Name Khadija-Tul-Urooj

Roll No MBNBM-20-42

Assignment Auditing

Assigned by Sir Zubair

Class MBA (NBE) 3rd Semester

Corporate governance is the system by which organizations are directed and controlled. It
encompasses the relationship between the board of directors, shareholders and other
stakeholders, and the effects on corporate strategy and performance. Corporate governance is
important because it looks at how these decision makers act, how they can or should be
monitored, and how they can be held to account for their decisions and actions.

A corporate governance system is comprised of a wide range of practices and institutions,

from accounting standards and laws concerning financial disclosure, to executive
compensation, to size and composition of corporate boards. A corporate governance system
defines who owns the firm and dictates the rules by which economic returns are distributed
among shareholders, employees, managers, and other stakeholders. As such, a county's
corporate governance regime has deep implications for firm organization, employment
systems, trading relationships, and capital markets. Thus, changes in Pakistani system of
corporate governance are likely to have important consequences for the structure and conduct
of country business.

Every company should be headed by an effective board which is collectively responsible for
the long-term success of the company and should lead and control the company’s operations.

There should be a clear division of responsibilities at the head of the company, which will
ensure a balance of power and authority, such that no one individual has unfettered powers of
decision.

Non-executive directors should constructively challenge and help develop proposals on

strategy. The board should include a balance of executive and non-executive directors such
that no individual or small group of individuals can dominate the board’s decision taking.

The board and its committees should have the appropriate balance of skills, experience,
independence and knowledge of the company to enable them to discharge their respective
duties and responsibilities effectively.

There should be a formal, rigorous and transparent procedure for the appointment of new
directors to the board. All directors should receive induction on joining the board and should
regularly update and refresh their skills and knowledge.
All directors should be submitted for re-election at regular intervals, subject to continued
satisfactory performance. The board should maintain sound risk management and internal
control systems. The board should establish formal and transparent arrangements for
considering how they should apply the corporate reporting and risk management and internal
control principles and for maintaining an appropriate relationship with the company’s auditor.

The audit committee members have responsibility to review the company’s internal financial
controls and systems, and the risk management systems, unless there is a separate risk
committee. Most large companies have an internal audit function, in which case the audit
committee should extend its monitoring role to include that function, including the evaluation
of the effectiveness of that function.

There should be a dialogue with shareholders based on the mutual understanding of

objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue
with shareholders takes place. The board should use the Annual General Meeting to
communicate with investors and to encourage their participation.

The audit committee should monitor the integrity of the company’s financial statements and
any formal announcements relating to the company’s performance. Significant financial
reporting judgements should be specifically reviewed. This means that committee members
should scrutinize all published financial information, and question and be ready to challenge
the finance director and external auditors on any contentious matters arising.

The audit committee members have responsibility to review the company’s internal financial
controls and systems, and the risk management systems, unless there is a separate risk
committee. Most large companies have an internal audit function, in which case the audit
committee should extend its monitoring role to include that function, including the evaluation
of the effectiveness of that function.

Where there is no internal audit function, the audit committee should consider annually
whether there is a need for internal audit and make a recommendation to the board, and the
reasons for the absence of such a function should be explained in the relevant section of the
annual report.
One of the key issues is that the audit committee should annually assess the independence,
objectivity and effectiveness of the external audit process, considering of the ethical
framework applicable in the jurisdiction in which the organization is operating. The audit
committee should report annually to the board on their assessment with a recommendation on
whether to propose to the shareholders that the external auditor be reappointed. The audit
committee section of the annual report should also discuss the annual assessment of the
external audit process by the audit committee and also include information on the length of
tenure of the current audit firm, when a tender was last conducted, and any contractual
obligations that acted to restrict the audit committee’s choice of external auditors.
In relation to potential threats to objectivity, the audit committee should seek reassurance that
the auditors and their staff have no financial, business, employment or family and other
personal relationship with the company which could adversely affect the auditor’s
independence and objectivity. The audit committee should seek from the audit firm, on an
annual basis, information about policies and processes for maintaining independence and
monitoring compliance with relevant requirements, including current requirements the
rotation.
 At the start of each annual audit cycle, the audit committee should ensure that appropriate
plans are in place for the audit. This includes consideration of planned levels of materiality,
and the proposed resources to execute the plan, having regard also to the seniority, expertise
and experience of the audit team. In practice this means that before any audit fieldwork takes
place, the audit firm should meet with the audit committee to discuss the audit strategy and
audit plan, demonstrating that auditing standards and quality control principles have been
adhered to in their development.

The audit committee should review, with the external auditors, the findings of their work. In
the course of its review, the audit committee should discuss with the external auditor major
issues that arose during the course of the audit and have subsequently been resolved and
those issues that have been left unresolved; review key accounting and audit judgements; and
review levels of errors identified during the audit, obtaining explanations from management
and, where necessary, the external auditors as to why certain errors might remain unadjusted.
The audit committee should review and monitor management’s responsiveness to the external
auditor’s findings and recommendations. Thus, all key audit findings should be shared with
the audit committee and discussed with them as the audit progresses.

At the end of the annual audit cycle, the audit committee should assess the effectiveness of
the audit process, by: reviewing whether the auditor has met the agreed audit plan and
understand the reasons for any changes, including changes in perceived audit risks and the
work undertaken by the external auditors to address those risks. Considering the robustness
and perceptiveness of the auditors in their handling of the key accounting and audit
judgements identified and in responding to questions from the audit committee. Obtaining
feedback about the conduct of the audit from key people involved, for example the finance
director and the head of internal audit reviewing and monitoring the content of the external
auditor’s management letter (report to those charged with governance), in order to assess
whether it is based on a good understanding of the company’s business and establish whether
recommendations have been acted upon and, if not, the reasons why they have not been acted
upon, and reporting to the board on the effectiveness of the external audit process.

In summary, the audit committee carefully monitors the conduct of the audit, and plays an
important part in ensuring the quality and rig our of the external audit of the financial
statements.
Specifically, the audit committee should develop and implement a policy on the engagement
of the external auditor to supply non-audit services, taking into account the relevant ethical
principles and requirements. The audit committee’s objective should be to ensure that the
provision of such services does not impair the external auditor’s independence or objectivity.
The audit committee should consider: whether the skills and experience of the audit firm
make it the most suitable supplier of the non-audit service

whether there are safeguards in place to eliminate or reduce to an acceptable level any threat
to objectivity and independence in the conduct of the audit resulting from the provision of
such services by the external auditor the nature of the non-audit services, the fees incurred, or
to be incurred, for non-audit services both for individual services and in aggregate, relative to
the audit fee, and the criteria which govern the compensation of the individuals performing
the audit.

The audit committee should set and apply a formal policy specifying the types of non-audit
service: for which the use of the external auditor is pre-approved (i.e. approval has been
given in advance as a matter of policy, rather than the specific approval of an engagement
being sought before it is contracted) from which specific approval from the audit committee
is required before they are contracted, and from which the external auditor is excluded.
Where there is no internal audit function, the audit committee should consider annually
whether there is a need for internal audit and make a recommendation to the board, and the
reasons for the absence of such a function should be explained in the relevant section of the
annual report.

Finally, the audit committee plays a part in fraud prevention and detection in that
whistleblowing arrangements should be made so that staff of the company may raise
concerns about possible improprieties in respect of financial reporting matters.