MSAF 608

ADVANCED AUDITING AND

ASSURANCE

Week 1
Overview of Auditing and Corporate Governance

Dr Rita A. Bekoe
rabekoe@ug.edu.gh/celestialrita@gmail.com
 Corporate Structure

Corporation

Create
Owners

Accountants
Elect Management
Board of
Directors Hires Hires

Audit Committee
Prepares Internal
Hires Auditors
Financial Statements
Independent (GAAP/IFRS)
Examine
Auditors
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 Introduction
• A free market economy can generally exist if there is sharing of accurate,
reliable information among parties that have a vested interest in the
financial performance of an organisation
• The market is further strengthened if the data are transparent and
neutral, i.e. the data do not favour one party over the other
• The audit process is intended to enhance the confidence that users can
place on the financial statements prepared by management

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 Auditing Defined
• ‘A systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and
established criteria and communicating the results to interested users’
American Accounting Association (Accounting Review. Vol. 47) .
• An audit is: the independent examination of and expression of
opinion on the financial statements of an entity by a duly appointed
auditor in pursuit of that appointment.

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 The Need for Independent Assurance
• The need for independent auditing arises from several factors that suggest
there is a risk that information provided by management may not be
accurate
– Potential bias in providing information
– Remoteness of Users
– Complexity of business transactions
To the extent that audits increase financial reporting reliability, they improve market
efficiency
The purpose of an audit is to enhance the degree of confidence of
intended users in the financial statements

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 Objectives of Auditing
• It increases the credibility of the information or matter being reported.
• It reduces conflict between opposing factions.
• It safeguards the interest of shareholders.
• It reduces fraud and error.
• It facilitates the work of governmental and non-governmental agencies
particularly GRA, banks and donors.
• It helps in the liquidation of companies.
• It promotes accountability and good corporate governance.
• It ensures the efficient and effective functioning of systems of control.

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 The Regulatory Framework for Auditing
• The Companies’ Act, 2019 (Act 992)
• The Institute of Chartered Accountants Ghana
• The International Auditing and Assurance Standard Board (IAASB)
• The International Ethics Standard Board for Accountants (IESBA)
• The International Standards on Auditing (ISAs)
• Other regulatory bodies in Ghana (BoG etc)
• The 1992 Constitution (Public Sector Accounting)
• The Institute of Internal Auditors (Internal Audit Agency Act, 2003 (Act,
658)

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• Corporate Governance and Audits

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 Corporate Governance Defined
• Corporate Governance is a process by which the owners and creditors of
an organization exert control and require accountability for the
resources entrusted to the organization.
• Corporate governance and financial reporting reliability are receiving
considerable attention from a number of parties including regulators,
standard setting bodies, the accounting profession, lawmakers and
financial statement users
• It focuses largely on the role of directors and their responsibilities to
shareholders and other stakeholders

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 The Parties Involved in Corporate Governance
• Shareholders
• Board of Directors
• Audit Committees (as a subcommittee of the board)
• Management (financial and operational)
• Internal Auditors
• Self-Regulatory Bodies (ICAG, GSE)
• Regulatory Agencies (SEC, EPA, BoG, NIC etc)
• External Auditors

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 Principles of Good Corporate Governance
• Good governance requires that organisations achieve objectives related to
financial performance, financial reporting and compliance with their own
policies as well as with applicable laws and regulations
• The Organization of Economic Cooperation Development (OECD) has
developed a framework to enhance good corporate governance.
• These principles are intended to help policy makers evaluate and improve
the legal, regulatory and institutional framework for corporate governance
• It serves as a check and balance to the parties involved in corporate
governance

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 Principles of Good Corporate Governance Contd.
• The principles are categorized into six broad areas of corporate
governance, namely;
– Ensuring the basis for an effective corporate governance
The framework should promote transparent and fair markets, efficient allocation of resources,
consistent with the rule of law and support effective supervision and enforcement
– The rights and equitable treatment of shareholders and key ownership functions
The framework should protect and facilitate the exercise of shareholders’ right, ensure the equitable
treatment of all shareholders including minority and foreign shareholders. For instance all shareholders
should have access to the same information
– Institutional investors, stock markets and other intermediaries
It should provide for stock markets to function in a way that contributes to good corporate governance.
For instance insider trading should be prohibited

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Principles of Good Corporate Governance Contd.
– The role of stakeholders in corporate governance
It should recognise the rights of stakeholders established by law or through mutual agreements and
encourage active co-operation between corporations and stakeholders in creating wealth, jobs and the
sustainability of financially sound enterprises
– Disclosure and transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all
material matters regarding the entity, including the financial position, performance, ownership and
governance
– The responsibilities of the board
The framework should ensure the strategic guidance of the company, the effective monitoring of
management by the board and board’s accountability to the company and shareholders. In particular,
the board should set its own objectives, monitor its performance and have its performance assessed

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 Principles to Boards and Management
• The boards fundamental objective should be to build long-term
sustainable growth in shareholder value for the corporation
• Successful corporate governance depends upon successful management
of the company as management has the primary responsibility for
creating a culture of performance with integrity and ethical behaviour
• Good corporate governance should be integrated with the company’s
business strategy and not viewed as simply a compliance obligation

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 Principles to Boards and Management Contd.
• Transparency is a critical element of good corporate governance, and
companies should make regular efforts to ensure that they have sound
disclosure policies and practices
• Independence and objectivity are necessary attributes of board
members; however, companies must also strike the right balance in the
appointment of executive and non-executive directors to ensure an
appropriate range and mix of expertise, diversity and knowledge on the
board

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 The Audit Committee
• A committee of the board that has important significance to the auditor
is the audit committee.
• It is a standing committee of the board whose purpose is to oversee the
accounting and financial reporting processes of the company and the
financial statement audits.
• The audit committee is composed of non-executive directors to whom
external auditors report

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 The Audit Committee Contd.
• The committee should include at least one financial expert who has an
understanding of GAAP and relevant accounting and auditing experience
• This committee relies on the internal and external auditors to develop and
communicate objective information needed to effectively perform its
oversight functions
 Responsibilities of the Audit Committee
• Provide oversight of the accounting and financial reporting process and
of the financial statement audit
– Ensure sound and effective systems of control
• Appoint, compensate and oversee the external auditor
– Recommend the appointment of the external auditors
– Facilitating the work of external auditors
– Approving non audit services provided by the external auditor
– Facilitating communication between the company and the auditor.

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 Responsibilities of Audit Committee Contd.
• Oversight of internal audit function
– Hire and fire head of internal audit unit
– Set the budget for the internal audit activity
– Review internal audit plan
– Discuss all significant internal audit reports
• Other responsibilities include performing or supervising special
investigations, maintaining communication between the board,
management, external auditors and internal auditors.
• Some audit committees are expanding their functions to include oversight
over risk management processes.

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 Important Points to Note
• The audit committee is now a key component of effective corporate
governance; its members must have both sufficient time and expertise
to fulfil its function.
• Further, the chair of the committee a strong individual who is willing to
have frequent contacts with auditors and management.
• Given the significant financial role of the audit committee, the auditor is
interested in the quality and effectiveness of this committee

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 Principles for Effective Audit Committee
• There is not one set of legislated or required principles
• However, there are some basic principles that audit committees should
exhibit in order to be effective
– Member independence and financial expertise
– A charter which identifies the scope of the committee responsibilities and a
framework for their activities
– Meet as needed with enough time for discussion of key risk issues
– Members must stay current on developments in business, accounting and auditing
– An effective audit committee should ask relevant and probing questions

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 Communication between Auditors and Audit Committees

• There should be ongoing communication between the auditor and the

audit committee throughout the audit until the audit opinion is issued.
• Some issues communicated are
 Corporate Governance and Audit
• Good governance is important to the conduct of an audit
• The reason is simple:
– Companies with good corporate governance are less risky to audit
• Such companies have the following characteristics;
– Are less likely to engage in financial engineering
– They have a code of conduct that is reinforced by actions of top management
– They have independent board members who take their job seriously and have
sufficient time and resources to perform their work
– Take the requirements of good internal controls over financial reporting seriously
– Make a commitment to financial competencies needed

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 Corporate Governance and the Audit Contd.
• A company that does not commit to good corporate governance is so
much of a risk for an audit firm
• Most audit firms consider corporate governance issues when making a
decision to accept or decline a client.
• Note that shareholders and other stakeholders want disclosure from
management that are accurate and objectively verifiable. The role of
the audit is to provide this independent verification
 Corporate Governance and the Audit Contd.
• The auditor is, therefore, in a much better position to provide accurate
verification when governance mechanisms, such as the board and the
audit committee, adhere to and embrace the principles of good
corporate governance.

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 DISCUSSION
• You are an audit manager of your audit firm and have been assigned to the audit of Subin Ltd, a
company planning to list on a stock exchange within six months. The listing rules of the stock exchange
require compliance with corporate governance principles, and the directors are unsure whether they are
following best practices in relation to this. They have asked the audit engagement partner for their view
on this matter.
• Subin’s board comprises six executive directors, a non-executive chairman and three other non-
executive directors (NEDs). The chairman and one of the NEDs are former executive directors of Subin
and on reaching retirement age were asked to take on non-executive roles. The company has established
an audit committee, and all NEDs are members including the chairman who chairs the committee. All
four members of the audit committee were previously involved in sales or production related roles.
• All of the directors have been members of the board for at least four years. As the chairman does not
have an executive role, he has sole responsibility for liaising with the shareholders and answering any of
their questions. The company has not established an internal audit function to monitor internal controls.

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 DISCUSSION Contd.
• Using the information above, you are required to describe five
corporate governance weaknesses faced by Subin Ltd and provide
recommendations to address each weakness to ensure compliance
with corporate governance principles

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