Professional Documents
Culture Documents
01-112171-016
BS A & F -7A
ASSIGNMENT – 1
CASE 1
Corporate Governance
Questions:
ANSWER: A Murray Co is not yet listed on a stock exchange, it is unlikely that they
are required to comply with a code of corporate governance. They may wish to
voluntarily comply in order to send out a positive signal with stakeholders about how
the company is managed and governed.
Once the company is listed on a stock exchange it will need to become fully
compliant
ANSWER: The Company does have some non-executive directors who will bring an
independent view to decision making and will have the power to balance the views
of the executive directors.
They have established an audit committee. This means that there should be a group
of people focused on all accounting, financial reporting and auditing matters within
the company.
There is also a remuneration committee which should bring some independence and
fairness into the decisions on salaries and rewards of the directors.
ANSWER:
Weakness Recommendation
There are not enough nonexecutive At least three more NEOS need to be
directors. recruited to ensure a balanced board.
Corporate governance principles
require the board to be balanced, and
currently the executive directors
outweigh the NEDs.
This means that the executives could
ensure all of their proposals are passed
at Board meetings which reduces the
effectiveness of the NEDs.
There does not appear to be a chairman One of the newly appointed NEOS
Corporate governance principles require should be asked to take on the role of
that there is a chief executive in charge chairman.
of running the company and an
independent chairman to run the board.
This is to ensure there is not too much
power in the hands of one person and so
these two roles cannot be fulfilled by the
same person
The current NEOS do not appear to be The two NEOS need to be replaced by
independent The logic for NEDs is to independent people
being an independent view to the board
and to feel comfortable challenging the
decisions of the executive directory
As the two current NEOS are related to
the CEO, it is unlikely they would
challenge any of their decisions making
them ineffective.
The NEOS appear to have a continuous All new NED contracts should make it
contract clear that there will be a re-election
In order to make sure they work in the process every three years,
company's best interests a directors
should be subject to reelection at regular
intervals. This does not appear to be the
case here.
The NEOS have share options as part of All new NED contracts should have
their remuneration
Corporate governance principles make it remuneration based on a flat fee that is
clear that in order to maintain their adequate for the role but not excessive
independence, NEDs should be paid a
flat fee for their services and it should
not be related to company performance.
Questions:
1. Describe the steps Wimble & Co should take to manage the conflict of
interest arising from performing the audit of Murray Co and Barker Co.
2. Explain 6 ethical threats which may affect the independence of Wimble &
Co in respect of the audit of Murray Co or Barker Co, and for each threat identify
ways in which the threat might be reduced.
Previous employment with the client The audit manager should not be assigned
The audit manager used to work for to the audit of Murray Co if they would be
Murray Co audited accounting records they had
This creates a self-review threat prepared whilst employed at the client
If employment with the client was recent,
the audit manager may be auditing vary for
which they were responsible when working
for Murray Co. They may not identify
errors in their own work, or if they are
identified, they may not be brought to the
client's attention
In addition, a familiarity threat may arise as
the audit manager is likely to have
friendships with previous colleagues which
could result in the audit manager not
applying sufficient professional
skepticisms and trusting the client too
much. The firm should evaluate the gift offered
and unless trivial and inconsequential, the
audit team must not accept the equipment
Gifts and hospitality
Murray Co has offered free equipment to
the auditor.
Accepting gifts or hospitality from an audit
client may create self-interest and
familiarity threats.
The auditor may feel indebted to the client
or the offer may be seen to be a bribe from Tim Andrews should not be on the audit
the client for a clean audit opinion team for Murray Co.
Personal relationship
The audit senior's sister is the financial
controller at Murray Co and is therefore in
a position to exert significant influence
over the financial statements_
Family and personal relationships
between a member of an assurance team
and a director of the client, or an
employee of the client in a position to
exert significant influence over the subject
matter, may create familiarity, self-
interest or intimidation threats firms must not represent audit clients in
The audit senior may be too trusting of his such disputes The request should be
sister and not apply sufficient professional politely declined
scepticism.
Representing the client
Murray Co would like the audit firm to
represent the company in a dispute with
the taxation authorities. Do not perform any more work for the
This would create advocacy and self- client until the outstanding have been paid,
review threats as the audit firm would be or arrangements for payment have been
seen to be taking sides with their client. agreed with the client.
Overdue fees
The fee for last year's audit of Barker Co
has not yet been paid.
Overdue fees create a self-interest threat
where they remain unpaid for some time.
The auditor may be reluctant to raise
issues with the client in case they refuse to
pay.
In addition, overdue fees could be
perceived to be a loan. An audit firm must
not enter into any Loan arrangement with
a client