Corporate Governance and Audit - Coursework Example

Corporate governance and audit Contents Part 3 Question 3 Question 2 3 Question 3 4 Question 4 5 Question 5 6 Question 6 7 Question 7 8 Part 2 9Question 1 9 Question 2 10 Question 3 11 Question 4 11 Question 5 12 Part 1 Question 1 The main objective of the agency theory is maximization of the wealth of the shareholders. The agency theory deals with the separation between the ownership and control. The government has decided to reduce the agency theory that will affect its shareholders since it is related or associated with the asymmetry in the information. The managers have full information about the company and the mangers focuses on the short term goal rather than long term goals of the organization. The main purpose of reducing the agency theory is that the theory states that the owner should control the firm but in reality it is controlled only by the directors not by the shareholders. Therefore the government decides to reduce this theory for minimizing the problem of principal agent and also reducing the direct and indirect cost involved for ensuring that the agents behave in accordance with the principles. The report that has been established by the UK committees of corporate governance includes the stakeholder theory that not only generates the wealth of the shareholders but also takes into consideration a wide group of stakeholders. The transaction cost theory that not only emphasizes on the wealth of the shareholders but effective accomplishment of the transactions. Question 2 a) The scandals of the corporate governance in the light of UK regulatory development can be explained as it facilitates innovation in which it allows the companies to implement new ideas, avoiding of box ticking in which the companies are allowed to complying with the principles and proportionality and long term learning for adopting cultural change in the companies for fulfilling the objectives and principles of corporate governance. b) The main objectives of OECD code of the corporate governance are to improve the institutional, legal and national framework required for the corporate governance. It focuses on improving the growth and development of the companies. The underlying principles of the OECD code of corporate governance are that it serves on the basis of the OECD and non OECD countries of the world. The principles mainly focus on the stock market listed companies that will contribute towards improving the corporate governance of the private companies. The principles deal with the transparent market, efficient market and also well regulated market. The recommendation for the OECD corporate governance is that it lacks legislative power. Therefore it is required to possess the power for implementing the code of OECD on Corporate governance. The countries especially UK can implement the OECD code for the purpose of self assessment and also developing their codes that can be utilized in corporate governance. Question 3 Shareholder theory The main objective of the shareholder theory is maximization of wealth of the shareholders. The shareholder theory is subjected to minimum regulatory and government intervention in the business operation. The main purpose of introducing this theory by Friedman is that the moral, legal and ethical aspects of the business are taken into consideration. Stakeholder theory The main objective of the stakeholder theory that is proposed by Freeman is on creation of wealth and it focused on gaining competitive advantage for the firm. The stakeholder theory can be categorized into three groups such as the organizational stakeholders, capital market stakeholders and the capital market stakeholders. Dissimilarity The main difference between the Shareholder theory and the stakeholder theory can be explained as the stakeholder theory deals with various groups such as the government, suppliers , employees and customers whereas the shareholder theory only concentrates on the shareholders. Shareholder theory aims on maximization of wealth of the shareholder and the stakeholder theory concentrates on the creation of wealth. Stakeholder theory focuses on gaining competitive advantage of the firm whereas shareholder theory focuses only on the interest of the shareholders. Stakeholder theory deals with the relationship between company and stakeholder whereas shareholder theory deals with the relationship between company and stakeholder. Question 4 The four theories of corporate governance are the shareholder theory which focuses on maximization of wealth of the shareholders, the stakeholder theory that deals with the creation of wealth and concentrates on the interest of wide range of stakeholders, the transaction cost theory that emphasizes on the cost related aspect of the business and the institutional theory that deals with culture and environment of the institution for maintaining corporate governance. Similarity The main similarities between these theories are that all these theories are emphasizing on corporate governance. The theories are developed for increasing the value of the company. This theory focuses on minimization of the activities such as insider trading, corporate fraud and accounting scandals. Agency theory is the outcome of the stakeholder theory. Dissimilarity The main differences between these theories are that the stakeholder theory deals with the interest of the wide range of stakeholder, whereas the shareholder theory deals with the interest of the shareholders. The institutional theory concentrates on wide group of people in safeguarding the environment and culture for maintaining corporate governance and the transaction cost theory deals with the interest of the company for eliminating risk and uncertainty. The shareholder theory takes risk whereas the transaction cost theory attempts to reduce the risk and uncertainty. The transaction cost theory and the institutional cost theory mainly focuses on the relationship between employees and the company whereas the stakeholder theory and the shareholder theory establish relationship between the company and the stakeholder or the shareholder. Question 5 The findings of the UK corporate governance are the scandals have occurred due to the fault of the chief executive officers, the pension funds were found to be passive and the approach of corporate governance is self regulated rather than prescriptive. The principles of the corporate governance are it tailors the regulation, focuses on the statutory requirements, emphasis on the management. The recommendations of UK corporate governance are the institutional investors are required to play a major role, the corporate governance code is required to be improved and the regulations are required to be modified according to the needs and requirements of the shareholders and stakeholders. These codes are effective and can be implemented in the UK economy since UK maintains a strict standard in formulating the standard of corporate governance. The audit committee of UK is required to disclose the information related to its shareholders and assessing the effectiveness of external audit. Question 6 Barring bank Nick lesson was a barring trader in Singapore he was engaged in unauthorized trade of future contracts. He have earned huge amount of profit for several years and he has also established an account for maintaining its errors and omissions. He has taken lot of risk band earned huge amount of profit and the loss from the trade was transferred in the hidden error account. Therefore when the situation was revealed he was accused of huge amount of debt. Barring bank lacked corporate governance as it did not follow the moral and ethics of corporate governance and it was alleged for practicing insider trading which is against the code of conduct of corporate governance. Enron Enron have transformed itself from the Energy Company to the energy and financial trading company. It has settled a dispute over the North Sea gas and it was found that Enron was accused of the severe financial loss or problem and was bankrupted. The main problem that was encountered by Enron was due to the failure in maintaining transparency in its balance sheet and it was accused of misstatements and the fraud in the financial reports. Enron issue lacked corporate governance since it failed to maintain transparency in its financial report and it failed to maintain ethical code of conduct. Question 7 UK non domiciled tax UK non domiciled tax is a facility that is extended to the foreign investors not residing in Britain. The main problem or the issue that is encountered is that the investors avoid payment of income tax, inheritance tax and the capital gain on investment. This has created a problem in corporate governance since it fails to maintain transparency and illegal practice of transferring the money to Swiss account by evading the payment of tax that is levied. The problem can be mitigated or solved by imposing tax on them and adopting stringent practice and introducing standards for levying such taxes. Fraud and money laundering The government of UK has imposed restrictions on few companies for practicing bribery activities. This restriction has been imposed mainly on the multinational companies. The problem related to this is that if the subsidiary company pays bribe to the parent company for its own benefit then the parent company should not be alleged. The briber influences the foreign official of performing his duty in an unofficial manner. This has created a problem in the corporate governance since definite standards have not been implemented for detecting the fraud and the morality is affected. This can be mitigated by adopting strict measures through the introduction of various acts that reduces the practice of such activities. Part 2 Question 1 a) i. The assumption of going concern concept is that the auditor has the responsibility of obtaining appropriate and sufficient audit evidence for the preparation and presentation of the financial statements, the entity is considered to continue its business operation, the financial statement of the company is prepared on the basis of the going concern concept and the assets and liabilities of the company is recorded on the basis of the assumption of going concern concept. The auditor is required to follow certain procedures for assessing the going concern concept are evaluating the plan of the entity in dealing with the orders of the customers, verifying the legality, enforceability and existence of the arrangement for maintain financial support of the third parties, performing the audit procedures for the events , determining the adequacy in the disposal of the assets, ensuring adequacy for offering borrowing facilities and reviewing the reports of the regulatory actions. b) ii. The nature and the basic elements of audit report is that it is associated with analyzing the financial statements and analyzing the cash flow, profit that is associated with forecasting the activities of the management. b) iii. As a audit manager in order to continue the business of Trend clothes, the assumption of the going concern will be adopted in such a way that the financial statements are to be prepared in compliance with the standards. Since the company is running at a loss therefore the financial statement of the company is prepared in such away the assets are realized for discharging the liabilities in the course of its operation. Question 2 a) i. Materiality can be defined as the process through which the financial report is being verified, inspected, enquired and confirmed. The performance materiality deals with the timing that is required for performing the audit and also assessing or determining the risk that is associated with it. a) ii. The risk of material misstatement can be defined as the risk that is associated with the auditor in performing and designing the audit procedures and also determining the extent, timing and the nature that is based on the assessment of the risk. The components or the factors that affects such risk are the nature of the audit procedure which determines the purpose of the audit, the timing required for preparation of the audit and the extent of the audit that determines the quantity required to be performed. b) iv. As an audit manager it has been observed that the orders from the potential customers have decreased which indicates that the sale of the company has decreased and as a result the profit will also decrease. Therefore the company is required to appoint new head of marketing and focus on new strategies for increasing its sales and retaining its customers. Question 3 a) Business risk can be explained as the risk that is associated in maintaining high level of inventory is over production as compared to its cash flow implications and the risk that is associated with maintain low level of inventory is difficulty in sustaining its customers. Audit risk is associated with loss or damage in storage, risk of theft and poor recording. The similarity of both this risk is that it affects the cash position of the company and both risk are associated with inventory and the dissimilarities between them is that business risk is associated with retaining its customers and the audit risk is related to poor maintenance of inventory. b) i. The information that will be useful for understanding the company is that the company has faced business risk in manufacturing the baby toys and manufacturing defective pants that increased the complaints of the customers, increase in the loss and it faced audit risk since no adjustment for valuation of the loss has been made. b) ii. The company has faced audit risk in respect of its adjustment in valuation and it faced business risk by manufacturing baby toys. The auditor is required to inspect the inventory and record its entire inventory through proper counting. Question 4 a) iii. The internal control system is implemented by the auditor in planning the audit procedures for identifying and detecting the errors in the financial statements and also designing the audit procedures. It identifies the risk of the business towards the achievement of the objectives. b) iv. The deficiency in the internal control system of the luxury industry is that it does not evaluate the inventory when the orders are placed and the sales order are not reviewed properly and the inventory are verified on the basis of assumptions. The implication in the internal control system is that it is not reviewed and monitored properly. b) v. The recommendation for resolving the issues related to the internal control system of the luxury styles is that the management is required to ascertain the risk and minimize the risk by designing the activities in such a way the objectives of the industry are attained. The industry is required to assess the risk, monitor the inventory and verify the inventory that is available and also controlling the environment. Question 5 a) The fundamental principles of the independent auditors are the auditors are required to understand the environment of the entity, determine the risk and materiality of the business, understanding the internal control system and the accounting procedures, the timing and the extent of the audit procedures and supervision, co ordination and review of the audit work. The independent auditor is required to properly judge the financial statement and the activities of the enterprise. b) The chief financial executive is offering a dinner to the auditor since it expects that the auditor will neglect the misstatement of r the error on the financial statement and will publish the report in favour of the company and the chief executive officer is attempting to build a good relation with the auditor who is going to audit Rem & Co. c) As an auditor it is advisable that for setting internal audit department it is required to appoint the auditors who will be responsible tracking the activities and rectifying the error that is committed by the company. The internal auditor is responsible for monitoring the activities of the company. Read More