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 Audit
There are three types of Audit.
1. Financial statement audit
2. Compliance audit
3. 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 auditors
2. Independent auditors
3. 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 Auditor
The 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 Auditors
An 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 Committee
An 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.
Thanks