Slide 14A.

The Combined Code (UK), July 2003:

An Example of Auditors’ Review of
Corporate Governance Best Practice
Principles of Auditing: An Introduction to
International Standards on Auditing - Ch 14
Appendix A

Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,
Philip Wallage

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14A.2

Directors

• Some key provisions

• Example of audit
implications
• Audit procedures
(illustrative)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14A.3

Some key provisions

 The chairman should ensure that new directors receive

a full, formal and tailored introduction on joining the
board.
 The board should identify in the annual report each
non-executive director it considers to be independent.
 Except small companies and the chairman, at least
half of the board should comprise non-executive
directors.
 A mostly independent nomination committee which
should lead the process for board appointments and
make recommendations to the board.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14A.4

Some key provisions (continued)

 All directors should be subject to election by

shareholders at the first annual general meeting after
their appointment, and to re-election thereafter at
intervals of no more than three years. The names of
directors should be accompanied by sufficient
biographical details.
 Non-executive directors should be appointed for
specified terms subject to re-election and to
Companies Act provisions relating to the removal of a
director, and re-appointment should not be automatic.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14A.5

Audit Implications

 The control environment could be considered weak if

there are insufficient non-executive directors.
 If directors are not properly trained can they make
strategic decisions about the company’s operations?
 With more independent directors, the directors may
not have the necessary understanding of the
company’s business and industry it operates in to
make informed strategic decisions.
 With directors being up for re-election every three
years there may be less continuity on the board.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14A.6

Illustrative Audit Procedure 1

The board should have a formal schedule of matters
specifically reserved to it for decision
–inspect the schedule of specific matters noting when
this was last updated;
–inspect the board minutes recording adoption of the
most recent schedule;
–consider whether the contents of the schedule are
likely to be adequate for the business taking into
account its size, nature and complexity;
–consider whether the schedule of matters appears to
be followed by reference to board minutes throughout
the period, and to any transactions, of which we are
aware, that would appear to require board approval

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14A.7

Illustrative Audit Procedure 3

Non-executive directors should be appointed for

specified terms subject to re-election and to
Companies Act provisions relating to the removal of a
director.
–inspect the service contracts letter of appointment of
all directors who were members of the board at any
time during the period under review
–check whether the non-executive directors’ contracts
specify the terms of appointment;
–consider, for those non-executive directors who came
to the end of their term during the period, whether there
is evidence that their re-appointment was formally
considered by the board.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14A.8

Thank You for Your Attention

Any Questions?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007