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					THE ROLE OF AUDIT COMMITTEES AND INTERNAL AUDITORS

Presented by R. DHARMARAJAN

TOPICS OF DISCUSSION
• Requirements on the formation of Audit Committees • Role and Responsibilities of Audit Committees • Role and Responsibilities of Internal Auditors • Relationship between Audit Committees and Internal Auditors • Opportunities and Challenges for Internal Auditors under the new code of Corporate Governance

R.DHARMARAJAN

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Requirements on the formation of Audit Committees
Introduction:

Recently we have seen the accounting and auditing matters in the front page of the media like never before.The effectiveness of the Audit Committee, the key group within a company’s Corporate Structure promoting the integrity of published financial information- in discharging its oversight responsibilities continue to be at the forefront of the minds of investors and regulators.

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Requirements on the formation of Audit Committees(cont'd)
• In most countries it is a compulsory committee required by law governing listed companies.

•

An effective Audit Committee is crucial in enhancing Corporate Governance practice of a company

•

In Singapore it is a compulsory committee required by law in listed companies(Listing Manual requirement).

•

Audit Committee is a key player of the Corporate Governance process.

•

The Singapore Companies act also sets out the requirements which Singapore incorporated listed issuers have to comply with in terms of the establishment and duties of the Audit Committee.

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Requirements on the formation of Audit Committees(contd)
As per The Code of Governance Code(CGC) by

recommendations which were subsequently approved the Singapore Government::-

•

The Audit Committee should comprise at least three directors, all non-executive, the majority of whom, including the chairman, should be independent. At least two members should have accounting or related financial management expertise or experience.This would enhance the members’ confidence and independence when

dealing with management, and also with the external and
internal auditors.
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R.DHARMARAJAN

Requirements on the formation of Audit Committees(contd)
Reference to some other sources
• The Basle Committee(U.S.A) calls for members of the audit

committee to have knowledge of financial controls.
• The Sarbanes-Oxley Act 2002-Audit Committee must include Financial Expert – S-O (§ 407): Public companies to disclose in periodic reports whether the audit committee chair is a “financial expert. • • The Treadway Commission Report discusses terms and duties of Audit Committee. The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees issued its recommendations to improve the effectiveness,operations and independence of audit committees.
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Role and Responsibilities of Audit Committee
Role
The increasingly important role of Audit Committees is now taking center stage in the wake of major accounting scandals and corporate collapses(E.g.- Enron,WorldComm). • Its basic role is to assist the board discharge of its duties to share holders.

•

To help improve board monitoring of the financial reporting process by liasing with management, internal and external auditors.

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Role and Responsibilities of Audit Committee
Role (Cont’d)
• The Chairman’s role is crucial. He or she need to work well with company’s chief executive/MD to ensure that the committee maintains the confidence and support of the management.

•

To oversee the review of a company’s internal control framework and reflect the reliability of financial information for inclusion in the financial statements.

•

To review company announcements

•

It is imperative the committee keeps up-to-date with developments in the company’s internal control structure

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Role and Responsibilities of Audit Committee (cont’d)
• Roles(cont'd)
– The members should operate under a charter and such charter should be approved by the board and should be reviewed and assessed annually to remain relevant(not mandatory).

– The Treadway Commission report(U.S.A) has called for a board- approved written charter outlining the responsibilities of audit committees.(Applicable for U.S.A)

– A strong Audit Committee will add credibility to the Board as neutral body in ensuring that an adequate internal control structure is being maintained by the company’s management.

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Role and Responsibilities of Audit Committee (cont’d)
• Responsibilities
– The primary responsibilities of the audit committee should involve assisting the board of directors in carrying out its responsibilities as they relate to organization's accounting policies, internal control and financial reporting practices.

– Over seeing the External Audit coverage including the timing of the visits

– Review of engagement letter and the estimated fees

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Role and Responsibilities of Audit Committee (cont’d)
• Responsibilities(cont’d)
– Co-ordination of Internal Audits

– The AC should review the independence of the external auditors annually

– Discuss risk assessment and risk management policies with management (NYSE)

– Must pre-approve all audit and permitted non-audit services

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Role and Responsibilities of Audit Committee (cont’d)
• Responsibilities(cont’d)
– The AC Should ensure that the internal audit function is adequately resourced and at appropriate standing within the company.

– The AC should meet with internal auditors, with out the presence of the company’s management at least annually

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Role and Responsibilities of Internal Auditors

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Role and Responsibilities of Internal Auditor
Every organization should have in place a function that can provide assurance that controls are adequate to mitigate risks: that policies and procedures are being followed throughout the organizations: that processes are effective, efficient and economical and that management and the board are meeting organizational goals and objectives. This, in brief is the role of Internal Auditor.

In August 2002, The New York Stock Exchange clarified through its newly revised listing standards requiring all companies to have an Internal Audit function,

In Singapore, as per the CGC(Corporate Governance Code), listed company should establish Internal Audit function that is independent of the activities it audits.

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Role and Responsibilities of Internal Auditor
Role
– To provide assurance that things Organization are as they should be. within the

– To provide financial, operational, assurance, consultative, governance, IT and fraud related services.

– Reports to Senior Management administratively

– Reports to the Audit Committee functionally

– Should be well versed in the Organization's culture, structure, records systems, policies, procedures and operating styles.

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Role and Responsibilities of Internal Auditor
Responsibilities
– To Assess financial, operational and compliance controls at the process level.

– To examine and evaluate the adequacy and effectiveness of the Organization's systems of internal control and to suggest quality recommendations to improve controls.

– To carry out internal audit activities in accordance with the national and internal accounting bodies standards and regulations.

– Follows The Institute of Internal Auditors Standards for the Professional Practice of Internal Auditing.

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Role and Responsibilities of Internal Auditor
Responsibilities
– To maintain high standard of independence at all times

– To identify problems, make recommendations, and help to facilitate resolution.

– To assist the management in identifying business risks and impact on the business and to make appropriate recommendations to address the risk identified.

– To communicate regularly to the management through audit reports and recommend corrective actions where required.

– To investigate allegations of fraud when requested by the management and to recommend steps for early fraud detection.
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R.DHARMARAJAN

Relationship between Audit Committees and Internal Auditors

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Relationship between Audit Committee and Internal Auditors
Achieving strong corporate governance process requires effort from the board of directors,senior management and all those involved in the Organization.

Internal Audit serves as a corporate support of the Audit Committee. A close relationship between the two enhances the Internal Audit function and also helps the AC in achieving its objectives.

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Relationship between Audit Committee and Internal Auditors
The following factors contribute to better relationship between the Audit Committee and Internal Auditors.

– Review and approve Internal Audit Charter by the Audit Committee

– Regular meetings with the Internal Auditors to review Audit Plans and Internal Audit in turn should communicate to AC if there is a change in the plan.

– Open communication between Internal Audit and Audit Committee is vital. To help assure independence, the Head/Director of Internal Auditing should have direct communication with The Chairman of The Audit Committee.

– Audit Committee may request for special projects to be carried out by IA on suspected fraud and other regularities.

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Relationship between Audit Committee and Internal Auditors
Factors(Contn’d)

– Audit Committee should request formal report from the Internal Auditors as to over all controls of the company.

– Audit Committee to concur in the appointment of Head of Internal Audit and key members of the department.

– AC to determine if IA activities are carried out in accordance with The IIA’s Standards.

– Internal Auditors can also provide help and support to the Audit Committee in the committee’s own governance process in establishing a charter and to help in training.

– The Internal Auditors may help the Audit Committee with the changes to the latest developments in the industry, compliance, rules and regulations.
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Relationship between Audit Committee and Internal Auditors (cont’d)
A sample Check list of Audit Committee review of Internal Audit activities

IA Activities Internal Audit Charter Internal Audit Plan Internal Audit Budget and staffing Internal Audit Objectivity Internal Audit Independence

QTR1
X

Qtr2

Qtr3

x

Summary of Significant findings
Compliance with IIA Standards

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Opportunities and challenges for Internal Auditors under the new Code of Corporate Governance

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Opportunities and challenges for Internal Auditors under the new code of Corporate Governance.

In April 2001, the Singapore Government accepted the Final report and Code of Corporate Governance issued by the Committee on Corporate Governance(CGC). Singapore now is added to the list of countries like USA,UK.Australia,Canada and other nations that have considered how listed companies should be organizing and managing themselves. The Code of Corporate Governance provides many challenges and opportunities to the Internal Auditors. The challenges and opportunities are examined with respect to the relevant clauses under the new Code of Corporate Governance.

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Opportunities and challenges for Internal Auditors under the new code of Corporate Governance.
Code of Corporate Governance
.
The company should establish internal audit function that is independent of the activities it audits.

Opportunities
Scope for establishing an Internal Audit function. Expand the services provided. Ability to demonstrate for challenging professionals

Challenges
To act like a strategic unit within the company Adapting to the new organizational environment. Case of easier said than done.

The Internal Auditor’s primary line of reporting should be to the Chairman of the Audit Committee although the Internal Auditor would also report administratively to the CEO.

To demonstrate high Fear of the top standard of management. Independence. Difficulties in Better standing conforming to within the Company. the established systems. Relationship between Auditees at various levels within the organization.

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Opportunities and challenges for Internal Auditors under the new code of Corporate Governance.

.

Code of Corporate Governance
The Internal Auditor should meet or exceed the standards set by the nationally or Internationally recognized professional bodies including the Standards of the Institute of Internal Auditors

Opportunities

Challenges

Opportunity for qualified professionals under the respective professional bodies to work in Internal Audits. To be able to maintain high professional standard with due recognition

To meet management expectation. To be able to present quality recommendations. To break the communications gap between management and IA.

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Opportunities and challenges for Internal Auditors under the new code of Corporate Governance.

.

Code of Corporate Governance
The Internal Audit function can be either inhouse or outsourced to a reputable accounting/audit firm or performed by a major shareholder.

Opportunities

Challenges

Opportunity for reputed accounting/audit firms to provide services. Co-sourcing and third party providers

The inability to develop an inhouse function if outsourced.

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Q&A

R.DHARMARAJAN

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