Professional Documents
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Table of Contents
CASE 1. MEG FURNITURE............................................................................................................. 3
1) Identify the weaknesses in controls in MEG’s purchases system and explain how
these weaknesses can be corrected. Explain the work an internal auditor of MEG
Furniture could carry out to check procedures in the purchases system and minimise
the risk of fraud and error................................................................................................................... 3
2) Explain what is meant by agency theory and its importance for understanding the
relationship between directors and shareholders....................................................................... 5
3) Explain the role of non-executive directors in the governance of companies and
identify their key characteristics....................................................................................................... 6
4) Identify any additional governance issues (not covered in (a) above) which could
arise in MEG Furniture.......................................................................................................................... 7
CASE 2. HD......................................................................................................................................... 8
1) Describe the weaknesses in the internal control system of HD and explain any
changes necessary to alleviate each weakness.............................................................................. 8
2) Contrast the responsibilities of the internal and external auditor in identifying
control weaknesses in a company..................................................................................................... 9
3) Explain how the efficiency and effectiveness of internal audit can be measured in an
organisation........................................................................................................................................... 10
4) Advise Ms D on the possible actions that she can take to attempt to resolve the
ethical conflict....................................................................................................................................... 11
CASE 3. RISK................................................................................................................................... 13
1) Discuss the role and responsibilities of risk committees as outlined in a principles
based corporate governance code.................................................................................................. 13
2) Explain why the Eastern Generating Company cannot guarantee the prevention of
further explosions using the ALARP (as low as reasonably practicable) principle.........14
3) With reference to The Chairman’s concerns, explain ‘risk appetite’ and demonstrate
how different risk appetites might affect the decision whether to invest in the specialist
gas technology....................................................................................................................................... 15
References...................................................................................................................................... 16
CASE 1. MEG FURNITURE
i. There are some weaknesses in the MEG Furniture’s Purchase system which could
exemplify from the case described. Firstly, The MEG Furrniture's Purchase systems
lack inventory management because inventory is the link between the production
and sale of products and is a part of short-term assets, accounting for a large
proportion, playing an important role in the production and business of enterprises
(Muller, 2019). Hence, it is indispensable to have an inventory management software
for identifying material availability. Inventory management software includes
business applications for statistics, tracking, management and organization of
product sales, raw material purchasing, and other manufacturing processes.
Businesses can use barcode or RFID-based systems to see when shipments come
in, where raw materials are located, and when their products have shipped. By using
inventory management software, businesses will save a lot of time and capacity, so
they can focus on finding, analyzing and reducing inefficiencies in the
model.Secondly, the purchase systems are still taking advantage of hand written
requisitions for purchase of material, this could lead to a limit in time-consuming and
lack in effectiveness. Thirdly, there is a lack of purchase request forms in order to
purchase materials and services in the MEG Furrniture's Purchase systems, followed
by the difficulty in management and sales. Not having a coupon can lead to sales
control as well as invoices and it can lead to loss of revenue due to dishonesty
(Mcavoy, 1986). Fourthly, there is no homogeneity in the order or order
reconciliation, the GRN does not match the consignee with the goods so they do not
know whether their goods have been received or not. Therefore, the reconciliation
between orders and GRN is very necessary and must be strictly controlled. Fifthly,
the payment process should be authorized by the executive director to ensure
greater security and ease of control (Camenisch et al. 1996).The payment process
greatly affects the financial management process of the business, so only the
authorized manager is the best guarantee. Finally, there are restrictions on paying in
cash and there are no invoices for this form of payment. Thus, it is crucial to have
invoices when paying cash, it helps to control the cash flow as well as the revenue
sources of the business (Chau & Poon, 2003).
Agency Theory is the theory that explains principal, such as stockholders, and
agents as well as executives (Shapiro, 2005). In this relationship, the employer
appoints or employs people to perform tasks. The theory of assuring to solve two
typical common problems: (i) the goals of the employer and the employee are not
contradicted called the agency problem, and (ii) the employer and the working party
agree (Mitnick, 2015).
The theory has the following meanings. Firstly, it defines the authority and rights
accorded to agents on behalf of the Principal. Secondly, it ensures the Principal's
Best Interest to be safe when performing the job. Thirdly, it defines the scope and
limits of both financial and non-financial activities that the Agent needs. Fourthly, it
facilitates the background of dispute resolution in the event of any dispute. Fifthly, it
distinguishes between the powers, responsibilities and the accountability of both the
agent and the agent. Finally, it provides compensation and payment of appropriate
expenses to enable the Agent to perform the Principal's work under the Agent
Relations.
The agency theory holds a conflict will arise when there is inadequate and
asymmetric information between the entity and the representative in the company.
Both parties have different interests and this problem is minimized by using
appropriate mechanisms that can limit the differentiation of interests between
shareholders and company managers, by establishing mechanisms. appropriate
remuneration for managers, and establish an effective monitoring mechanism to limit
unusual and self-interested behavior of company managers.
According to Healy and Palepu (2001) the optimal contract between the director and
the shareholder, the management remuneration and bonus agreement, the solution
to reconcile the benefits between the enterprise director with the benefits of external
investors. These contracts often require enterprises to use information provided by
the international economic system such as: budgeting system, cost control
information, and allocation of resources for investors to assess compliance with
commitments in contracts and assess corporate governance of corporate resources
management associated with the interests of external investors.
Non-executive directors are those who advise the business by proposing different
types of strategy and also determine the CEO's remuneration (Pass, 2004). The role
of the Non-Executive Director in Corporate Governance can be found in some typical
roles as follows. They are the company's independent consultants and do not
depend on anyone. They will provide strategic direction and direction for the CEO to
follow the organization's goals and mission. They will also play the role of overseeing
the company along with social engagement and corporate roles with social issues.
They have the power to oversee the executives and advise them on how to
troubleshoot the organization's problems.
Based on the case of MEG, there are some governance issues in MEG Furniture’s.
There seems to be no internal and external auditors in the organization to examine
MEG’s accounting practices, followed by the paucity in ethical business practice and
financial management. Hence, the organization should have an auditing system
exactly with high commitment of auditors working for checking all accounting
practices. Only managing director authority with all signatures of payment is good
enough because they could see what is happening in payment process and cash
flow. It would be excellent that external auditors can evaluate fraudulent transactions
and bring it directly to the CEO because there will be some limitations in the ethics of
the internal audit. The organization should also have a well-established software
system to perform all tasks such as auditing, sales invoices, accounting and order
management. The application of scientific and technological advances to the
business management process will help businesses save costs as well as resources.
In addition, businesses should also manage cash payments as efficiently as possible
so that the financial management process is clear and transparent. Reconciliation of
payments should be done in parallel between the checking account and the cash, it
will also help make the balance sheet much clearer and more standard. Moreover,
the organization of meetings between the board members and the executive is also
essential and it is held monthly, quarterly and annually. During meetings, views
should be set up objectively and absorb opinions from stakeholders. Finally, the
business should have at least 2 non-executive directors who specialize in two
different areas such as finance and management so that they have the right to give
suggestions to the CEO in appropriate ways (Siladi, 2006).
CASE 2. HD
There are some weaknesses in the internal systems of HD with the following
mentions. First, there would be an over workload for contracting managers because
they are both responsible for the payment and also responsible for the selection of
subcontractors. Second, the accounting department still enters in writing into the
ledger, which can lead to errors and time consuming. In addition, it also greatly
affects the ethics of the accountants because they can easily be mistyped, affecting
the payment of invoices. Third, it is that dividing too many ledgers can lead to
overlap and inefficiency. Fourth, invoices are back at internal auditor's house when
Ms D finds out. This proves that the invoice system of HD has many errors and lack
of responsibility in the invoice management. Simultaneously, the invoice should not
be kept in a private house because it is very forbidden in the audit principles
because it affects a lot of audit ethics.
Here are a few recommendations for HD to improve its internal audit system. First,
the HD should have a clear assignment of tasks to the contract manager because
they cannot do many things at the same time but instead assign additional tasks to
other levels of management such as the accounting department. Second, HD should
apply many new technologies in the management of internal audits to increase
efficiency and especially the ledger. HD should not use too many ledgers, but should
have a common ledger for all to increase management efficiency. Instead, a pooled
ledger system uses only a single ledger. All transaction data is entered into just one
data sheet with two entries, debit and credit, executed at the same time.
Furthermore, the aggregated ledger system's reporting functionality is based on a
system of user-customized analysis codes instead of a fixed account structure. It
helps keep the account system (COA) simple and the reporting capabilities stronger.
Therefore, the pooled ledger is a leap forward in accounting software technology. It
helps to streamline the financial reporting system, providing real-time information.
Third, HD should use electronic invoices instead of paper invoices, so it will be much
safer and easier to manage and avoid ethical risks of auditing. Electronic invoices
help to enter and process all information quickly and conveniently. If you encounter
errors on paper, you can completely correct them. Electronic invoices are less
cumbersome and more complicated than traditional paper invoices. Since then, the
job of managing invoices has become easier than ever (Yueting et al., 2018).
Building an effective management process saves businesses time. You can do many
other things instead of taking notes and keeping paper bills. With just a few small
steps on the computer, invoices will be stored scientifically and easy to retrieve when
needed. The manager facilitates the search. As mentioned above, just fill in some
information about the date, list and the administrative staff can immediately find the
required invoice. Moreover, these management software also prevent strange
situations and loss of important papers. Finally, HD should have a strict and careful
internal audit training system because they will have a very strong impact on the
decision-making process of business owners. Therefore, it can be said that Internal
Audit is like a beacon that paves the way for the business boat to go in the right
direction amidst the storms of the business market.
While independent auditor will report to shareholders and related parties to the
company's business operations, the internal auditor will report to Board of Directors
and senior managers in the operational structure and corporate governance (Brown,
1983).
While the internal and external inspection features are complementary and you may
want to work together carefully. However, in terms of functions and perceptions of
internal and external audits are different. These two features do not conflict with
each other but also complement each other to help businesses increasingly improve
their accounting system (Carmichael, 2004).
Internal auditors have an overall view of their employer's governance structure,
dangers, risks and manipulations on the financial aspect. In other words, often
records of non-economic records. In contrast, external auditors pay attention to the
accuracy of the amount owed to the business, the economic situation of the business
and the employer. At the same time, the external audit also focuses on the
compliance of business owners with labor regulations, state guidelines and legal
regulations (Carmichael, 2004).
To evaluate the effectiveness and reliability of the Internal Audit function in the
annual monitoring and evaluation cycle, HD needs to focus on the main areas.
Firstly, whether the Internal Audit has been independent from the Board of Directors
and the objectivity of the auditor has been properly protected by directly accessing
and reporting to the regulators.Secondly, Internal Audit has been provided with
sufficient resources in terms of personnel, capacities, skills and expertise to perform
the tasks. The annual plan covers all essential areas, including risk management
specifically in compliance with internal capital adequacy assessment (ICAAP)
procedures (Unegbu & Kida, 2011). Thirdly, Internal Audit function has been properly
empowered to execute in a timely manner with the commitment of Board of
Directors, the necessary corrective actions to address the detected weaknesses.
On the basis of the three points to be noted above, Audit Committee or Supervisory
Board will periodically evaluate the effectiveness and efficiency of the Internal Audit
with the following contents: Firstly, the heads of Internal Audit Department should be
appointed with compliance, including criteria such as reputation, experience,
independence/conflicts of interest and time commitment. Secondly, reassessment of
all activities of Internal Audit includes risk framework elements such as type of risk
and processes and methods of measuring and managing and monitoring risks.
Thirdly, evaluating the adequacy of Internal Audit function according to national and
international professional standards. Fourthly, they should assess key risk
compatibility and propose management plans. Risks are assessed as credit risk,
exchange rate risk, market risk, interest rate risk, liquidity risk, operational risk and
other risks. Fifthly, they should evaluate the approach and implementation of Internal
Audit, including continuous monitoring and improving the working environment in the
bank, identifying and monitoring the risks faced by the bank, assessing internal price
control systems, issuing recommendations to eliminate anomalies, and creating an
efficient working environment. Sixthly, they should assess the ability to warn risks,
propose preventive solutions of Internal Audit in addition to evaluating the efficiency
and productivity of banking operations (Coetzee & Lubbe, 2011).
4) Advise Ms D on the possible actions that she can take to attempt to resolve
the ethical conflict.
CASE 3. RISK
The risk committee is an independent body of the business and is often taken from a
board of directors (Abdullah & Said, 2019). They have a special privilege of
monitoring the risks that businesses may face when participating in different value
chains. They will be the observer of an overview of the environment and the risks
faced by the business both internally and externally.
The roles and responsibilities of the risk committee can be listed under the following
assessments. First, they will evaluate and recommend the Board of Directors on risk
assessment and acceptable risk levels during business operations and the process
of rating the risk levels that need attention, which in turn helps. The company has an
overall overview of the risks to avoid. Second, they have the role of assessing the
risks that the business will face and also identifying the risks that the business may
face during its operation. Third, the risk committee has a role to play in establishing
specific risk assessment policies and providing risk solutions for the business. At the
same time, they will have a clear role in the analysis of the company's financial
statements, internal risk management reports and what the company may face when
faced with independent auditors and state audits. Fourth, the risk committee will
have a role in insurance and insurance evaluation. Insurance is understood to be the
policies that businesses need to show in the process of ensuring their needs and
social duties, so the risk committee needs to consider the level of labor insurance
and cargo insurance. Fifth, it is essential that businesses are constantly reporting on
the portfolio risks and corporate governance processes. Based on the reports of the
committee, businesses can limit the risks they may face. Sixth, they will have to
investigate the enterprise on the risk areas of the business and consider the auditor's
recommendations to the board of directors, thereby drawing the risk conclusions (Al‐
Hadi, 2016). Seventh, they will appoint and facilitate the risk management team with
key factors such as employees, financial plans and various assets based on their
obligations. Eighth, they will play a very important role in devising risk management
measures that businesses can use to respond to market entry. Finally, in order for
the audit to take place accurately and smoothly, the risk committee needs to build a
risky roadmap such as ethics, corporate reputation or finance to the board of
directors for them. can make timely decisions in the management of the business.
The ALARP principle is that the activity is based on the most feasible, not the most
affordable. When using the new gas technology to pump into the underground cable
system, the Company used cost benefit analysis to balance which option is
affordable and to minimize risks. In particular, the plan should also minimize the risk
of fire and explosion as possible. Since no casualties had ever been recorded as a
result of exploding underground cables, there was no justification for purchasing and
using the specialist gas. In fact, it would be cheaper for shareholders to simply pay
the clean-up costs as well as any compensation in the event of injuries resulting from
explosions.Therefore, the Board of Directors and shareholders find this unjustifiable
to implement this new technology as a control measure for small level of risk
reduction compared to cost involved.
Risk appetite represents the types and levels of aggregate risk an enterprise is
willing to accept to proactively pursue their strategic goals (Gai and Vause, 2005). It
should be within the broader range of risk capacity and, where best possible, will be
consistent with the organization's current risk profile. A high risk appetite will use a
large portion of the capacity to risk, while a low risk appetite will use a smaller
portion, thereby creating less pressure and reducing the capital and resource
disadvantages of enterprise. A business' risk profile should be asymptotic to its level
of risk tolerance. In practice, however, it is difficult for firms to fully understand their
risks, possibly obscured by risk assessments generated internally by firms, poorly
understood correlations, and inadequate analysis of income and value drivers
(Danielsson et al., 2010) . Getting a full understanding of a company's risk - and then
risk taking - is what makes RAS exceptionally valuable.
Jonathan Swift reminded the board of The Eastern Generating Companies ‘risk
appetite’ and that shareholders invested in order to get high returns. The board’s
responsibility was to keep costs low for shareholders and customers alike. The
Eastern Generating Company has a high-risk appetite which could be exemplified
with the following identifications. The ultimate goal of the company is to keep a low
cost of production in order to benefit shareholders and customers, they only aim to
revenue. Therefore, investing in a particular gas can be a hindrance and a challenge
for a company. Certainly they will not invest because they think the risk is huge.
They often pay attention to the lowest profitability and cost instead of using new
technologies to challenge their businesses. The company's risk appetite is similar to
that of many other businesses.
In particular, fire and explosion caused by underground cables are very unlikely and
many studies have shown that we can limit the installation of underground gas.
Therefore, investment in gas is a good thing to do and is a legitimate investment to
apply new technology. Challenging new products and technologies will help
businesses create huge profits for the future. In the investment in new special gas
technology, it is essential that if shareholders are involved, they will help in
contributing a portion of the cost to make the company more motivated to make
investment in new gas technology.
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