Professional Documents
Culture Documents
learning outcome:
Outline and explain the need for the legal and professional framework
including:
i) public oversight of audit and assurance practice
ii) the role of audit committees and impact on audit and assurance
practice.
Candidates attempting P7 are expected therefore to be conversant with
corporate governance principles, many of which they will have seen in
previous exams F8, Audit and Assurance and P1, Governance, Risk and Ethics. The focus
in P7 is on the impact that corporate governance principles and practice
can have on the audit process, and this article explores some of these
issues.
The board and its committees should have the appropriate balance of
skills, experience, independence and knowledge of the company to
enable them to discharge their respective duties and responsibilities
effectively.
There should be a formal, rigorous and transparent procedure for the
appointment of new directors to the board. All directors should receive
induction on joining the board and should regularly update and refresh
their skills and knowledge.
All directors should be submitted for re-election at regular intervals,
subject to continued satisfactory performance.
ACCOUNTABILITY
The board should maintain sound risk management and internal control
systems. The board should establish formal and transparent
arrangements for considering how they should apply the corporate
reporting and risk management and internal control principles and for
maintaining an appropriate relationship with the companys auditor.
REMUNERATION
Finally, the audit committee plays a part in fraud prevention and detection
in that whistleblowing arrangements should be made so that staff of the
company may raise concerns about possible improprieties in respect of
financial reporting matters.
EXTERNAL AUDITORS GENERAL PRINCIPLES
reviewing whether the auditor has met the agreed audit plan and understand the reasons for any changes,
including changes in perceived audit risks and the work undertaken by the external auditors to address those
risks
considering the robustness and perceptiveness of the auditors in their handling of the key accounting and
audit judgements identified and in responding to questions from the audit committee
obtaining feedback about the conduct of the audit from key people involved, for example the finance director
and the head of internal audit
reviewing and monitoring the content of the external auditors management letter (report to those charged
with governance), in order to assess whether it is based on a good understanding of the companys business
and establish whether recommendations have been acted upon and, if not, the reasons why they have not been
acted upon, and
whether the skills and experience of the audit firm make it the most suitable supplier of the non-audit service
whether there are safeguards in place to eliminate or reduce to an acceptable level any threat to objectivity
and independence in the conduct of the audit resulting from the provision of such services by the external
auditor
the nature of the non-audit services
the fees incurred, or to be incurred, for non-audit services both for individual services and in aggregate,
relative to the audit fee, and
the criteria which govern the compensation of the individuals performing the audit.
The audit committee should set and apply a formal policy specifying the
types of non-audit service:
for which the use of the external auditor is pre-approved (i.e. approval has been given in advance as a matter
of policy, rather than the specific approval of an engagement being sought before it is contracted)
from which specific approval from the audit committee is required before they are contracted, and
CONCLUSION
Candidates preparing to attempt P7 should be familiar with the corporate
governance principles outlined in this article, and they are encouraged to
read the source documentation to obtain a full understanding of general
corporate governance principles and the role of audit committees in
particular. It is the impact of these matters on the audit process that is
particularly important to understand, and candidates should be ready to
include points relating to corporate governance in their answers where
appropriate.
Written by a member of the P7 examining team