The Role of Audit Committees and the Control Environment - Literature review Example

The Role of Audit Committees and the Control Environment Name Affiliation 1.0. Introduction In any organization, achievement is the ultimate goal and to realize this, all functions in an organization must be synchronized to act as a unit. In analyzing the effectiveness and efficiency of audit committees in corporate governance, I endeavor to look at audit committees acceptable practices, and environment control for effective audit committee, ethics, independence, good corporate governance, management control, and internal control. In order to get an insight of the role of audit committees in an organization, in the strive for efficiency and effectiveness, I will give the definition of auditing, and the role of auditor, and the evolution of auditing. In my own opinion, auditing is a process that auditors use to acquire and evaluate documentation of some statements on an action or event with the aim of establishing the extent to which those statements and actions conform to the set up criteria. The outcome of the process is given to the parties concerned for decision making purposes and to correct where necessary (Grant & Simnett, 2012). The auditors’ work is to deal with the client to get resources, carry out auditing, and report the outcome of the auditing process to the management. He must keep all information in secret. The profession of auditing has rulings that are ethical and professional standards have been laid down. This is for the sole aim of guiding auditors in their duties (Broadley & Derek, 2006). History points out that audit dates back to the thirteenth century. During those early days, audits were focusing on solvency and uncovering of fraud and inaccuracies. As time went by, improvements have ocurred and the credibility of financial reports was done based on the set objectives and hence approaches in auditing have changed tremendously setting up credibility in this profession (Krishnan, 2005). Despite the fact that credibility in this profession has been enhanced, credibility of information is questionable due to conflict of interest between concerned parties, consequences that will follow when one is caught not doing right things right, and the complex structure of organizations. In this case, it requires an audit committee that is credible and transparent so as to give assurance to the parties concerned (Broadley & Derek, 2006). 1.1 Audit Committee’s efficient and effective practices. 1.1.1 The time factor. In order for the audit committee to be efficient and effective, the members must be skilled and know how to work brighter and smarter. They must give themselves enough time to finish their duties without any delay. In fact, owing to the workload they struggle very much to know and understand what to put on the list as their top priority, and this is not a good practice. To attain success, they have a lot to perform. According to studies done, organizations that are leading on the auditing and audit committees’ effectiveness are managing and excelling in doing their responsibilities as they come up (Zhou et al, 2007). 1.1.2 Financial Statement The financial statement is a tool that auditors check and examine its integrity. They review this statement annually. In order for them to ensure they gain confidence from the clients, they must review the statements carefully, assess earning’s quality, and understand them in detail. To accomplish these tasks effectively, accounting policies is a must for every member and taken as a practice. Those committees who take the lead sacrifice their time and devote a lot of efforts to this part of their work (Raghunandan & Rama, 2007). 1.1.3 Risk Management Audit committee has remained focused on understanding the internal control in the firm. This is possible due to the SOX and Bill 198 which set out the listing requirements and also stock exchange. Despite the fact, the audit committees play a critical role in managing long term success of the company in performing against its strategy (Dezoort & Salterio, 2001). The board is in charge of approving a strategic plan that considers principal risks into report. It is also accountable to guarantee implementation of a suitable risk management system. In the past, aspects that informally dealt with by the board have done without the distinction between the board responsibilities and those done by the audit committee. Even though, the audit committee focuses on internal control, they are acknowledging that they may lack expertise and knowledge to provide necessary oversight in areas such as fraud and information technology. These are areas where management overrules controls. The message should be brave in encouraging outsiders or train the committee members to get the necessary skills (Richard & Catherine, 2005). 1.1.4 The Compliance and Ethics. In public organization, there is implementation of the codes of conduct in their SOX and 198. The boards ought to oversee the code with correct monitoring functions. In most organizations, constant exposure to rules would require frequent revision to these codes by the board management for producing a new report. Audit committees are not exempted from this since they should be part and parcel of these codes (Richard & Catherine, 2005). 1.1.5 The Relationship with the External Audit. Audit committees are required to enhance relationships which are honest and professional with external auditors while dealing with tasks for choosing, giving back, assessing and keeping them, as well as managing autonomy. They ensure their comfort ability with the auditors’ capacity to undoubtedly, frankly and efficiently talk matters and concerns, and with the lead partner’s industry, potential and professionalism. They also remain in touch most of the times with lead partners before meetings, to reinforce and further cement the direct reporting relationship (Grant & Simnett, 2012). 1.1.6 The resources and investigations. The bills provide the audit committee to hire experienced advisers of their own. They must be having access to internal resources in order to support their objectives. They also need authority that is indisputable to allow the engage advisers from outside and to conduct investigations when warranted. When the committee is launching investigations, they need to ensure that they understand essential elements and apply them for success. They ought to take action quickly, retain right advisers, counsel and experts. Effective communication that is appropriate both internally and externally is mandatory (Grant & Simnett, 2012). 1.1.7 Composition of the Committee The driver of the committee’s success is possible by having directors on the audit committee with authorization, freedom and financial literacy together with honesty, fit cynicism, and verdict. They should also have knowledge of the firm and the profession, and the ability to confront decisions. The members of the committee cannot succeed on their own. They need leadership of an effective chair. The chair must be a leader who can handle the committee with professionalism (Broadley & Derek, 2006). 1.1.8 Training and Meeting Members of the audit committee who are new need a tough course program. This will allow them to know their role and the financial reporting process of the company so as to exert an impact to the company immediately. These programs should be long enough and sufficiently cover key topics and have appropriate participants. The orientation should touch on areas such as key relationships and committee processes. Formal and informal continuing education for members of the audit committee is also noteworthy. Those committees who lead create a training approach. These should be one that is more integrated by articulating clearly at the beginning of the year the time and topics that the committee will devote to training. They even n as well incorporate selected topics into agendas of meetings (Broadley & Derek, 2006). In meetings, the core work must be conducted. The committees need to the appropriate time for effective deliberation of issues fully throughout the year. All members must be active. The chair must drive the meeting agendas, distribute appropriate information on time. This must amends before the meeting. Private Sessions should be held with the financial management, the internal auditor director, external auditors, counsel, and other necessary managers. The committee members should meet themselves to give room for candid and frank session on sensitive issues (Raghunandan & Rama, 2007). 1.1.11 Charter and evaluation. The charter should be well written clearly in order to communicate the reason of existence of committees, and its roles and responsibilities, their authority and performance assessment. This plays a decisive role in guiding the committee’s tasks all round the year. This also communicates to stakeholders, through disclosing information on the company website and in filings. They will make the committee be on toes and forced to evaluate themselves regularly so as to discharge all their responsibilities. The committee evaluated as a whole and also every member evaluated individually (Grant & Simnett, 2012). 1.2 Control Environment for effective Audit committee The work of the management is to see that there is a favorable working environment that is good for working. This is realized the out performance reviews, ensuring that the process of information that is accurate and efficient. On top of this, physical facilities such as lock rooms must be provided to ensure that there is safe keeping of information. Also, duties should be divided by the employees based on specialization so that each individual can perform the intended task. This way, there is accurate and efficient discharge of duties without dulcification of duties. This will ensure elimination of fatigue. The management should also put in place information systems which is efficient. This will ensure that processing of information accurately. The following are the things management must do so as to provide good environment for audit committee to work effectively. 1.2.1 Internal control The management is responsible internal control. In order to ensure that there is better management, there should be an appropriate system. A financial report is the creation of accounting system, and judgments made by those charged with governance and management. The main reason of carrying out audit is to capture a degree confidence of the financial report users. In order to form a judgment on the financial report, the auditor must critically observe the data and allocations of the financial report so that negligence will not be an excuse. Accounting standards make room for the choice of all accounting methods and calls for the accountants to exercise judgments (Broadley & Derek, 2006). Those responsible for preparing financial reports can be biased due to their own interests. Therefore, an auditor should prepare and carryout audit with professionalism. He should do a critical assessment of evidence, and have a questioning mind. At the same time, he must exercise judgments in a professional way by using relevant knowledge, experience, and training acquired (Grant & Simnett, 2012). On the other hand, employees must not be overworked. This is because when the staff is tired then efficiency is compromised and this will affect the results. An auditor should be given the mandate and authority to assess capabilities and competence, review objectivity, get to know the work, and assess the suitability of the work of the expert for the relevant assertion. This is possible by discussing or reviewing the reasonableness of assumptions and methods used. Also, the relevance, accuracy, and completeness of source data used taken into account; considering consistency of expert’s work with results of other audit procedures (Broadley & Derek, 2006). 1.2.2 Management control This is a process undertaken in order to get rid of risk. Communicating ensures that people get information in time and correctly. Management must ensure that there is proper communication by providing efficient channels. There should be clear lines of communication. Management should adopt either horizontal or vertical lines of communication depending to the one that is effective. The management should set rules, procedures, and policies t to be followed. This is done by making sure that duties are performed according to the set rules and procedures. Besides this, there should be ample control environment. 1.2.3 Ethics and codes of conduct Ethics is Codes of ethics which are rules set by the community in order to support the welfare and ethical behaviors of individuals. The codes state explicitly the values required and outlined how members should behave towards one another. They provide objectives for the purpose of sanctions. They are principally attitudes that the mind develops by the use of conscience (Richard & Catherine, 2005). Ethics is values which deal with the requirements for the universal welfare, success, happiness and health of human beings. This calls for knowledge and understanding on the application of skills and morals and decision making and solving problems. Ethical codes set up and discipline rules so as not to create ethical culture or ensure the moral integrity of employees, but indicates what members are to do and comply as stated by the APES 110 ‘Code of Ethics for Professional Accountants (Richard & Catherine, 2005). APES 110 set out main ethical pronouncements that relate to the undertaking of an audit. ASA 200.14/ISA 200.14 and ASA 102.5 require that auditors comply with relevant ethical requirements. It consists of three sections: General Application of the Code, Members in Public Practice, and Members in Business (Grant & Simnett, 2012). The distinguishing thing in accounting as a career is its acceptance that it operates to safeguards the public defined as the collective welfare of the society of the people that the members serve. The code of ethics outlines by five fundamental principles which are: objectivity, professional competence, integrity, confidentiality, and due care. Decision making, which are sound, depends on knowledge and understanding of the basic principles on which decent values and rules bases, and competency in decision-making skills (Grant & Simnett, 2012). 1.2.4 Corporate Governance. Corporate governance is a system where companies give direction and management. It covers the behavior of Directors, management and shareholders. Board of Directors normally composed of a few corporate executives (such as CEO and CFO) and a majority of nonexecutive (preferably independent) directors (Richard & Catherine, 2005). The director is not independent if he or she associates with share holders; he has been an employee as an executive for three years, and a director after such employment. On top of these, he, or she has been a principal, employee, or consultant for three years, has been a supplier or client; has a contractual engagement with a company and has worked as a board member. The period which might affect the director's ability to act for the betterment of the company and has a relationship that could show that it is conflicting with the director's ability to act for the company’s best interests (Richard & Catherine, 2005). In 1998, the OECD developed a set of corporate governance standards covering six key area on the principles of Governance which ensures governance that is efficient, and key ownership functions, treatment that is equal to all the shareholders, part played by stakeholders, being transparent and duties of the board (Raghunandan & Rama, 2007). 1.2.5 The Oversight of Management. Audit committees work best when they have industrious closeness with all concerned with straight, and channels of communication that is ongoing. The most effective chair set out the time required in between the meetings to promote those relationships meeting unofficially, conversation on the phone, talk about issues, and preparation of upcoming meetings. Committees need to have assurance in management’s competency and thus should have a voice in assessing management. The audit committees who take the lead promote close relationships through regular communication and secret meetings. This causes the internal director to feel comfortable. It makes the char of the internal audit committees to provide to provide information and discuss issues they concerned (Krishnan, 2005). 1.2.6 Organization Management Control. In planning, the auditor must have to know the firm and the surrounding environment. This includes the industry, its regulations, nature of the firm and it operations. Also, the ownership, its structures of the firm, selection of entity and their accounting policies, strategies, and objectives (Zhang et al, 2007). The ASA/ISA 315.A1points that knowledge of the entity can assist the auditor to evaluate threat and recognize troubles, establish materiality, and think about the correctness of accounting policies and disclosures. Also, recognize areas requiring significant audit deliberation, build up prospect for use when performing investigative measures, plan audit events in reply to assessed risks of material misstatement, and evaluate audit evidence (Broadley & Derek, 2006). The structure of the organization segments the entity into small duties to be carried out by individual employees, and departments. The auditor understands this by going through the organizational charts, inquiring, and from manuals. He also gets policies and procedures by observation of actions of the workers and the top management on business transactions. The auditor gains this understanding by preparing a brief description of the business activities, undertaking a tour of the entity’s physical facilities, reviewing entity’s legal documents, examining minutes of meetings of the entity’s board of directors, and determining how the identification of related parties occurs (Grant & Simnett, 2012). He can also gain knowledge and understanding of the firm. This is by considering previous experience with entity and industry, discussion with senior people within the entity, discussion with internal auditors within the entity, discussion with other auditors and advisers, discussion with people who are knowledgeable such as industry economists and industry regulators, review of significant legislation and regulations, and performance of analytical procedures. The firm’s economic state, regulations by government, technological changes, and competition affecting the business must be considered (Richard & Catherine, 2005). In conclusion, audit committee is part and parcel of corporate governance charged with the responsibility of giving reports and the efficiency of the organization's internal systems. The main reason is to make sure financial information given to the public is accountable, transparent, credible, objective, and of integrity. This is for enhancing better decision making and formulation of policies. When there is an effective audit committee in an organization fraud reduced, and as a result, behaviors that are not ethical and illegal reduced drastically. On the other hand, there should be a control environment. This is to allow the audit work effectively. The management is charge with this responsibility and they have to provide an ample environment if the aim is to have an effective and efficient audit committee. Read More