Lecture slide ,chapter 2, Governance and the Auditor

1. Chapter 2
Governance and the Auditor
Prepared by Dr Phil Saj
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2. Learning objectives
1. Describe the nature of governance
2. Appreciate the role of the auditor in governance
3. Discuss the issues of internal control, risks and
earnings management in governance that concern the
auditor
4. Appreciate the roles of internal and operational audits
in the governance processes
5. Consider the significance of the role of the audit
committee in governance
6. Describe the nature of governance and the type of
audits in the public sector.
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3. Key auditor interactions
Audit
Committee
External
Users
Auditor
Board
Shareholders
Legend: Responsible to: ; Working relationship: ; Interested:
Adapted from Competition Commission, United Kingdom, 2013.
Management
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4. What is governance?
The exercise of economic and administrative
authority to manage an entity’s affairs.
Concerned with processes by which
decisions are made and implemented.
Applicable to all entities.
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5. What is governance?
“…characterised by participation, transparency,
accountability, rule of law effectiveness, equity… Good
governance refers to the management of [the]
governing body in a manner that is essentially free of
abuse and corruption, and with due regard for the rule
of law.” (OECD, 2010)
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6. Governance
Agency structure:
Separation of ownership and management.
Members reply on management (agents).
Agents conduct the business on behalf of
members.
Authority of governing body underpinned by
transparency and accountability.
Independent auditor adds to the credibility of the
the agent’s conduct.
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7. Enterprise governance
“The set of responsibilities and practices exercised by
the board and executive management with goal of
providing strategic direction, ensuring the objectives
are achieved, ascertaining that risks are managed
appropriately, and verifying that the organisation’s
resources are used responsibly.”
(CIMA & IFAC 2002)
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8. Enterprise governance
Value Creation
Resource Use
Business Governance:
Performance
Accountability
Assurance
Corporate Governance:
Conformance
Enterprise Governance
Source: Adapted from CIMA/IFAC, Enterprise Governance: Getting the Balance
Right, February 2004, p.10, www.ifac.org.
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9. Enterprise governance
Based on organisation's entire accountability framework.
It includes:
Roles of chair of the board and top management.
Composition, skill, remuneration and training of the board
and its committees.
Adequacy and reasonableness of executive
compensation schemes.
Internal control structure, risk management and role of
internal audit.
Financial reporting and disclosure regime.
Independence of the audit function.
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10. The auditor and governance
Overall objective of the auditor:
“ ...to obtain reasonable assurance about whether
the financial report as a whole is free from
material misstatement, whether due to fraud or
error…” (ASA200.11)
The effectiveness of the assurance engagement
is a function of the auditor’s relationship with the
entity’s management and governing body.
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11. The auditor’s role in enterprise
governance
Provides assurance of verifiability, compliance
and accountability of the organisation.
May also be required to ensure the organisation
and board of directors have complied with
relevant legislation and regulations.
Performance dimension includes setting strategic
directions, managing risk and key performance
drivers and decision making processes.
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12. Corporate governance
and auditing
Corporate governance
Framework of rules, relationships, systems and
processes by which authority is controlled.
Includes structure, systems and relationships
between board of directors, management,
auditors regulators shareholders and the public.
Encourage companies to create value and
provide accountability and control systems
commensurate with risks involved.
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13. Corporate governance
and auditing
OECD corporate governance principles:
Ensure basis for an effective corporate
governance framework though transparency
and efficient markets, legal and regulatory
requirements.
Ensure equitable treatment of shareholders.
Deal with conflicts of interest.
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14. Corporate governance and
auditing
Baker and Owsen (2002): Concept that audited financial
reports should provide assurance that:
The financial statements are right;
The company will not fail;
There has been no fraud;
The company has acted within the law;
The company has been competently managed; and
The company has adopted a responsible attitude to
environmental and societal matters.
Highlights expectations of stakeholders’ view of auditors role
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15. Business governance
Assurance services that add value:
Due diligence audits
Forensic and probity audits
Social auditing
Performance audits
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16. Business governance
Role of accountants and auditors:
Provide assurance of integrity and reliability of
internal control and risk management systems.
Ensure awareness of possible financial
misstatements.
Ensure audit independence.
Enhance audit quality control processes.
Actively practise the code of conduct.
Monitor development of and adherence to
auditing standards.
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17. Audit trinity concept
External audit, internal audit and audit
committee as a tripartite.
Audit function is to perform specific duties that
complement and interlock with the other
members.
Internal audit includes corporate governance
and accountability matters.
Audit committees oversee internal audit and
external audit functions.
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18. Issues in governance:
Internal control and risk management
Effective governance and accountability based on
effective functioning of internal control and risk
management.
Risk management is the culture, process and
system established to manage opportunities
and minimise/ control adverse risks.
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19. Issues in governance:
Internal control and risk management
Risk management system
Define objectives, principles and priorities.
Formulate overall risk classifications
Understand business activities and processes
Identify and classify risks
Assess probability & possible consequences of risk
Compare and analyse risk tolerance
Evaluation of controls, costs and monitoring process
Assess exposure and report position
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20. Issues in Governance:
Relationship of objectives and components of ERM
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21. Issues in governance:
Financial misstatements
Financial statements should be prepared
without material misstatements.
Earnings management is when financial
statements or transactions are managed to
achieve a particular outcome.
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22. Internal Auditing
“An independent, objective assurance and
consulting activity designed to add value and
improve an organisations operations. It helps an
organisation accomplish its objectives by bringing a
systematic, disciplined approach and evaluate and
improve the effectiveness of risk management,
control and governance processes.” (IPPF, 2012)
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23. Internal Auditing
Internal audit encompasses examination and
evaluation of:
Adequacy and effectiveness of governance
and internal control structure.
The quality of performance.
The procedures of risk identification and
management
Mechanisms to ensure regulatory compliance.
Supplements the work of independent auditors.
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24. Internal Auditing:
Organisational and functional differences between
internal and independent auditors
Internal Auditor External Auditor
Employer Companies and Government
Units
Public Practice Entities
National
Organisations
Institute of Internal Auditors
Australia
Institute of Chartered
Accountants in Australia, or
CPA Australia
Certifying
Authority
Certified Internal Auditor Institute of Chartered
Accountants in Australia, or
CPA Australia
License to
Practice
No Certified Practicing Accountant.
Registered Company Auditor.
Public Practice Certificate.
Primary
Responsibility
To the board of directors To members
Scope of audits All activities of the organisation Mainly financial statements
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25. Operational auditing
Examines use of resources to evaluate
whether they are being used in the most
efficient and effective manner.
Three approaches:
Risk-based audit approach
Value-for-money approach
Process audit approach
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26. Operational auditing
Objectives
Assist directs to discharge their responsibilities
Improve credibility and objectivity of accounting
process
Improve effectiveness of internal and external
audit function
Facilitate independence of internal and external
auditors
Strengthen role of non-executive directors
Fosters an ethical culture
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27. Operational auditing
Five Phases:
1. Preliminary preparation
2. Field survey
3. Program development
4. Audit application
5. Reporting and follow-up
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28. Audit committees
Enhance effective internal accountability.
Facilitate participation of independent
directors in governance process.
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29. The role and objectives of the
audit committee
Assist directors in discharging their duties.
Improve the credibility and objectivity of the accounting
process.
Improve the effectiveness of the internal and external audit
functions and facilitate communications between the
board and the internal and external auditors.
Facilitate the independence of the internal and external
auditors.
Strengthen the role and influence of the non-executive
directors.
Foster an ethical culture throughout the organisation.
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30. Requirements of public
accountability
Head of State
Parliament
• Upper House
• Lower House
Parliamentary
Committees
Ministry
Executive
Council
Auditor-
General
Government
Cabinet
Public Sector Bodies
• Government Companies and Authorities
• Government Agencies
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31. Performance audits
Defined as: “an independent, objective and
systematic assessment of public sector entities’
programs, resources, information systems,
performance measures, monitoring systems and
legal and policy compliance.” (ANAO, 2013)
Includes consideration of:
Economy
Efficiency
Legislative and policy compliance
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32. Performance audits
Types of performance audits
Audits of a program or activity in an entity
Protective security audits
Cross-entity audits
Follow-up audits
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33. Performance engagements
Two types of performance engagements:
Performance audits, which provide reasonable
assurance, and
Performance reviews, which provide limited
assurance.
Ethical requirements: compliance required.
Quality control: proper system required.
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34. Performance engagements
Objectives:
Expression of a conclusion
Examination of:
Economy, efficiency or effectiveness
Validity and reliability of performance
Compliance with legislation
Intended and unintended impact
Probity processes and identification of
weaknesses
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