AAF8
Syllabus A. Audit Framework And Regulation A3. Corporate Governance

A3a. Corporate Governance & Auditing

Syllabus A3a)

Discuss the objectives, relevance and importance of corporate governance.

Corporate governance is the system by which companies are directed and controlled

It is concerned with matters such as directors responsibilities, the board of directors, the audit committee and relationship with external auditors.

It ensures that companies are run in the interests of their shareholders and the wider community

Poor Corporate Governance

  • Many corporate failures have been blamed on poor corporate governance such as WorldCom and Enron.

  • Poor controls allowed management to abuse their position either in the form of excessive executive pay or manipulation of results to the ultimate detriment of shareholders.

Who is Responsible?

  • The directors are responsible for implementing a sound system of governance.

  • Auditors will have an interest also because poor governance makes it more likely that material errors exist in the firms’ financial statements.

Responsibility of Auditors for reporting on Corporate Governance

A statement regarding corporate governance included in the Annual Report is reviewed by the auditor and any inconsistencies highlighted as below:

  1. An error in the financial statements

    The auditor will issue a qualified report if the directors refuse to amend the error

  2. An error in the corporate governance statement

    The auditor will add an emphasis of matter paragraph to their report