Notes on Module 2 Corporate Governance.

 Corporate governance plays a crucial role in auditing by establishing a framework that

guides the relationships between various stakeholders, including shareholders,
management, and auditors. It encompasses the systems and processes that ensure the
integrity of financial reporting and compliance with laws and regulations. Effective
corporate governance mechanisms, such as audit committees and internal audits, are
essential for enhancing audit quality and ensuring that financial statements are reliable
and free from material misstatement.
My Notes from the book lesson.
 Ensures the company runs in the interest of the shareholders.
 Principles –
 Rights of Shareholders
 Equitable treatment of shareholders (fair, same)
 Stakeholders relations ( treat them properly)
 Disclosure & Transparency ( not trying to hide)
 Responsibilities of the board.
 If they can't follow these principles they have to say why.
Research for better understanding.
 One significant aspect of corporate governance in auditing is the influence of ownership
structure and board independence on auditor choice. Research indicates that institutional
shareholders often serve as a vital corporate governance mechanism, reducing agency
costs by actively monitoring and disciplining corporate managers. This active
involvement can lead to a preference for high-quality auditors, such as the Big Four firms,
which are perceived to provide more reliable audit services compared to smaller firms.
Furthermore, independent audit committees are linked to improved audit quality, as these
committees oversee the audit process and ensure that auditors remain objective and free
from management influence.
 The internal audit function also plays a pivotal role in corporate governance by enhancing
the effectiveness of risk management and internal controls. Internal auditors provide
independent assurance of the effectiveness of governance processes, thereby contributing
to the overall reliability of financial reporting. Their reports can influence management
decisions and enhance the quality of corporate governance by ensuring that
recommendations are acted upon. Moreover, the alignment of internal audit objectives
with those of corporate governance has evolved, with internal audits now focusing on
adding value to the organization rather than merely serving management.
 Additionally, the importance of audit report timeliness underscores the relationship
between corporate governance and audit quality. Studies have shown that strong corporate
governance attributes can lead to reduced audit report lag, as firms with better governance
practices are more likely to prioritize timely and accurate financial reporting. This is
further supported by the notion that high audit quality can serve as a sufficient signal of
robust governance structures, potentially diminishing the need for additional governance
mechanisms.
 In conclusion, corporate governance significantly impacts auditing by shaping auditor
choice, enhancing audit quality through effective internal controls, and ensuring timely
 financial reporting. The interplay between these elements underscores the necessity for
organizations to foster strong governance frameworks that prioritize transparency and
accountability in their financial practices.

Practice Questions
Jun 2004 Question 1
Memo
To: Board of Directors, ZX
From: Kristaleen Jailal, Internal Audit Department
Date: 15th September 2024
Subject: Internal Audit’s Role in Corporate Governance & Audit Committee
Considerations.

(a) Role of Internal Audit in Corporate Governance

The internal audit department plays a critical role in supporting the board in
upholding principles of good corporate governance. It provides independent
assurance of the effectiveness of internal controls, risk management, and
governance processes. By regularly evaluating and improving these areas,
internal audit ensures that the company adheres to regulatory requirements and
best practices, thereby enhancing transparency and accountability. This function
helps the board fulfill its oversight responsibilities, identify potential
weaknesses early, and ensure that strategic objectives are met while managing
risks effectively. Their reports can influence management decisions and enhance
the quality of corporate governance by ensuring that recommendations are acted
upon. Moreover, the alignment of internal audit objectives with those of
corporate governance has evolved, with internal audits now focusing on adding
value to the organization rather than merely serving management.

(b) Audit Committee: Advantages and Disadvantages

Advantages
1. Enhanced Oversight: An audit committee provides focused oversight on
financial reporting and internal controls, improving the reliability of
financial statements.
2. Expertise: It brings specialized knowledge in auditing and financial
management, which can enhance the quality of governance.
3. Independence: It helps ensure that internal and external audits are
conducted impartially, increasing stakeholder confidence.

Disadvantages
1. Cost: Establishing and maintaining an audit committee can involve
additional expenses, including remuneration for committee members and
additional administrative costs.
2. Complexity: It can add another layer of governance which might
complicate decision-making and communication within the board.
3. Potential for Conflict: Disagreements between the audit committee and
other board members may arise, potentially impacting cohesion and
efficiency.
Should you require further details on these aspects, please reply to me.

Best Regards
Kristaleen Jailal

June 2006 Question 3

Memo
To: Jumper & Co
From: Kristaleen Jailal, Audit Manager, Tela & Co
Subject: Recommendations for SGCC to Achieve Compliance with
International Corporate Governance Codes.

(a) Non-compliance with International Codes

SGCC’s current governance practices do not align with international corporate
governance codes due to several key issues:
1. Concentration of Power: Mr. Sheppard’s dual role as CEO and Board
chairman undermines the principle of separation of powers, which is
crucial for independent oversight.
2. Lack of Performance Evaluation: The absence of formal performance
targets and reviews for board members violates the codes’ requirements for
accountability and transparent evaluation of executive performance.
3. Internal Audit Deficiency: The lack of an internal audit department
indicates inadequate internal control monitoring, which is essential for
ensuring effective governance and risk management.

(b) Potential Problems of Non-compliance

Failure to meet international codes may result in several problems for SGCC:
1. Regulatory Risks: Non-compliance can result in regulatory penalties and
damages to the company’s reputation.
2. Stakeholder Confidence: Investors and stakeholders may lose confidence
in the company’s governance practices, potentially affecting stock prices
and investment opportunities.
3. Operational Risks: Inadequate internal controls and performance oversight
can lead to inefficiencies, increased risk exposure, and potential financial
mismanagement.
(c) Recommended Changes for Compliance
To align with international corporate governance codes, SGCC should consider
the following changes:
1. Separate CEO and Chairman Roles: Appoint a distinct chairman to ensure
independent oversight and reduce the concentration of power.
2. Implement Performance Targets: Establish formal performance targets and
conduct regular reviews for all board members, including the CEO, to
enhance accountability.
3. Establish an Internal Audit Department: Create an internal audit function to
independently assess and improve internal controls and risk management
processes.
Implementing these changes will strengthen the SGCC’s governance framework
and enhance its compliance with international standards. Should you require
further details or assistance, please contact me.

Best regards
Kristaleen Jailal

Serena VDW Question

(a) Corporate Governance: Definition and Importance
Corporate Governance refers to the system by which companies are directed
and controlled, focusing on the relationship between the company’s
management, board of directors, shareholders, and other stakeholders. It ensures
that the company operates in an accountable, transparent, and ethical manner.
Effective corporate governance is crucial as it promotes trust and integrity,
minimizes risk, ensures compliance with laws and regulations, and enhances
long-term shareholder value.
(b)
Item Consequence Recommendation
Not enough This means that the The company should hire
Non-executive shareholders would not have at least 2 more NEDs to
Directors enough representation within the board to ensure more
(NEDs) the company and the board shareholder
may be left to make decisions representation and
that are not in the shareholder’s enough personnel for the
best interest during the non-executive roles of
financial year. the board.
Concentration of Daniel Brown is both CEO and Appoint a separate
Power chairman, which undermines chairman to ensure
the separation of powers. independent oversight.
Limited Board Only the finance director Expand board
Oversight reviews financial statements involvement in financial
and budgets. This is all about reviews and decision-
trust at this point. Changes can making processes to
be made, and other directors enhance oversight.
wouldn’t be aware.
Audit The audit committee is chaired Ensure the audit
Committee by the CEO, and decisions on committee is
Composition external auditor appointments independent and not
are made by the chairman and chaired by the CEO. The
finance director. committee should make
decisions on auditor
appointments and
remuneration.
No Internal There is an absence of an Establish an internal
Audit Function internal audit function to audit department to
monitor internal controls. regularly assess and
improve internal controls
and risk management.
 Lack of Director Directors have not been re- Introduce regular re-
Re-Election elected by shareholders since election of directors to
the listing. ensure ongoing
accountability to
shareholders.
Directors’ The finance director proposes, Implement a formal
Remuneration and the chairman approves remuneration committee
executive remuneration, with with independent
no performance-based review. members to review and
approve executive
compensation based on
performance.

(c) Auditor Ethical Responsibilities

(i) Obligatory Responsibility: Auditors must maintain client confidentiality
unless required by law or regulation to disclose information. This includes
situations where there is a legal obligation to report fraud or other illegal
activities.
(ii) Voluntary Responsibility: Auditors may choose to disclose client
information if it is necessary to prevent a serious threat to public interest,
such as significant financial wrongdoing or harm. However, this should be
approached with caution and in compliance with legal and professional
standards.