ACCT 304

AUDITING

Session 2 – CORPORATE GOVERNANCE

AND AUDITING

College of Education
School of Continuing and Distance Education
2016/2017
 Session Overview
• Corporate Governance is about how organizations are
managed and controlled. The composition of management,
the line of authority and responsibilities plays a major role in
auditing. This session seeks to introduce students to the
impact of corporate governance on auditing.

Mr. Donkor Slide 2

 Learning Objectives
• At the end of the session, the student will be able to
– Explain the term corporate governance
– Outline the objects of corporate governance
– Discuss the OECD principles of corporate governance
– Identify and distinguish between the various committees
of the board of directors and their role in corporate
governance

Mr. Donkor Slide 3

 Session Outline
• This session covers the following topics
– Corporate Governance
– Objects of Corporate Governance
– The OECD Principles of Corporate Governance
– Role of the Board of Directors
– Committees of the Board
– The Audit Committee

Mr. Donkor Slide 4

 Reading List
• Read Chapter Chapter 1 of Solomon J. (2013) Corporate
Governance and Accountability, 4th Edition, Willey

• Session Slides

• Other Auditing and Assurance text books available to students

Mr. Donkor Slide 5

 Corporate Governance
• Corporate governance is the system by which
business corporations are directed and controlled
• It involves the evaluation of the responsibilities of
directors, the composition of the board of directors,
board committees, internal and external audits
• It encourages running organist ions efficiently in the
interest of all stakeholders
• Corpoarte governance came to be braodly due to
agency problem

Mr. Donkor Slide 6

 Objects of Corporate Governance
• To ensure that organizations are strategically position to
achieve its aims
• To promote the effective monitoring of management by
board of directors
• To ensure accountability of the board of directors to all
stakeholders
• To ensure that the board of directors are composed of by
competent individuals
• To promote balance of power on the board
• To ensure an efficient and effective system for risk
management to ensure a fair remuneration system
Mr. Donkor Slide 7
 The OECD Principles of Corporate Governance

• These principles are to see to the strategic guidance of

the company, the effective monitoring of management
by the board, and the board’s accountability to the
company and the shareholders.
• There are six (6) main principles
– Ensuring the basis for an effective corporate governance
framework
– The rights of shareholders and key ownership functions
– The equitable treatment of shareholders
– The role of stakeholders in corporate governance
– Disclosure and transparency
– The responsibilities of the board
8
 Governance of Companies
• Companies are governed by board of directors
• Boards control the company while CEO and the
management team manage the resources of the
company
• There are two main models of the structure of the
board;
– The two-tier board
– The unitary board

Mr. Donkor Slide 9

 The Two-tier Board
• The board are the executive board and the
supervisory board

• The executive board is made up of the management

of the company. the board is in charge of the day to
day running of the company

• The supervisory board oversees the executive board.

Normally made up of representatives of employees,
investors and other stakeholders.
Mr. Donkor Slide 10
 The Unitary Board
• A single board of directors
• Have two broad categories;
– Executive: they are the directors who occupy
functional positions in the company. (e.g.
management)

– Non-executive: made up of directors who are not

employees of the company. They exercise
oversight of the actions of management (executive
directors)
Mr. Donkor Slide 11
 Role of the Board
The role of board outline by the OECD;
• Assume responsibility of leadership and control of
the corporate
• Direct and supervise the corporate’s affairs
• Make decisions in the interests of the corporate
• Review and guide corporate strategy
• Select, compensate, monitor and, when necessary,
replace key executives and oversee succession
planning.
• Review key executive and board remuneration
Mr. Donkor Slide 12
 Role of the Board
• Ensure a formal and transparent board nomination
process.
• Monitor the effectiveness of companies governance
practices and making changes where necessary
• Monitor and manage potential conflict of interest of
management, board members and shareholders
• Ensures the integrity of the company’s accounting and
financial reporting system including audits and adequate
system of control
• Oversee the process of disclosure and communication,
etc.
Mr. Donkor Slide 13
 Board Committees
• Board of directors operates through committees
• Remuneration Committee –recommend pay awards
to senior executives.
• Risk Management Committee – initiate policies on
identifying, assessing and managing financial,
business and operational risk in companies with the
assistance of internal auditors.
• Nomination Committee – recommend the
appointments of candidates for the board and senior
executives.
Mr. Donkor Slide 14
 Board Committees
• The Audit Committee - They are to liaise with
auditors and the main BOD. It is a stock exchange
requirement that all listed companies have an audit
committee made up of at least three NED members,
to review the work of external auditors. At least one
member of the committee must have recent and
relevant financial experience o be financially literate.

Mr. Donkor Slide 15

 Functions of the Audit Committee
• Monitor the integrity of financial statements
• Review the company’s internal financial controls
• Monitor and review the effectiveness of the internal
audit function
• Make recommendations for the appointment and
removal of external auditors and their remuneration
• Review & monitor the external auditor’s independence,
objectivity & the effectiveness of the audit process.
• Review arrangement for confidential reporting by
employees & investigation of possible improprieties.
 Functions of the Audit Committee
In respect of internal audit function
• Ensure the internal auditor has direct access to the board
chairman and to the audit committee.
• Review and assess the annual internal audit work plan
• Receive periodic report on the results of internal audit work
• Review and monitor management’s responsiveness to the
internal auditor’s findings & recommendation
• Meet with the head of internal audit at least once a year
without the presence of management
• Monitor and assess the effectiveness of internal audit in the
overall context of the company’s risk management system.
 Advantages of the Audit Committee

• Increasing public confidence in the credibility and

objectivity of published financial statement
• Assist (Non-executive directors) NED in meeting their
responsibilities in respect of financial reporting
• Strengthen the independent position of a company’s
external auditor by providing an additional channel of
communication
• Improve the quality of management accounting, being
better placed to criticize internal function.
 Disadvantages of Audit Committees
May lead to;
• Fear that their purpose is to catch management
• NED being overburdened with detail
• Additional cost in terms of time and money
• Undue delay associated with the two-tier BOD