Question Tag: Corporate Governance

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  • 1 Marks

BL – May 2016 – L1 – SA – Q3 – Company Law

Identify the item not included in the Articles of Association of a company.

Which of the following is NOT contained in the Articles of Association of a company?
A. Appointment of Directors
B. Share transfer procedures
C. Appointment and remuneration of auditors
D. Procedures at meetings
E. Object clause

Answer:
E. Object clause

Explanation:
The Object clause is typically found in the Memorandum of Association, not the Articles of Association. The Memorandum outlines the company’s scope and purpose, while the Articles detail the internal management and governance.

  • 8 Marks

BMF – May 2024 – L1 – SB – Q4a – Business and Organizational Structures and Choices

Definition of stakeholders and explanation of internal stakeholders of a company.

a. Define the term “Stakeholder.” (2 Marks)
Explain briefly THREE internal stakeholders of a company. (6 Marks)

a. Stakeholder: A stakeholder is any individual, group, or organization that has an interest in or can affect or be affected by the activities, objectives, and policies of a business. Stakeholders can include both internal and external parties.

Internal Stakeholders:

  1. Employees: Employees are crucial stakeholders as they are directly involved in the day-to-day operations of the company and are affected by its success or failure.
  2. Managers: Managers play a key role in decision-making and steering the company towards its objectives. They are responsible for the efficiency and productivity of the company.
  3. Owners/Shareholders: Owners or shareholders have a financial stake in the company’s success and influence major decisions through voting rights and governance structures.
  • 5 Marks

AA – July 2023 – L2 – Q2a – Regulatory Framework and Audit Responsibilities

Procedures for appointing a new auditor after a conflict of interest at AWS Bank Plc.

a) AWS Bank Plc has one of their non-executive directors as a partner with their external auditors. This was known after a due diligence was conducted by Bank of Ghana (BoG) and later reported to the directors of AWS Bank Plc. BoG has advised the directors of the bank to take the necessary action within a month.

Required:
What procedures should the Directors of AWS Bank Plc take in appointing the new Auditor? (5 marks)

a) Procedures the Directors of AWS Bank Plc should take in appointing the new Auditor:

  • An auditor of a bank or specialized deposit-taking institution shall be appointed at an annual general meeting of the bank and must be approved by the Bank of Ghana in the manner and on the terms prescribed.
  • The directors may appoint the first auditor to act until a new auditor is appointed at the annual general meeting or until the Bank of Ghana appoints an auditor.
  • The auditor must be a member of the Institute of Chartered Accountants (Ghana) and must not be disqualified by any enactment from being appointed as an auditor of a corporate body.
  • An auditor’s tenure must not exceed six years, and they are eligible for re-appointment after a cooling-off period of at least six years.
  • 5 Marks

AA – July 2023 – L2 – Q1a – Institutional Regulation and Standard-Setting, Professional and Ethical Considerations

Requirements in the composition and functions of Audit Committees in corporate governance.

a) Boards rely on the Audit Committee to offer effective oversight of the financial reporting process, making it one of the cornerstones for effective corporate governance. Effective Audit Committee is vital for protecting investors and the health of the capital markets.

Required:
i) Identify THREE (3) requirements in the composition of Audit Committees in accordance with the best practice in Corporate Governance. (3 marks)
ii) List TWO (2) functions of an Audit Committee. (2 marks)

a) i) Requirements in the composition of Audit Committees:

  • The Audit committee should comprise at least three directors, the majority of whom should be non-executive.
  • The appointed directors should ideally have adequate knowledge of finance, accounts, and the basic legal framework governing the corporate body.
  • The Chairman of the committee should be a non-executive director.
  • The Managing Director, Finance Director, Chief Internal Auditor, and external auditor representative should be invited to attend meetings.

ii) Functions of Audit Committee:

  • Recommend the appointment of external auditors of the corporate body.
  • Review with the auditors their report on the financial statements of the corporate body.
  • Assist the board in developing policies that would enhance the operations of the corporate body.
  • 10 Marks

AA – Nov 2023 – L2 – Q4d – Internal Audit and Its Relationship with External Audit

This question identifies measures to ensure the independence of the internal auditor.

The independence of an internal auditor can be challenging, especially if he or she is a full-time employee, as compared to the external auditor who is not an officer of the company. For that matter, companies try to ensure the independence of the internal auditor through various methods.

Required:
Identify and explain FIVE (5) measures that can be put in place to ensure the independence of the internal auditor.
(10 marks)

To ensure the independence of the internal auditor, the following measures can be implemented:

  1. Reporting to the Audit Committee: The internal auditor should report to the audit committee instead of management, ensuring that they are not influenced by executives or line management.
  2. Scope of Work Decided by the Audit Committee: The scope of internal audit work should be determined by the audit committee rather than management, to avoid bias in audit assignments.
  3. Rotation of Internal Audit Staff: Internal auditors should be rotated regularly to avoid familiarity threats. Rotating them every few years helps maintain objectivity.
  4. Appointment of the Chief Internal Auditor by the Audit Committee: The audit committee, not senior management, should appoint the chief internal auditor to ensure they are not controlled by management interests.
  5. Internal Controls Should Not Be Designed by the Internal Auditor: Internal auditors should not be responsible for designing the internal control systems they will later audit, as this would compromise their independence and objectivity.

These measures help protect the internal auditor’s independence, fostering an objective and impartial audit process.

  • 10 Marks

AA – Nov 2023 – L2 – Q1b – Planning and Approach for Audit and Assurance Engagements

Identify and explain five risks that should be considered when planning an audit for Akanji Ltd.

Your firm has been appointed as Auditor for Akanji Ltd for the year ended 31 December 2022. Akanji Ltd designs, manufactures, and retails traditional fabrics. In trying to understand Akanji Ltd’s business, you observed the following:

  • Inventory is held at the warehouse and at retail shops in three different locations.
  • Customers place orders online and review the designs before sales are made.
  • There was a sharp fall in revenue due to the influx of “pirated fabric” and the directors are uncertain whether this trend will stop.
  • One retail shop was closed during the year and the premises are still available for sale.
  • The Internal Auditor was dismissed in the course of the year and is pursuing a claim for unfair dismissal. The Finance Director currently doubles as the Internal Auditor.
  • The Managing Director is due to retire next year and is likely to request repayment of loans he advanced to the business. Negotiations with the bank in respect of a loan to repay the Managing Director have started.

Required:
Identify and explain FIVE (5) risks arising from the above that should be considered when planning the audit of Akanji Ltd.
(10 marks)

  • Inventory Movement: Due to the portable nature of inventory and its movement between multiple locations, controls must be strong to prevent theft, and revenue recognition issues may arise when customers hold inventory on approval.
  • Specialized Inventory Valuation: Individual material inventory may need careful valuation and evidence from independent experts to verify authenticity, especially with specialized items like traditional fabrics.
  • Going Concern Risk: The entity’s declining sales, closure of one shop, and the Managing Director’s retirement raise concerns about the ability to continue as a going concern.
  • Internal Control Weakness: Dismissal of the Internal Auditor and consolidation of the role with the Finance Director indicate weakened internal controls.
  • Provision for Legal Liability: The potential claim for unfair dismissal from the Internal Auditor might require a provision in the financial statements.
  • 5 Marks

AA – Nov 2023 – L2 – Q1a – Audit and Assurance Risk Environment

List five ways an external auditor can fulfill responsibilities toward a company’s corporate governance.

The external auditor’s responsibility towards corporate governance is to provide an independent and objective assessment of the effectiveness and efficiency of the company’s corporate governance practices. The auditor’s role is to evaluate the company’s internal controls and make recommendations for improvements to ensure the company is adhering to good corporate governance practices.

Required:
State FIVE (5) ways the External Auditor can fulfill his/her responsibility towards the company’s corporate governance practices.
(5 marks)

  • Conduct a comprehensive audit of the company’s corporate governance practices, including its internal controls, risk management framework, and compliance with applicable laws and regulations.
  • Review the company’s policies and procedures to ensure they are appropriate and effective in achieving the company’s corporate governance objectives.
  • Assess the effectiveness of the board’s composition, independence, and risk management processes.
  • Evaluate the company’s code of conduct and ethics policies to ensure proper implementation and communication throughout the organization.
  • Review the company’s sustainability reporting practices to ensure compliance with relevant reporting frameworks and standards.
  • 10 Marks

AA – Nov 2017 – L2 – Q2a – Internal Audit and Its Relationship with External Audit

Compare and contrast the roles of internal auditors and external auditors.

Internal audit is a function established by management to assist in corporate governance by assessing internal controls and helping in risk management. It can be a department of employees or outsourced to expert service providers.

Internal auditing is different from external auditing, although the techniques used by both are very similar. While the technique used may be similar, the focus and reasons behind the audit are different.

Required:
Compare and contrast the roles of internal auditors and external auditors.

Aspect Internal Audit External Audit
Objective To add value and improve an organization’s operations. To express an opinion on the truth and fairness of financial statements.
Reporting Reports to the board or those charged with governance (e.g., audit committee). Reports to shareholders or members on the financial statements’ accuracy.
Scope Work focuses on assessing internal controls and risk management. Work focuses on verifying the financial statements for accuracy and fairness.
Relationship with Co. Often employees or outsourced experts hired by the company. Independent of the company, usually appointed by shareholders.

(4 points @ 2.5 marks each = 10 marks)

  • 14 Marks

AA – Nov 2017 – L2 – Q1a – nternal Audit and External Audit Relationship

Discuss the benefits of forming an audit committee for Ebaatsake Ltd based on issues raised in a scenario.

Ebaatsake Ltd designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Ebaatsake Ltd is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital.

The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Ebaatsake Ltd’s jurisdiction does not require any. The executive directors are very successful in running Ebaatsake Ltd, partly from their training in production and management techniques, and partly from their hands-on approach providing motivation to employees.

The board is considering a significant expansion of the company. However, the company’s bankers are concerned with the standard of financial reporting as the Finance Director (FD) has recently left Ebaatsake Ltd. The board is delaying provision of additional financial information until a new FD is appointed.

Although Ebaatsake Ltd does have an internal audit department, the Chief Internal Auditor frequently complains that the board of Ebaatsake Ltd does not understand his reports nor provide sufficient support for his department and the internal control systems within Ebaatsake Ltd. The board of Ebaatsake Ltd concurs with this view. Adoko & Co, the external auditors, have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Adoko & Co are appointed by and report to the board of Ebaatsake Ltd.

The board of Ebaatsake Ltd is considering a proposal from the Chief Internal Auditor to establish an audit committee. The committee would consist of one executive director, the chief internal auditor as well as three new appointees. One appointee would have a non-executive seat on the board of directors.

Required:
Discuss how the formation of an audit committee could address the issues raised in the above scenario.

  • Improved financial reporting: Now that the financial director has left, the company appears to have no-one internal with appropriate financial reporting knowledge. The audit committee could recruit personnel with financial reporting experience, improving the quality of financial reporting and allowing the board to focus on operations.
  • Strengthening the internal audit position: The internal audit function is poorly supported. An audit committee would strengthen the independence of internal audit and provide more support for control systems.
  • Strengthening the position of the external auditor: External auditors face a similar issue with misunderstood reports. The audit committee would offer an independent forum for addressing concerns raised by external auditors.
  • Strengthening external auditor independence: With the audit committee recommending the appointment of external auditors, the risk of familiarity threat due to the current close relationship between the auditors and board would be reduced.
  • Non-executive director: The committee would bring in a non-executive director, offering an independent view on critical decisions, especially where there are currently no non-executive directors.
  • Increased credibility: Establishing the audit committee would increase the credibility of the company’s financial reports and demonstrate a move towards best practices in corporate governance, helping to reassure the bank.

(6 points @ 2.3 marks each = 14 marks)

  • 10 Marks

AA – Nov 2020 – L2 – Q4b – Internal Audit and Its Relationship with External Audit

Discuss the role of internal audit in corporate governance and risk management.

You have responded to an advertisement by a reputable company for the appointment of an internal auditor. You realized the need to prepare well for the interview.

Required:
In anticipation of the questions you may be asked at the interview, discuss the role of internal audit in corporate governance and risk management.
(10 marks)

Role of Internal Audit in Corporate Governance:

  1. Assessment of Control Systems: Internal audit assesses the effectiveness of the company’s internal control systems to ensure that controls are adequate and functioning properly. This helps to maintain reliable financial reporting and compliance with regulations.
  2. Support to the Board: Internal auditors provide the board with assurance on the effectiveness of control systems and risk management practices, helping the board fulfill its oversight responsibilities.
  3. Monitoring Compliance: Internal audit monitors compliance with laws, regulations, and company policies, ensuring that the organization adheres to legal and regulatory requirements.
  4. Improvement Recommendations: Internal auditors offer recommendations for improving processes and controls, enhancing the overall governance framework and operational efficiency.

Role of Internal Audit in Risk Management:

  1. Risk Assessment: Internal audit plays a key role in identifying and assessing risks facing the organization. This involves evaluating the risk management processes and ensuring that risks are properly identified and mitigated.
  2. Evaluation of Risk Management Framework: Internal audit evaluates the effectiveness of the risk management framework, including the implementation of risk mitigation strategies and the management of emerging risks.
  3. Assurance on Risk Management: Internal auditors provide assurance to management and the board that risk management processes are effective and that significant risks are being managed appropriately.
  4. Consultative Role: Internal audit may also provide consultative services to help management develop and implement risk management strategies, improving the organization’s ability to manage and respond to risks.

(1 mark for each point – 10 marks total)

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