant, recent and relevant financial experience
at senior level
 Members should have experience in corporate
financial matters

E
M
A
C
 Should at least annually meet the external and internal auditors,
without management, to discuss issues arising from the audit
 Sufficient internal should be allowed between audit committee
meetings and main board meetings to allow any work arising from
AC meeting to be carried out and reported to the board
 Should have sufficient resources to undertake its duties
 New committee members should be given an induction program
 Role of audit committee, ToR,
 Overview of company’s business
 Identifying the main business and financial dynamics and risks
 Meeting some company staff
 Regular training should be given to all members of audit committee
 Understanding the financial reporting and financial statements
 Company law or entity memorandum
 Formal courses
 Internal Agency talks and seminars
 Briefing by external advisers

E
M
A
C
 AC should review financial reporting issues on financial
statements, interim reports and related statements
 Judgments
 Clarity
 Completeness of disclosure
 AC should monitor the integrity of internal financial
controls
 AC should assess the scope and effectiveness of the
systems established by management to identify, assess,
manager and monitor Risks ( unless there is a separate
committee on risks

E
M
A
C
Best Practices for Audit Committee
 Annually the AC should consider whether
there is a need for internal audit function
and make recommendation to the board
 AC should review the complementing effect
of internal and external audit
 AC should approve the appointment or
termination of appointment of CAE
 AC should review and monitor internal audit
activities

E
M
A
C
Best Practices for AC
 AC should ensure that
 CAE has direct access to the board chairman and audit
committee and is accountable to audit committee
 AC should review and assess annual internal audit work plan
 AC should receive a report on the result of the internal auditors’
work on a periodic basis
 Review and monitor management responsiveness to the
Internal auditor findings and recommendations
 Meet with the head of Internal audit at least once a year
without the presence of management
 Monitor and assess the role and effectiveness of internal audit
function in overall company context of risk management.

E
M
A
C
Best Practices of AC
 AC should ensure independence and objectivity of
the external auditor annually
 At start of audit cycle, the AC should ensure that
appropriate plans are in place for the audit
 AC should review with the external auditors, the
finding of their work
 At end of audit work the AC should assess the
effectiveness of external audit process

E
M
A
C
Audit Committee Issue
The duties of care and loyalty, and the
expectation that directors will act in good
faith.
These are the primary source of Trustee
liability.

E
M
A
C
Audit Committee Issues(cont.)
Board members who wish to become
empowered guardians and builders of
corporate value must:
 Learn and follow best practices,
 avoid conflicts of interest,
 pay strict attention to board matters,
 drawing on appropriate expertise, including
their own.
 AC members should be “eyes on” “hands
off”
 The lines of authority for AC and management should be
clear and understood
 AC members must communicate openly with management
as appropriate

E
M
A
C
Challenges of Audit Committees
 Understanding the organization
 The few hours they meet is a challenge. So?
 Never be afraid to ask questions even if stupid
 Insisting heads of functions to attend the meeting so as to understand
their roles, perspectives and control
 Responding to change
 Corporates a changing so fast. So what to do?
 Ensure annual confirmation by directors and staff of compliance of key
regulations and policies
 Overseeing Risk and Control
 Apply root course analysis
 Improving continuously
 Communicating with stakeholders
 Organization failures
 Financial literacy and changing accounting rules

E
M
A
C
Current issues in AC
 Development of laws and regulations
 Significant government and regulatory interferences
 We need to be more balanced and refocus our
attention back on the business
 International Professional Practice Framework
(IPPF)
 Risk Management
 Effectiveness of Audit Committees
 Financial statements errors and fraud
investigations

E
M
A
C
Part III
Financial Management

E
M
A
C
Financial Reporting and Controls
 The central role of Audit Committee is to oversee
the integrity of entity’s financial statements and
related controls
 AC receives a great deal of financial information
and it is the key to explain the company
performance
 The Audit committee must properly understand
the operations of the company

E
M
A
C
Financial Reporting
 Understand the basic financial Reports
 Statement of financial performance
 Statement of financial position
 Statement of cash flows
 Statement of changes in equity
 Understanding the organization
 Review the business discussions of last year
 Visit company operations, zones and facilities
 Meet the business unit leaders to grasp the operational details
 Meet the finance management, internal audit, and the external auditors
 Review the analyst reports about the company
 Review the competitors financial statements and non financial information
 Understand the major business transactions and changes during the period
 Understanding the company’s regulators
 Meet the finance, taxation, and treasury personnel to understand capital
structure, tax structure and investment strategies

E
M
A
C
Financial Reporting
 The other areas of financial reporting
 Complex, difficult and risker areas
 Materiality
 Accounting policies
 Accounting estimates
 Significant changes during the reporting period
 Related party transactions
 Interim financial statements
 Timing issues

E
M
A
C
Case study 4
Issues in
Financial Reporting and Controls

E
M
A
C
Internal Controls and Risk
Assessment
 Internal Controls
 It Is an essential tool to help mitigate risks to
an acceptable level
 The best framework is the COSO internal
Control Framework, defines Internal Control as
 Process that provides reasonable assurance a
company will be able to achieve its objectives
for
 Effectives and efficiency operations
 Reliability of financial reporting
 Compliance with applicable laws and regulations

E
M
A
C
Case study 5
COSO Internal Control Framework

E
M
A
C
Role of AC on Internal Controls
 Meet with individuals who are primarily responsible for
internal control over financial reporting
 Understanding and help set a tone at the top
 Discuss with management on controls in place to mitigate
key financial reporting risks including fraud risks
 Focus discussions on areas of greatest potential risk
 Understand management plans to assess the internal
control and what role internal audit and other related
resources will play
 Understand the external auditor’s scope and plan to test
the controls
 Meeting regularly with management, internal audit and
external auditors to discuss significant deficiencies and
material weakness and management’s action plan to
respond

E
M
A
C
Role of AC on Internal Controls
Areas of potential risk for internal
controls
 Management override controls
 Outside services provider
 Information technology
 Restructuring of organsiation

E
M
A
C
Risk Assessment
 AC should oversee how management
addresses risk for financial reporting
 The risk assessment should be linked to
company strategy and risk appetite
 The AC should report to the Board on the
results of committee’s review of risk
management and internal control system

E
M
A
C
Case Study 6
Risk Assessment
Framework

E
M
A
C
Role of AC in Risk Assessment
 The AC have responsibility of overseeing the risk
management process
 How management identifies events that could put the
company at risk and how it assess the likelhood and impact of
identified risks
 How management has tailored the process to meet the
company specific needs
 Whether the process of risk management is continuous
 If individuals are assigned primary responsibility for risk
management and has appropriate expertise, statute within
the company and available time
 Ensure that all key risks are subject to the Board-level
oversight
 Understand the internal auditor role in risk management and
the extent of its audit plan covers the key risks

E
M
A
C
Part IV
Operations Management

E
M
A
C
Process Owners
 A process owner is a person who has
ultimate responsibility for the
performance of the process in realizing its
objectives measured by key process
indicators and has the authority and
ability to make necessary changes
 The focus of audit committee operations
management should be on period end
process owners

E
M
A
C
Anti-Fraud programs
 Fraud prevention and detection makes
good business sense and can provide cost
savings to entity
 The following are main anti-fraud
programs
 Performing Fraud Risk Assessments
 Creating a control environment
 Designing antifraud control activities
 Sharing information and communication
 Monitoring activities

E
M
A
C
Fraud Risk
 The CFE Report in 2010 identified
 Assets misappropriation (where employees steal or
misuse an organization's resource) are the most
common forms of fraud
 Corruption ranked the second ( where an employee
gains a personal benefit by violating his or her duty to
the company including, bribery, extortion, and conflicts
of interests)
 Financial Statement fraud ranked the last but has
greater impact
 Weakness in internal control can make a company more
susceptible to fraud

E
M
A
C
Fraud Risk
 There are many company’s fraud, but the Audit
Committee is more concerned with financial reporting
fraud
 Financial reporting fraud is a deliberate
misrepresentation of a company financial position,
stemming from intentional misstatements or
omissions in the financial statements
 Many company’s have admitted to fraudulent
financial reporting

E
M
A
C
Motivators for financial reporting
fraud
 To meet political expectations
 Personal gain, including maximizing bonuses and
compensation
 Conceal bad news, such as company’s deteriorating
financial conditions
 Increase company value
 Others
 Audit querries
 Procurement failures

E
M
A
C
Role of AC in Fraud Risk
 When the motivators for fraud are present audit
committee should
 Review the internal control
 Maintaining skepticism
 Overseeing the company strategy on financial reporting
 Assess management integrity regularly
 Review and understand the results of complaints to the
whistle blower hotline
 Fully understanding the third party transactions and significant
non routine transactions
 Have management periodically report on the control
environment and fraud prevention program.

E
M
A
C
Role of AC in Fraud Risk
Assessing the tone at the top
Overseeing company compliance
programs
Review the whistleblower
programs

E
M
A
C
Whistleblower process owner
 Whistleblower have become another source of information for
Audit Committees
 They are used to identify inappropriate behavior on part of
company personnel involving issues such as sexual harassment or
violation of anti-bribery programs
 Many experts believe that providing mechanism to allow employees
to report concerns anonymously is core to compliance programs
 Best practices requires audit committees to establish procedures
for the receipt, retention, and resolution of any complain regarding
 Accounting
 Internal accounting controls
 Auditing matters
 But other organizations have put in place regulations to prohibit
whistle blowing procedures that encourage anonymous reporting.
 The organizations using whistleblowing believe that it will decrease
the likelhood that managers who engage on wrong doing will be
able to suppress staff concerns over the long term

E
M
A
C
Role of AC in Whistleblowing
The whistleblowing must be
reported periodically to the audit
committee.
 It is important to get a summary of
all complaints received at least
annually.
Audit committees should determine
how often they wish to receive
information

E
M
A
C
Case study 7
Fraud Risk Management
Fraud Risk Management

E
M
A
C
 Management has deep insight into company
and its challenges, and therefore is best
positioned to recommend what information
the audit committee needs
 The audit committee can add value for
management
 AC should work with management to add
value by bringing an objective perspective on
financial reporting decisions and counseling
on how to handle difficult issues

E
M
A
C
 Audit committee should have positive, trusting
relationship with management , they need to
maintain their skepticism an be ready to question
management on uncomfortable topic including
 Fraud risk
 Appropriateness of judgments
 Management should expect rigorous questioning
from audit committee
 Failure of management to provide clear responses or
overly defensive that should raise red flag for the
committee

E
M
A
C
 The degree of interactions and involvement between
the committee and management shifts with changes
in
 The business environment
 Changes in company circumstances
 Capabilities of individuals in the finance function
 When the company is running in a steady state, the
committee continues to review information carefully
and challenge management when necessary, but
properly relies on management to resolve everyday
issues

E
M
A
C
 The knowledge and technical competence of the
finance team is vital to an audit committee faith in the
financial reports it reviews
 There should be discussions with the CFO on how
he/she ensures the finance team is qualified
 Assessment of performance of the finance personnel
based on witnesses at committee meetings and
responses to queries
 Reviewing confidential feedback from internal and
external auditors
 The AC should also monitor succession plan for the
CFO position

E
M
A
C
 The AC should ensure that there are formal and
informal meetings with management for a strong
relationship
 Management’s participation should focus on
engaging in meaningful dialogue with the committee,
answering questions and providing additional insights
 The following members could attend the meeting;
the CFO, CA and controller, treasurer, head of PMU
and chief information officer
 AC should hold private sessions with internal audit
head and external auditors

E
M
A
C
Case Study 9
AC Operations Management

E
M
A
C
Part 6
External and Internal Audit

E
M
A
C
Pre-audit
Physical audit
Post audit
Audit follow-up
63
Basic Audit Activities

Scope & Depth
Team Selection
E
M
A
C
Budget
Team Meeting
Preps
Entry Meeting
Documents
Pre-Audit
Physical Insp..
Functional Areas
Findings
Company De-brief
Daily Meetings
Audit
Audit Report
Corrective Action
Follow Up
Wrap-up Activities
Post-Audit
Follow-Up
Start Finish
64
Basic Audit Activities

E
M
A
C
AC and Internal Auditor
 Internal auditing is an independent, objective
assurance and consulting activity designed to
add value and improve organization's
operations. It helps an organization o
accomplish it objectives by bringing
systematic, disciplined approach to evaluate
and improve effectiveness of risk
management, control and governance process
 They are day to day tools for audit committees

E
M
A
C
AC and Internal Auditor
 The internal auditors deals with issues that are
fundamentally important to the survival of an
organisation.
 Unlike external auditors, they look beyond
financial risks and statements to consider
wider issues such as organisation’s reputation,
growth, its impact on environment and the
way it treats its employees.
 They help organizations to succeed by
combination of assurance and consulting

E
M
A
C
Evaluating External Auditors
 Audit Committee should evaluate external
auditors based on its own experience and
ask management and internal audit to
provide their own assessment

E
M
A
C
Evaluating External Auditors
 Areas of evaluation
 Caliber of external audit firm (cases, reputation and resources)
 Quality process ( approach, control, personnel and risk)
 Audit Team (competence, knowledge, resources, scope, team
member)
 Audit Scope (agreement, regulations, understanding, areas
covered)
 Audit Fees (comparison with other, variation between actual and
estimated fee, service)
 Audit Communication (inform AC on risk, governance, controls,
access with AC, feedback of service)
 Audit governance and independence ( does the AC or
management control relationship with external auditors?,
communication of internal control weaknesses

E
M
A
C
Evaluating of internal auditors
 The following are main areas for evaluation
 Understanding
 Charter and Structure
 Skills and experience
 Communication
 Performance
 Planning
 Skills and experience
 Work program
 Overall performance

E
M
A
C
Assessment of audit committee
 In addition to reviewing its ToR, the AC members should
review the effectiveness of audit committee annually
 This is done using AC self Assessment
 Areas includes
 Creating an effective audit committee
 Running an effective Audit Committee
 Professional development
 Overseeing financial reporting
 Overseeing risk management and internal control
 Overseeing external audit
 Overseeing internal audit

E
M
A
C
WHAT MAKES AUDIT COMMITTEE
EFFECTIVE
 Member experience/educational qualifications
 Inquiry
 Diligence
 Decision making
 Integrity
 Independence
 Leadership
 Communication
 Ability to work with others
No two audit committees are equal
The only way to know and factor this is at annual evaluation

E
M
A
C
Qualities of an effective audit
committee
 Strong interpersonal and communication skills
 Disciplined and focused
 Conversant with the current issues of the industry
 In-Depth knowledge of Strategic Plans
 Technical Financial Expertise
 Industry regulation knowledge
 Understand Audit Review findings
 Monitor quality of internal audit
 Help build right team
 Meet regularly with internal auditors
 Resource allocation

E
M
A
C
Qualities of an effectives committee
member
 Has appropriate and requisite experience
 Has appropriate and requisite technical knowledge about
accounting, auditing, tax, internal control and other
necessary subject areas
 Satisfies requisite independence requirements
 Is interested and committed to the company
 Is knowledgeable about the company, and its industry
 Has a willingness to learn about matters relating to the
audit committee function
 Has a thorough understanding of his or her legal
responsibilities
 Demonstrates leadership and tone at the top
 Has sufficient time availability

E
M
A
C
member
 Has sufficient time availability
 Has integrity; doing the right thin attitude
 After due consideration is comfortable (i.e., satisfied) that
the committee has complied with the laws, regulations,
rules , and charter provisions that govern and related to
audit committee activities
 Reviews and is comfortable of financial statements related
documents, securities filings and corporate communications
to the extent required by laws, regulations, rules, and audit
committee Charter provisions
 Reviews and is comfortable with the accuracy of all
documents and statements signed by or attributed to the
committee members, or the committee

E
M
A
C
member
 Is comfortable with other audit committee members, CEO,
CFO, inside auditor, outside auditor, board, counsel and
others
 What is more: individual self-confidence, humility and
conviction
 Meetings are conducted in a collaborative, participatory,
interactive and organised manner
 The services of the outside auditor, and the outside auditor
selection process are evaluated annually, and more often as
necessary
 There is an appropriate and effective anonymous whistle
blower and complaint, inquiry and investigation processes.

E
M
A
C
Other attributes of Audit Committee
 The ease and demeanor of communications between
committee members are appropriate
 The ease and demeanor of communication with other people
outside of the committee are appropriate, including the CEO,
CFO, Controller, outside auditor, inside auditor, board, legal
counsel and others
 The committee has appropriate accessibility to information
and resources paid for by the company
 The committee has appropriate accessibility to continuing
education about core areas, new developments, and hot
topics, paid for by the company
 The committee has a accessibility to independent legal
counsel and consultants, paid for by the company

E
M
A
C
Other attributes of Audit Committee
 There is an audit committee charter.
 There are prudent process for the documentation of
committee activities
 The activities and performance of audit committee are
evaluated annually; or more often as necessary
 There is prudent procedures for the timing, calendaring,
and organization of committee activities
 There is effective meeting agenda and dissemination
process

E
M
A
C
Annual Assessment
 Audit Committee Chairperson should continuously monitor the
effectiveness of the Audit Committee
 Areas of assessment includes
 Audit Committee Charter
 Audit Committee composition
 Audit Committee independence
 Meetings and Attendance
 Risk Management Assignments
 Code of Conduct – Supplier relationship management
 Reporting of fraud and illegal Acts – Whistleblower function
 Financial Expert Oversight
 Oversight of External Auditor
 Oversight of internal auditor
 Oversight of self assessment

E
M
A
C
Sample evaluation forms
 Evaluation of external auditors
 Evaluation of internal audit
 Audit committee self Assessment
 Checklist for oversight of internal auditors
 Checklist for oversight of external auditors

E
M
A
C
Case Study 10
Assessment of Audit Committee and
useful template
(see a separate guide)

E
M
A
C
Conclusion
Audit Committee

Comprehensive audit committee training emac

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (6)

Similar to Comprehensive audit committee training emac

Similar to Comprehensive audit committee training emac (20)

More from EMAC Consulting Group

More from EMAC Consulting Group (20)

Recently uploaded

Recently uploaded (20)

Comprehensive audit committee training emac