1. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14A.1 The Combined Code (UK), July 2003: An Example of Auditors’ Review of Corporate Governance Best Practice Principles of Auditing: An Introduction to International Standards on Auditing - Ch 14 Appendix A Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage

2. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14A.2 Directors Some key provisions Example of audit implications Audit procedures (illustrative)

3. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14A.3 Some key provisions  The chairman should ensure that new directors receive a full, formal and tailored introduction on joining the board.  The board should identify in the annual report each non-executive director it considers to be independent.  Except small companies and the chairman, at least half of the board should comprise non- executive directors.  A mostly independent nomination committee which should lead the process for board appointments and make recommendations to the board.

4. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14A.4  All directors should be subject to election by shareholders at the first annual general meeting after their appointment, and to re-election thereafter at intervals of no more than three years. The names of directors should be accompanied by sufficient biographical details.  Non-executive directors should be appointed for specified terms subject to re-election and to Companies Act provisions relating to the removal of a director, and re-appointment should not be automatic. Some key provisions (continued)

5. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14A.5 Audit Implications  The control environment could be considered weak if there are insufficient non-executive directors.  If directors are not properly trained can they make strategic decisions about the company’s operations?  With more independent directors, the directors may not have the necessary understanding of the company’s business and industry it operates in to make informed strategic decisions.  With directors being up for re-election every three years there may be less continuity on the board.

6. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14A.6 Illustrative Audit Procedure 1 The board should have a formal schedule of matters specifically reserved to it for decision  –inspect the schedule of specific matters noting when this was last updated;  –inspect the board minutes recording adoption of the most recent schedule;  –consider whether the contents of the schedule are likely to be adequate for the business taking into account its size, nature and complexity;  –consider whether the schedule of matters appears to be followed by reference to board minutes throughout the period, and to any transactions, of which we are aware, that would appear to require board approval

7. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14A.7 Non-executive directors should be appointed for specified terms subject to re-election and to Companies Act provisions relating to the removal of a director.  –inspect the service contracts letter of appointment of all directors who were members of the board at any time during the period under review  –check whether the non-executive directors’ contracts specify the terms of appointment;  –consider, for those non-executive directors who came to the end of their term during the period, whether there is evidence that their re- appointment was formally considered by the board. Illustrative Audit Procedure 3

8. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14A.8 Thank You for Your Attention Any Questions?