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Corporate Governance and Limitation of Auditor Assignment help

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Corporate Governance and Limitation of Auditor

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Corporate Governance and Limitation of Auditor’s Liability

 

Question 1
The key motive in audit is expressing an opinion on the “truth and fairness” of the financial statements, financial position, and organization’s result of operation in all material aspects in accordance with Generally Accepted Accounting Principles. And to express such opinion, the external auditor, in addition to using auditing techniques to support his findings, needs to make sure that financial information provided to shareholders is authentic and reliable.

The Companies Act 1961, makes sure that the appointed external auditors perform their duties and fulfil their obligations effectively. The amendments brought in 2001 and 2010 have further improved the efficiency of auditors for the interest of shareholders and owners. Owing to the recent scams involving negligence on the part of both external auditor and audit committee over the world, the concern for corporate governance has increased substantially and creating more pressure on external auditors for their reliance on audit committee.

This report examines the auditors’ responsibility in reviewing the governance of audit client. It reviews the AISC report on Commonwealth Bank and investigates the role of auditor in dissolution of companies.

Introduction

Corporate governance is one of the most dynamic aspect of any organization. According to Justice Owen, corporate governance can be described as a structure of systems, processes, rules, and relationships, within which the authority and responsibility is regulated within an organization (HIH Royal Commission Report, 2003). It is a framework of how the key managerial personnel are to perform their duties to add value to shareholders’ wealth. This framework ensures most effective allocation of capital for productive purposes.

Corporate governance is very significant for market success and shareholders’ wealth. In the wake of audit scandals such as HIH Insurance and Enron, major economies around the world have reacted swiftly by eliminating the possibility of similar events. Hence, corporate governance is now a globally debated topic, and the main concern of this is the role and responsibility of an auditor within its framework.

Methodology

The research methodology for preparation of this report involved gathering related significant data from precise documents along with the AISC report on Commonwealth Bank and creating a database for the purpose of analysing the gathered information and arriving at a better conclusion and understanding the auditor’s responsibility in corporate governance.

Findings, Discussion, and Recommendations

Corporate governance is the process of monitoring the activities of key managerial personnel of a company. The areas which are considered to be of most significance in corporate governance are monitoring and supervision of management’s performance and safeguarding the accountability of management towards stakeholders of the company (Keay, 2016). Before this, the most important elements of corporate governance were independence of auditors and directors and full disclosure by them. Independence of auditors and directors means that they must make a safe distance from organization to assure the stakeholders of their unbiasedness (Sternberg, 2004). On the other hand, full disclosure requires contents of audit work to be provided in professional pronouncements and regulatory demands.

Auditors plays a major function in the framework of corporate governance. Their responsibilities include analysing some of the most significant corporate governance aspects which help to regulate the activities of management. Furthermore, the audit of annual statements makes the financial information more reliable and ensures its transparency (Bosch, 1995). The main objective of external auditors is to certify that actions of management and Board of Directors are towards creation of shareholder’s wealth. The external auditors, by maintaining objectivity, ensure the effectiveness of organization’s internal control and efficiency of its internal check. Moreover, external auditors can also facilitate an effective supervision of financial reporting by relying on the data of audit committee and working with internal auditors (Sternberg, 1998).

Nevertheless, the extent of external auditor’s capabilities on fraud and error is limited, so there is a need to acknowledge the expectation gap in corporate governance. An auditor cannot be expected to locate and unearth every single instance of fraud or error in the organization. As stated by Solomon in his Cadbury Report, the obligation of auditor is not to prepare financial statements, or assure that data provided in it is accurate, but to state in the company’s annual report that consolidated financial statements show a true and fair view of state of affairs and working results of the organization. The report also highlighted that while there is no question of whether or not audit function is required, what matters is how audit function can be assured to be conducted efficiently and effectively by external auditors (Martin, 2006).
 
In August 2017, due to numerous incidents in relation to CBA group which damaged its public standing and reputation, the Australian Prudential Regulation Authority (ARPA) announced a Prudential Inquiry in order to examine the practices and framework relating to accountability, culture, and governance within Commonwealth Bank of Australia. On 1st May 2018, ARPA released its final report on Commonwealth Bank’s prudential inquiry which includes its numerous issues recognised and recommendations. The overall conclusion of report was that Commonwealth Bank’s continuous success has “dulled the senses” of upper level management, with special reference to non-financial risk management.

The following table explains the impact of each issue in Commonwealth Bank governance as identified by ASIC in its final report on prudential inquiry. It also explains how the recommendation of ASIC will reduce the audit risk mentioned therein.
 
 

 

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