Auditing Effect on Firm Performance

PRESENTATION IN MANAGERIAL FINANCE

Presented By:
 Corporate Governance
• Corporate Governance is the system by which Corporations are direct
and control. It includes the rules and procedures for making decisions
on corporate affairs to ensure success while maintaining the right
balance with the stakeholders’ interest.
• Boards of directors and committees must be:
• Proactive
• Informed
• Investigative
• Accountable
 Corporate Governance
Corporate Governance Models:

1) Anglo-American Model

2) German Model

3) Japanese Model
 Corporate Governance
1) Anglo-American Model (Anglo – Saxon)
 Corporate Governance
2) German Model (Continental System)
 Corporate Governance
3) Japanese Model
Corporate Governance Committees

Board of
Directors

Audit Remuneratio Nomination

Committee n Committee Committee
The Auditing

Audit Committee
External Audit

Internal Audit
 The Audit Committee
• The audit committee’s ‘core’ duties overseeing financial reporting and controls, as
well as external and internal auditors are a substantial undertaking and time
commitment.

• In addition, many audit committees have oversight responsibilities for a range of

other risks that have become increasingly complex and challenging in the current
business environment from operational and compliance risks posed by globalization
and the extended organization (partners, suppliers, vendors, etc.) to cybersecurity
and other risks related to emerging technologies.

• Prioritizing this heavy audit committee workload continues to be a challenge for

most audit committees.
 The Audit Committee
Audit Committee Key Responsibilities are to assist the Board in fulfilling its
oversight responsibilities:
1) Financial reporting.
2) The effectiveness of the system of risk management and internal control.
3) Compliance with applicable external legal and regulatory requirements.
4) Monitoring the qualifications, expertise, resources and independence of
both the internal and external auditors.
5) Assessing the internal and external auditors’ performance and
effectiveness each year.
 The Audit Committee
Audit committees are meeting this oversight challenge by focusing on ways to improve their effectiveness
and efficiency, refining their agendas and oversight processes and reassessing their skills and composition.
This requires the following:
1) Agendas that are manageable (what risk oversight responsibilities are realistic given the audit
committee’s time and expertise?).
2) Focusing on what is most important (starting with financial reporting and audit quality).
3) Allocating time for robust discussion while taking care of ‘must do’ compliance activities and perhaps
most importantly.
4) Understanding the tone, culture, and rhythm of the organization by spending time outside of the
boardroom.
5) Visiting company facilities.
6) Interacting with employees and customers.
7) Hearing outside perspectives.
 The Audit Committee
• The Audit Committee keeps the Board informed of its activities and
recommendations.

• Where the Audit Committee is not satisfied with, or if it considers that

action or improvement is required concerning any aspect of financial
reporting, risk management and internal control, compliance or audit-
related activities, it promptly reports these concerns to the Board.
 The Audit Committee
Audit Committee Activities
The Audit Committee covers a variety of topics in its meetings. These
include both standing items that the Audit Committee considers as a
matter of course
1) The quarterly unaudited financial statements, control issues,
accounting policies and judgements and reporting matters.
2) A range of topics relevant to corporation control framework.
 The Audit Committee
The Audit Committee invites the Following to Attend Each Meeting:
1) Chief Executive Officer.
2) Chief Financial Officer.
3) Legal Director.
4) Chief Internal Auditor.
5) Executive Vice President Controller.
6) Vice President for Accounting and Reporting.
7) External auditor.
The Chair of the Board also regularly attends the meetings as an observer. Other members of
management attend when requested.
• At every meeting, the Audit Committee holds private sessions separately with the external
auditor and the Chief Internal Auditor without members of management, except for the
Legal Director, being present.
 The Audit Committee
Members of the Audit Committee
The Audit Committee consists of:

1) A chairperson, who is an independent and non-executive member of the board

2) A minimum of two other non-executive members of the board, excluding the

CEO and any former member of the board. All members shall be independent.

• At least one member has to have recent and relevant financial expertise;
the others must be familiar with the issues of accounting and audit.
 The Audit Committee
Audit Committee and Firm Value
1) Expert-independence of audit committee (more than 50%) results in positive
firm value.
2) Positive firm value if expert-independent directors have control of board
(more than 50% are expert-independent directors).
3) If a director simultaneously serves on all three important committees (audit,
nominating, and compensation), he/she has a positive impact on the
independence of audit committee.
4) With countries all over the world converging toward an Anglo- Saxon model
of corporate governance, many accept that audit committee can play an
important role to establish confidence in financial markets.
THE INTERNAL AUDITING
 Internal Audit
• The Audit Committee is responsible to the board for the oversight on
internal control and risk management systems.
• The mission of internal audit is to enhance and protect organizational
value by providing risk-based and objective, assurance, advice and
insight.
• Internal audit is an independent, objective assurance and consulting
activity designed to add value and improve an organization’s
operations
 Internal Audit
• Internal Audit helps an organization and audit committee accomplish
its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control
and governance processes.
• Part of the audit committee’s role is to review annually the need for
an internal audit function and, where such a function exists, its
effectiveness.
 Internal Audit
• The Top Five Ranked Activities currently performed by internal
auditors are:

1) Operational audits.
2) Audits of compliance with regulatory codes.
3) Auditing of financial risks.
4) Investigations of fraud and irregularities.
5) Evaluating effectiveness of control systems.
 Internal Audit
• Internal Auditors’ Competencies:

1) Level of Education
2) Academic Major
3) Current Position in the Organization
4) Professional Certifications
5) Professional Experience
6) Continuing Professional Education
 Internal Audit
• Internal Auditors’ Competencies:
• Level of Education
• Education is an indicator of competency. Highly educated auditors tend to deal with the
job challenges in a more skillful and competent way than the lesser educated.
• Academic Major
• It is clear that accounting is the most frequently chosen major, this is followed by general
business, then finance.
• Current Position in the Organization
• Many of Internal Auditors are Chief Audit Executives (CAEs)
 Internal Audit
• Internal Auditors’ Competencies:
• Professional Certifications
• Certified Internal Auditor (CIA) is the professional certification is the most Frequency,
Then public accountancy certificates such as Certified Public Accountant (CPA), this is
followed by Chartered Accountant (ACA), and Chartered Certified Accountant (ACCA),
Then the information systems auditing certificates such as Certified Information Systems
Auditor (CISA)
• Professional Experience
• Many of the internal auditors have experience in other fields such as accounting,
management, external auditing, finance, IT/ICT, engineering, and others.
• Continuing Professional Education
• The IIA requires practicing CIAs to have on average 40 hours per year of continuing
professional education (CPE).
 Internal Audit
• Internal Audit Sourcing:
1) In-house Function
2) Co-source
3) Outsource
 Internal Audit
• In-house Source of Internal Audit
 Internal Audit
• Co-Source of Internal Audit
 Internal Audit
• Outsource of Internal Audit
 Internal Audit
• Getting the right balance between core assurance and value creation
audit
• In a business that has an unstable control environment, or is
experiencing significant change or growth, value is often demonstrated
by giving high quality assurance over the effectiveness of core controls.
• Adjusting the balance can see internal audit working alongside
management in a business partnering role.
• This type of role requires careful management to ensure the
responsibilities of the business and the independence of internal audit
do not become blurred.
 Internal Audit
• An overview of the potential roles and range of input internal audit
can provide
 Internal Audit
• Internal Audit Report:
• The Internal Audit Report to Management (Preferably The CEO)
• The Internal Audit Report to Audit Committee
• It is good practice for internal auditors to prioritize their findings
against agreed standards. This indicates the importance of each audit
recommendation and the urgency of any required action.
• The audit committee should concentrate on gaining assurance that
the organization's risk management, control and governance
arrangements are adequate and effective.
 Internal Audit
• Internal Audit Performance Monitoring
 Internal Audit
• Internal Audit and Corporation Performance:
1) It assists management to improve internal controls by identifying
weaknesses in systems and provides an opportunity to correct
those weaknesses.
2) It helps a firm to fulfill its objectives and improve the effectiveness
of risk management, control, and governance processes.
3) Improve an organization’s operations.
4) Internal auditors deal with issues that are important to the
continued existence and prosperity of any company.
THE EXTERNAL AUDITING
 The External Audit
• Audit committee have an important role in helping boards discharge
their duties by providing independent oversight over external audit.

• The primary goal of external auditing is to determine the extent to

which the organization adheres to managerial policies, procedures,
and requirements.

• The typical independent audit leads to an attestation regarding the

fairness and dependability of the statements.
 The External Audit

Major types of audits conducted by external auditors include:

1) financial statements audit.
2) operational audit.
3) compliance audit.
 The External Audit
1) Financial Statement Audit
examines financial statements, records, and related operations to
ascertain adherence to generally accepted accounting principles
“GAAP”.

• The primary purpose for financial audits is to give regulators,

investors, directors, and managers reasonable assurance that
financial statements are accurate and complete.
 The External Audit
2) An Operational Audit
examines an organization's activities in order to assess
performances and develop recommendations for improvements, or
further action.

• The operating models of business activities and processes, such as

operational excellence, supply chain optimization, talent mobility and
innovation.
 The External Audit
An Operational Audit
• The goal of the operational audit process is to determine whether the internal
controls of the business, such as policies and procedures, are sufficient to
produce an optimum level of efficiency and effectiveness.

• This is critical for businesses, because a lack of efficiency and effectiveness

typically translates to fewer sales or increased operational costs, which
sometimes mean the inability of the business to compete and stay in business.
 The External Audit
3) Compliance Audit
• has as its objective the determination of whether an organization is following
established procedures or rules.

• Companies in certain high-risk categories—such as pressure vessels, elevators,

gas appliances, and electrical and medical devices—wanting to do business in
Europe must comply with Certification Body requirements.
 The External Audit

Compliance Audit

Certification Body Examples

• ISO 9001 for Quality Management System

• ISO 14001 for Environmental Management System

• ISO 50001 for Energy Management System

• OHSAS 18001 for occupational health and safety management systems.

 The External Audit
Compliance Audit
• The International Accreditation Forum (IAF) is the world association of
Conformity Assessment Accreditation Bodies and other bodies interested
in conformity assessment in the fields of management systems, products,
services, personnel and other similar programs of conformity assessment.
• The Egyptian Accreditation Council (EGAC) is the sole national body for
the assessment and accreditation of conformity assessment bodies in
Egypt performing testing/ calibration Laboratories, inspection and
certification of products & systems as well as personnel.
 The External Audit
Audit Phases
1) Audit preparation

2) Audit Performance

3) Audit Reporting

4) Audit Follow-up and Closure

 The External Audit

Audit Phases
1) Audit preparation – Audit preparation consists of everything that is
done in advance by interested parties, such as the auditor, the lead
auditor, the client, and the audit program manager, to ensure that the
audit complies with the client’s objective.
• The preparation stage of an audit begins with the decision to conduct the
audit. Preparation ends when the audit itself begins.
 The External Audit
Audit Phases
2) Audit performance – The performance phase of an audit is often
called the fieldwork.
It is the data-gathering portion of the audit and covers the time
period from arrival at the audit location up to the exit meeting.
It consists of activities including on-site audit management, meeting
with the auditee, understanding the process and system controls
and verifying that these controls work, communicating among team
members, and communicating with the auditee.
 The External Audit
Audit Phases
3) Audit reporting – The purpose of the audit report is to communicate the
results of the investigation.
• The report should provide correct and clear data that will be effective as a
management aid in addressing important organizational issues.
• The audit process may end when the report is issued by the lead auditor or
after follow-up actions are completed.
 The External Audit
Audit Phases
4) Audit follow-up and closure – According to ISO 19011, clause 6.6, “The audit
is completed when all the planned audit activities have been carried out, or
otherwise agreed with the audit client.”
• Clause 6.7 of ISO 19011 continues by stating that verification of follow-up
actions may be part of a subsequent audit.
 The External Audit
Top Criteria for External Auditor Selection:
• Understanding of the company’s risks and needs (including strategic
management issues).
• Geographical coverage.
• Perceived value added.
• Experience of sector and existing client list.
• Staff experience and number of planned partner/senior staff hours.
• Proposed fee and value for money considerations.
 The External Audit
External Audit and Conflict of Interest:

• Any engagement of the external auditor must satisfy applicable rules

and legislation. The external auditor does not have a preferred supplier
status for the provision of other services and is to be appointed only
when they are best suited to undertake the work and do not have a
conflict of interest due to a relationship with another entity.
 The External Audit

External Audit Effect of Corporate Performance:

1) Improve Reputation

2) Provides Credibility and Assurance

3) Increase Market Value

4) Improve Work Process (Accounting, Operation,…etc.)

5) Decrease Business Risks (Fraud, Environmental Violation,…etc.)

6) Increase Business Opportunities (Open New Markets by Exports)

 THE END

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