Governance Reviewer

CHAPTER ONE: AUDIT  PUBLIC WILL BENEFIT

01 Definition of Auditing
“An audit is systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to CHAPTER 2: THE PROFESSIONAL STANDARDS
ascertain the degree of correspondence between the assertions and  Generally Accepted Auditing Standards (GAAS)
established criteria and communicating the results to interested - Minimum standard of performance that auditors should
follow
users.”
- Enhances the quality of assurance
— Auditing and Assurance Standards Council
- Guide for auditors in doing the audit
 Auditing is a systematic process.
 GAAS Groupings
 An audit is conducted objectively. - General Standards (TIP) – Characteristics of an auditor
 An audit involves obtaining and evaluating evidence about  Technical Training & Proficiency
assertions regarding economic actions and evidence.  Independence
 Auditors certain the degree of correspondence between assertions  Professional Care
and established criteria. - Standards of Fieldwork (PIE) – Audit Procedures Required
 Auditors communicate the audit results to various interested  Adequate Planning & Supervision
users.  Internal Control Consideration
02 Types of Audits & Auditors  Evidential Matters
Types of Audits - Standards of Reporting (GIDO) – Auditor’s Report Contents
 Financial Statement Audit  GAAP
financial statements of an entity are fairly presented  Inconsistency
 Compliance Audit  Disclosure
organization has adhered to specific procedures, rules, or  Opinion
regulations  Philippine Standards on Auditing (PSA)
- Detailed approach in applying GAAS.
 Operational Audit
- Issued by AASC as Interpretations to GAAS
measuring its performance
 Auditing and Assurance Standards Council (AASC)
Compliance
- Issues the PSAs
FS Audit Operational Audit
Audit - Reviews standards and practices statements issued by the
That the
organization
That the IAASB to determine adoption in the Philippines
That the financial organization’s
Assertions statements are fairly
has complied
activities are
- Practices Statements – additions to PSAs for practical
made with laws,
presented.
regulations or
conducted effectively assistance
and efficiently.
contracts.  System of Quality Control
Philippine Laws, “Policies and procedures to provide reasonable assurance of
Established Objectives set by the
Financial Reporting regulations,
board of directors. conforming to professional standards in performing audit and
criteria Standards (PFRS) and contracts.
related services.”
Reports on the PSQC 1: Requires audit firms to have their own system of quality
degree of
Auditor’s compliance Recommendations or control.
Opinion whether the FS
Report are fairly presented in
with the suggestions in  Elements of Quality Control Policies and Procedures
applicable improving business
conformance with PFRS.  Leadership Responsibilities
Contents laws, operations.
regulations, - Designed to promote an internal culture based on
and contracts.
recognition that quality is essential in the performance of
Types of Auditors
the engagements.
 External Auditors or Independent Auditors
 Ethical Requirements
- Financial Statement Audit
- Integrity
- These are independent CPAs who offer their professional
- Objectivity
services to different lions on a contractual basis.
- Professional Competence and Due Care
 Government Auditors
- Confidentiality
- Compliance Audit
- Professional Behavior
- These are Operational Audit
 Independence
- Internal auditors are entity's own employees to investigate
- Independence in Fact
and appraise the effectiveness and efficiency of operations
 Unbiased mindset
and internal controls
- Independence in Appearance
03 Independent FS Audit  Physical independence
 MANAGEMENT  Acceptance and Continuance of Client Relationships
- preparing and presenting the FS in accordance with The audit firm will ONLY accept/continue if the client has:
standards. - Integrity
 AUDITOR’S RESPONSIBILITY - Competence
- form and express an opinion on the FS based on his audit - Ethically Complied
 REASONABLE ASSURANCE  Human Resources and Assignment
- An audit conducted with PSA is designed to provide only The audit firm has sufficient, competent and ethically
this committed personnel
04 Limitations of an Audit (SERIN) o Recruitment
 Sampling Risk/Use of Testing o Performance Evaluation
 Error in application of judgment o Capabilities
 Reliance on management’s representation o Career Development
 Inherent limitations of the client’s accounting and internal o Engagement Team Assignment
control systems  Engagement Performance
 Nature of evidence o Direction
05 Principles in Auditing of FS (CPA) o Supervision
 Code of Professional Ethics o Review
 Philippine Standards on Auditing (PSA) o Consultation
 Attitude of Professional Skepticism o Engagement Quality Control Review
o Differences of Opinion
06 Need for an Independent FS Audit (CERF)
 Monitoring
 Conflict of Interest Policies and procedures should ensure continued effective application
 Expertise of other quality control elements
 Remoteness
 Financial consequences  Quality Assurance Review
07 Framework of Auditing (FINECOP) CERTICATE OF ACCREDITATION
 FINANCIAL DATA ARE VERIFIABLE - All CPA firms and CPAs are required in order to practice the
 INDEPENDENCE profession.
 NO LONG-TERM CONFLICT - Renewable every 3 years after complying with BOA
 EFFECTIVE INTERNAL CONTROL requirements
 CONSISTENT APPLICATION OF GAAP/PFRS
 CONTINUITY
 Governance Reviewer
INTRODUCTION TO INTERNATIONAL TRADE AND BUSINESS
 The Definition of International Business
 It is a cross border transaction between individuals,
businesses or government entities for anything such as
physical products, services, technology, knowledge and etc.
 A broader definition of international business may serve you
better both personally and professionally in a world that has
moved beyond simple industrial production. International
business encompasses a full range of cross-border
exchanges of goods, services, or resources between two or
more nations.
 These exchanges can go beyond the exchange of money for
physical goods to include international transfers of other
resources, such as people, intellectual property (e.g.,
patents, copyrights, brand trademarks, and data), and
contractual assets or liabilities (e.g., the right to use some
foreign asset, provide some future service to foreign
customers, or execute a complex financial instrument).
 The entities involved in international business range from
large multinational firms with thousands of employees doing
business in many countries around the world to a small
one-person company acting as an importer or exporter.
 This broader definition of international business also
encompasses for-profit border-crossing transactions as well
as transactions motivated by nonfinancial gains (e.g., triple
bottom line, corporate social responsibility, and political
favor) that affect a business’s future.
 Strategic management and Entrepreneurship
A knowledge of both strategic management and
entrepreneurship will enhance your understanding of
international business. Strategic management is the body of
knowledge that answers questions about the development
and implementation of good strategies and is mainly
concerned with the determinants of firm performance. A
strategy, in turn, is the central, integrated, and externally
oriented concept of how an organization will achieve its
performance objectives.
One of the basic tools of strategy is a SWOT
(strengths, weaknesses, opportunities, threats) assessment.
The SWOT tool helps you take stock of an organization’s
internal characteristics—its strengths and weaknesses—to
formulate an action plan that builds on what it does well
while overcoming or working around weaknesses.
Entrepreneurship, in contrast, is defined as the
recognition of opportunities (i.e., needs, wants, problems,
and challenges) and the use or creation of resources to
implement innovative ideas for new, thoughtfully planned
ventures. An entrepreneur is a person who engages in
entrepreneurship. Entrepreneurship, like strategic
management, will help you to think about the opportunities
available when you connect new ideas with new markets.
INTERNATIONAL BUSINESS and TRADE
What is Global International Trade?
 What is global trade?
 Global trade, also known as international trade, is
simply the exchange of goods and services across
international boundaries.
 When did it begin?
 Records from the 19th century BC attest to the
existence of an Assyrian merchant colony at
Kanesh in Cappadocia.
 The domestication of camels allowed Arabian
nomads to control long distance trade in spices.
 Why is trade important?
 Availability of products worldwide (competitive
advantage)
 Reduce vulnerability and dependence on the domestic
market (economy, seasonal fluctuations, weather, etc.)
 Increase in product quality because of competition
and higher quality standards required in other
countries.
 Fair trade raises working conditions that contributes
to the economy.
 Why should I trade?
 Enhance sales and profits through market expansion.
o Exporting is profitable. In fact, 60% of small
companies that engage in exporting derive 20%
of their annual earnings from exports.
 Reduce cost of products by importing less expensive
raw materials and through foreign manufacturing.
 Learn new ideas and management techniques.
 How trade works
Something to think about…
“Nations that trade don’t go to war with each other” -Guy
Tozzoli, WTCA
 What is International Business?
 Any business that involves operations in more than
one country can be called an international business.
 International business is related to the trade and
investment operations done by entities across
national borders.
 Firms may assemble, acquire, produce, market, and
perform other value-addition operations on
international scale and scope.
 Business organizations may also engage in
collaborations with business partners from different
countries.
 Apart from individual firms, governments and
international agencies may also get involved in
international business transactions.
 Companies and countries may exchange different
types of physical and intellectual assets. These assets
can be products, services, capital, technology,
knowledge, or labor.
 Internationalization of Business
 Let’s try to explore the reasons why a business would
like to go global.
 It is important to note that there are many challenges
in the path of internationalization, but we’ll focus on
the positive attributes of the process for the time-
being.
 There are five major reasons why a business may want
to go global:
1. First-mover Advantage: It refers to getting into a new
market and enjoy the advantages of being first. It is
easy to quickly start doing business and get early
adopters by being first
2. Opportunity for Growth: Potential for growth is a very
common reason of internationalization. Your market
may saturate in your home country and therefore you
may set out on exploring new markets.
3. Small Local Markets: Small local markets always
looked at internationalization as a major strategy from
the very beginning because their local market is small.
4. Increase of Customers: If customers are in short
supply, it may hit a company’s potential for growth.
In such a case, companies may look for
internationalization.
5. Discourage Local Competitors: Acquiring a new market
may mean discouraging other players from getting into
the same business-space as one company is in.
 Advantages of Internationalization
 Product Flexibility
o International businesses having products that
don’t really sell well enough in their local or
regional market may find a much better customer
base in international markets.
o Hence, a business house having global presence
need not dump the unsold stock of products at
deep discounts in the local market.
o It can search for some new markets where the
products sell at a higher price.
 Governance Reviewer
o A business having international operations may  The following are the most important factors that
also find new products to sell internationally helped globalization take shape and spread it
which they don’t offer in the local markets. drastically.
o International businesses have a wider audience  The Reduction and Removal of Trade Barriers
and thus they can sell a larger range of products  After World War II, the General Agreement on Tariffs
or services. and Trade (GATT) and the WTO have reduced tariffs
and various non-tariff barriers to trade.
 It enabled more countries to explore their comparative
 Less Competition advantage.
o Competition can be a local phenomenon. International  It has a direct impact on globalization.
markets can have less competition where the  Trade Negotiations
businesses can capture a market share quickly.  Trade negotiations The WTO agreements cover goods,
o This factor is particularly advantageous when high- services and intellectual property.
quality and superior products are available.  They spell out the principles of liberalization, and the
o Local companies may have the same quality products, permitted exceptions.
but the international businesses may have little  They include individual countries' commitments to
competition in a market where an inferior product is lower customs tariffs and other trade barriers, and to
available. open and keep open services markets.
 Protection from National Trends and Events  Transport Costs
o Marketing in several countries reduces the  Transport costs are the costs internally assumed by
vulnerability to events of one country. the providers of transport services.
o For example, the political, social, geographical  They come as fixed (infrastructure) and variable
(operating) costs, depending on conditions related to
and religious factors that negatively affect a
geography, infrastructure, administrative barriers,
country may be offset by marketing the same
energy, and how passengers and freight are carried.
product in a different country.
 Growth of the Internet
o Moreover, risks that can disrupt business can be
 Expansion of e-commerce due to the growth of the
minimized by marketing internationally.
Internet has enabled businesses to compete globally.
 Learning New Methods
 Essentially, due to the availability of the Internet,
o “Doing business in more than one country offers
consumers are interested to buy products online at a
great insights to learn new ways of
low price after reviewing best deals from multiple
accomplishing things.
vendors. At the same time, online suppliers are saving
o This new knowledge and experience can pave
a lot of marketing costs.
ways to success in other markets as well” a
 The Development of Trading Blocs
 What is Globalization?
 The 'regional trade agreement' (RTA) abolished internal
 The growing interdependence of the world’s economies,
barriers to trade and replaced them with a common
cultures, and populations, brought about by cross
external tariff against non-members.
border trade in goods and services, technology, and
 Trading blocs promote globalization and
flows of investment, people and information
interdependence of economies via trade creation.
 Understanding Globalization
 Factors Causing Globalization of Businesses
o Globalization can be defined as a process of rapid
The Reduction and Removal of Trade Barriers
economic, cultural, and institutional integration
among countries. Trade Negotiations
o Globalization makes the world more accessible to Transport Costs
everyone Growth of the Internet
 Causes of Globalization The Development of Trading Blocs
o Trade liberalization  Philippine Export as of July 2023
o Improvement in technology  Major exports are: electronic products (42 percent),
o Reduced costs/ improvement of communications other manufactures (10 percent) and woodcrafts and
and transpiration furniture (6 percent).
o Deregulation of financial markets  Philippines is also the world’s largest producer of
o Increase significance of TNCs (transnational coconut, pineapple and abaca.
corporations)  Philippines's main export partners are: Japan (21
 Effects of Globalization percent), the United States (15 percent), China (12
o Globalization has led to increase in competition. percent) and Hong Kong (8 percent).
o Globalization causes exchange of technology.
o Globalization helps in knowledge and information
transfer across the world. Globalization leads to
procurement and outsourcing. Accenture provides
procurement and outsourcing services includes
sourcing, demand management, invoice
processing, travel and expense processing,
contract administration and many more.
o Globalization has increase in investment levels
and rise of opportunities.
 What is the difference between international and
global?
 Globalization
o Although globalization and internationalization
are used in the same context, there are some
major differences.
o Globalization is an intensified process of
internationalizing a business. In general terms,
global companies are larger and more widespread
than the low-lying international business
organizations.
 Factors Causing Globalization of Businesses
 There are many factors related to the change of
technology, international policies, and cultural
assimilation that initiated the process of globalization.
 Governance Reviewer
The following key points summarizes the important provisions of Sox:
Strengthening of external auditor's independence:
• The external auditor of a corporate issuer is prohibited from
performing cight non-audit services, namely: bookkeeping,
information systems design and implementation, appraisal or
valuation services, actuarial services, internal audit, management
functions or human resources, investment adviser, and legal
services unrelated to the audit.
• Corporate officers and directors are prohibited from fraudulently
misleading or coercing their external auditors in the performance of
their examination of the financial statements.
• Members of the audit team must wait for a one-year period before
accepting employment as CEO, CFO, or its equivalent in an audit
client.
• Audit engagement partners must be rotated every five years.
Proactive and more independent audit committees.
• All covered companies must have audit committees wherein majority
are to be "Independent."
• Audit committee members may not accept any consulting, advisory,
or other compensatory fees from the issuing company.
• Audit committees are directly responsible for the appointment,
compensation, and oversight of the auditor's work.
• Disclosure as to the existence of a "financial expert" on the audit
committee.
Assessment of Internal controls over financial reporting:
• Management is required to make an assessment of the effectiveness
of the company's internal controls over the financial reporting
process.
• The CEO and CFO must certify the assessment of internal controls
over the financial reporting process.
• Auditors are to perform an attestation of the management's
assessment of internal controls over the financial reporting process.
Fraud prevention
• Provides criminal penalties for obstruction of justice or destruction
of accounting and other documents.
• Provides protection to "whistleblowers" who report fraud and other
irregularities of corporate officials.
DIFFERENCE BETWEEN MANAGEMENT AND GOVERNANCE
• Governance and management are two distinct functions.
Management takes charge of the day-to-day operations of the
business. Simply stated, management deals with "running the
business." Governance, on the other hand, is "ensuring that
the business is being run properly."
• Furthermore, this oversight and governance role is being performed
by the board of directors together with various board committees
such as the audit committee and risk oversight committee.
• When it comes to setting the future direction of the company, the
board of directors approves the company's strategic plans and long-
term capital investment proposals.
• It is the management who will implement these plans. Managers will
carry out projects intended to provide the company with steady
revenue and cash flow streams. The board of directors, though
detached from operating these projects, must conduct an oversight
of actual performance.
• Figure 8. The Roles of the Board of Directors andManagement
Governance and Management
Board
Sets the direction of the organization
Management
Runs the day-to-day operations
Definition of Terms
 Accounting shenanigans - accounting schemes that distort
amounts and disclosures in the financial statements in order to
hide financial problems and/or to paint a brighter picture of
economic performance. It is synonymous with the term "window
dressing.
 Agency problem - a situation that exists when the "agents" of the
corporation use their authority for their own benefit and not for
the benefit of the "principal" or owners. The term "agents"
pertains to corporate managers while "principal" pertains to the
shareholders of the company.
 Audit committee - committee composed of directors tasked to
perform oversight of the financial reporting process, selection of
the external auditor, and receipt of audit findings from both
internal and external auditors.
 Board of directors - the governing body elected by the
stockholders that exercises the corporate powers of a corporation,
conducts all its business, and controls its properties.
 Corporate governance - system of stewardship and control to
guide organizations in fulfilling their long-term economic, moral,
legal, and social obligations toward their stakeholders.
 Corporate issuer - a corporation that issues securities such as
stocks and bonds to the public.
 Debt ratio- a measure of financial soundness computed as total
liabilities divided by total assets.
 Energy derivatives - are complex financial instruments whose
underlying asset is based on energy products such as oil, natural
gas, or electricity. Energy derivatives are traded on a formal
exchange such as the Chicago Mercantile Exchange.
 Enterprise risk management - a process, effected by an entity's
board of directors, management, and other personnel, applied in
strategy setting and across the ent that is designed identify
potential events that may affect the entity, to manage risks to be
within its risk appetite, and to provide reasonable assurance
regarding the achievement of entity objectives.
 Executive director - a director who has executive responsibility
of day-to-day operations of a part or the whole of the
organization.
 External auditor - independent accounting firm that renders a
report or opinion on the financial statements of client-companies.
 Independent director - a person who is independent of
management and the controlling, shareholder, and is free from
any business or other relationship which could reasonably be
perceived to materially interfere with his/her exercise of
independent judgment in carrying out his/her responsibilities as
a director.
 Internal control - a process effected by an entity's board of
directors, management, and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives
relating to operations, reporting, and compliance.
 Management - a group of officers given authority by the board of
directors to implement the policies it has laid down in the
conduct of the business of the corporation.
 Nonexecutive director - a director who does not perform any
work related to the operations of the corporation.
 Off-balance sheet accounting - the practice of not reflecting an
asset and/or a liability on the financial statements.
 Organisation for Economic Co-operation and Development
(OECD) - inter-governmental entity founded in 1961 intended to
stimulate economic growth through the formulation of policies for
"better lives."
 Publicly-listed company - a company whose shares of stock are
traded in the stock market such as the Philippine Stock
Exchange.
 Sarbanes-Oxley Act - a corporate governance regulation passed
in the United States requiring the strengthening of corporate
governance structures among corporate issuers, stricter
regulation of the auditing profession, and assessment of internal
controls over financial reporting among others.
 Special-purpose entity - an entity created for a narrow and
specific business objective; for instance, an SPE is created simply
for the purpose of obtaining finance.
 Stakeholders - any individual, organization, or society at large
who can either affect and/or be affected by the company's
strategies, policies, business decisions, and operations in general.
This includes, among others, customers, creditors, employees,
suppliers, investors, as well as the government and community in
which it operates.
 Stakeholder theory - states that the corporation exists not only
for the benefit of the stockholders but also for the benefit and
protection of the other stakeholders such as employees, creditors,
suppliers, government, and the society in general.
 Stockholder theory - theory stating that the corporation exists
for the benefit of the shareholders or stockholders.
 Short-termism - a term that connotes actions of corporate
managers intended to increase short-term profits only.
 White knight - a "friendly" investor that purchases a target
company at a fair price and with the support of existing
management and directors.
The Agency Problem
The "agency problem" is a situation that exists when the
"agents" of the corporation use their authority for their own benefit
and not for the benefit of the "principal" or owners. The term "agents"
pertains to corporate managers while "principal" pertains to the
shareholders of the company.
A company owned by a thousand or more shareholders will
not be run by the owners themselves for that would result to disorder
 Governance Reviewer
and chaos. Besides, not all shareholders possess managerial ability to
manage their own businesses. In this case, the owners will hire
managers. As hired individuals, these managers (the agents) must act
for the best interests of the owners (the principal). However, this does
not always hold true in real life such as in the case of Enron.
As mentioned previously, managers tend to focus on just
short-term profit in order to achieve the profit target and thereby
obtain bonuses to the detriment of the owners.
It is also possible on the part of managers to engage in self-
dealing transactions that will not benefit the owners of the company.
lake the case of a purchase manager in an ABC Company who sets up
his own trading business. ABC Company, through the purchase
manager, buys materials from the trading business at excessive prices.
This transaction benefits the personal business of the purchase
manager but it is disadvantageous on the part of ABC Company.

To ensure that corporate managers act in the best interests of the

owners, the following are being implemented:
1. External and internal audits;
2. Oversight of managerial performance by the board of
directors;
3. Management compensation is linked to corporate
performance and/or stock price;
4. Code of ethical conduct;
5. Internal controls; and
6. Government regulation (e.g.. Sarbanes-Oxley, SEC
regulations).