Governance, Risk and Ethics

2 Section A: Governance and responsibility Section B: Internal control and review Section C: Identifying and assessing risk Section D: Controlling risk Section E: Professional values and ethics Governance, risk and ethics

3 Section B: Internal control and review B1. Management control systems in corporate governance B2. Internal control, audit and compliance in corporate governance B3. Internal control and reporting B4. Management information in audit and internal control Designed to give you knowledge and application of:

4  Describe the function and importance of internal audit. [1]  Explain, and discuss the importance of, auditor independence in all client- auditor situations (including internal audit). [3]  Explain and assess the nature and sources of risks to, auditor independence. Assess the hazard of auditor capture. [3]  Explore and evaluate the effectiveness of internal control systems. [3] Study Guide B2: Internal control, audit and compliance in corporate governance Learning Outcome

5 Describe the function and importance of internal audit Extremely essential for assurance & investigation of managerial processes that support management objectives Key aspects of business Internal audit ensures Risk management Internal control Governance processes  Identification of risk  Estimation of significance of risk  Assessment of likelihood of occurrence of risk  Decision on action to manage risk  Review economy, efficiency & effectiveness of operations  Review compliance with laws & other external regulations  Reliability of financial reporting  Stakeholder satisfaction  Encourage transparency & accountability Refer to page 246 Continued…

6 Under the UK combined code Comply / explain provisions make it Assessing requirement of internal audit Factors that have increased / are expected to increase risk Restructuring of organisation Changes in reporting process / information system Increased irregularities in existing internal control system Continued…

7 Value for money audit (VFM) VFM principle implies that efforts must be made to ensure available funds are spent in the provision of services in a way that maximises the benefit to the users of services Scope of IA Monitoring of internal control VFM IT audit Financial audit Advice & assurance regarding risk & controls Compliance audit Special investigation Reviewing controls, monitoring their operation & recommending improvements Economy: lowest possible cost Efficiency: maximise output / input Effectiveness: meet objectives using available resources Focused mainly on internal controls & provide assurance regarding errors & frauds Evaluation of controls & advice to mitigate risk Examination of controls within IT infrastructure Investigation into certain specific areas of operation in business Provides assurance regarding compliance with rules Scope of audit

8 Importance of, auditor independence, nature and sources of risks to, auditor independence and hazard of auditor capture Ensuring independence of internal auditor Internal audit department Internal auditor must not be involved Appointment / termination of CIA Review of internal controls IA should provide objective services & impartial opinion Should have suitable reporting structure In operations / systems of entity In all areas of business Based on recommendations of audit committee Refer to Test Yourself 2 on page 253 Continued…

9 Assessing independence of external auditor (EA) – responsibilities of audit committee To take undertaking from audit firm that firm’s staff have no relationship with company To obtain statement of audit firm’s policies regarding independence To monitor application of management’s policy relating to employment of auditor’s staff Review policies of audit firm  At first appointment of EA  Second partner review  Rotation of partners after 5 years  Such a staff might affect independence of the auditor  With respect to guidelines issued by regulatory & accounting bodies Refer to LO 5 on page 264 Continued…

10 Threats to auditor independence Self-interestSelf-review Familiarity / trust IntimidationEthical threats Direct / indirect interest in client & fear of losing a client Auditor will lose objectivity if he becomes an advocate for a client Auditor is / feels threatened by audit work Occurs when auditor audits own / colleague’s work Auditor has close relationship with audit client Auditor faces risk of acting against interests of company Advocacy Continued…

11 Safeguards to auditor independence Rotation of partners Procedures to be performed by auditing firm Review by second partner Disclosure to audit committee Restriction on auditor’s relationships with audit client Prohibition on owning stock of audit client Not assigning work to auditors whose family members are employed by company Continued…

12 RECAP  Describe the function and importance of internal audit. [1]  Explain, and discuss the importance of, auditor independence in all client- auditor situations (including internal audit). [3]  Explain and assess the nature and sources of risks to, auditor independence. Assess the hazard of auditor capture. [3]  Explore and evaluate the effectiveness of internal control systems. [3]