©The National Board of
Accountants and Auditors, 2017
EXAMINATION : INTERMEDIATE LEVEL
SUBJECT : MANAGEMENT, GOVERNANCE AND ETHICS
CODE : B6
EXAMINATION DATE : FRIDAY, 5TH MAY 2017
TIME ALLOWED : THREE HOURS (2:00 P.M. – 5:00 P.M.)
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GENERAL INSTRUCTIONS
1. There are TWO Sections in this paper. Sections A and B which comprise a total of SIX questions.
2. Answer question ONE in Section A.
3. Answer ANY FOUR questions in Section B.
4. In total answer FIVE questions.
5. Marks are shown at the end of each question.
6. This
question paper comprises 6 printed
pages.
SECTION A
Compulsory Question
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QUESTION 1
(a)
Businesses do not operate in vacuum. They operate in political, economic, social
and technological environment. The
stability of these factors enhance both growth of new businesses and expansion
of the existing ones.
REQUIRED:
Discuss five
main effects of government policies on businesses. (10 marks)
(b) Internal controls are the systems (manual or electronic) procedures and processes adopted by management to provide reasonable assurance regarding the achievement of objectives with respect to effectiveness and efficiency of operations, safeguarding of the company’s assets and compliance with applicable laws and regulations.
REQUIRED:
Illustrate various types of internal controls that are used by management to provide reasonable assurance. (5 marks)
(c) According to Kant’s ethical theory, individual have to obey moral laws which are universal. These are to be obeyed by all irrespective of the consequences because they are fundamental principles. Kant’s theory is applied in all spheres of life including business.
REQUIRED:
Argue for and
against Kant’s ethical theory citing examples from business undertakings. (5
marks)
(Total: 20 marks)
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SECTION B
There are FIVE questions in this section. Answer ANY FOUR questions
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QUESTION 2
(a) It is argued that one can run a business successful without having vision and mission statements. But research has proved that vision and mission are important tools for the business sustainability as well as essential ingredients of a company’s strategy.
REQUIRED:
Discuss five main benefits of organizational vision and mission.
(10 marks)
(b) Most Boards of Directors do not reach their fullest potential for effective governance. In fact, many may suffer from boardroom dysfunctions that might not be fully apparent. In many cases Board of Directors remain ineffective and therefore they do not meet the taste of strategic governance.
REQUIRED:
Illustrate various characteristics
of effective Board of Directors.
(5
marks)
(c) For any business industry to succeed, there must be several supporting factors and environment. One of these factors is harmony and peace in the society/country where the business is being operated. However, lack of peace and harmony are mainly influenced by presence of egoistic culture and tolerance.
REQUIRED:
Using
Ethical Relativism Theory explain how this theory propounds peaceful
coexistence. (5
marks)
(Total: 20 marks)
QUESTION 3
(a) Kirikiri is an accountant running a medium size shoe company where he has customers from East African countries. His company offers a good and competitive quality shoes in terms of durability and outlook. Due to the tremendous increase of customers over the past two years, Kirikiri has planned to register his firm into a group of large business firms in the market offering the same product.
Kirikiri continued to improve his services as well as making adhoc decisions on his own without understanding the impact of the external environment on his business. This resulted in the failure to earn higher profits in spite of committing to higher investments. Later, Kirikiri realized that strategy is a very important factor in any business.
REQUIRED:
Explain the
importance of strategy to any business undertakings. (10
marks)
(b) Business companies are controlled by laws and regulations in their respective countries. These companies are forced to observe all laws and regulations to avoid penalties and unnecessary sanctions from the government. But apart from laws and regulations, business companies are either directly enforced to observe and adhere to various corporate characteristics.
REQUIRED:
Elaborate various features of a good corporate governance. (5 marks)
(c) For an ordinary person, ‘law’ and ‘ethics’ seem to be synonymous, however, the two terms differ greatly in many areas.
REQUIRED:
Discuss various distinctions between ‘law’ and ‘ethics’. (5 marks)
(Total: 20 marks)
QUESTION 4
(a) Development of business strategy has been a challenge to most business organisations. The main problem is formulating business strategy in a scientific and procedural way.
REQUIRED:
Analyse necessary
steps in formulating business strategy. (10 marks)
(b) Political corruption exists in many countries and it is practised in different forms.
REQUIRED:
Discuss various
forms of political corruption. (5
marks)
(c) Mr. Makyela has been a businessman for about twenty years by now. He has been involving himself in buying food crops from farmers and store them in his large stock stores which later come to sell them in higher prices when there is scarcity of food crops. This business made him to be one of the richest men in the region. One day on his way to buy new food crops in one of the regions he met one of his friends who advised him to change his mind not to go to buy crops but to buy a piece of mineral which could earn him huge profit. He decided to buy that idea and handed over the money to his friend who took him to the place where he bought that piece of mineral. His friend and other colleagues who were possessing the mineral pretended to be innocent to him and even hired him a taxi to return him home with his piece of mineral. After reaching home Mr. Makyela started to look for business people who deal with Jewells. Unfortunately, it was discovered that the mineral was not real but instead, it was just a piece of metal.
REQUIRED:
Identify and
explain ethical problem in this case. (5
marks)
(Total: 20 marks)
QUESTION 5
(a) Business are growing not only in terms of physical expansion but also in methods of doing business. Internet and e-commerce are now gearing towards the new business world. The two have become useful for both developed entrepneurs in developing countries.
REQUIRED:
Analyse the
importance of Internet and e-commerce to developing countries such as Tanzania. (10
marks)
(b) Apart from good intention of procurement process in the purchase of public goods, the process is characterized by several malpractices including frauds.
REQUIRED:
Discuss various
types of frauds in the procurement process. (5
marks)
(c) Every organization has its unique style of working which often contributes to its culture. The beliefs, ideologies, principles and values of an organization form its culture. The culture of the workplace controls the way employees behave amongst themselves as well as with people outside the organization.
REQUIRED:
Elaborate the
importance of culture to a business company. (5
marks)
(Total: 20 marks)
QUESTION 6
(a) Apart from overseeing the operation of the business company, Board of Directors are responsible also to oversee possible business risks. Manufacturing companies for example, always face the market risks of an increase in the prices of raw materials and hence, the risk of decrease in profit margins.
REQUIRED:
Enumerate
various actions that can be taken by Board of Directors to minimize risks in a
manufacturing company. (10 marks)
(b) Chapakazi which is one of the major auditing firms in East Africa does not favour bribery and corruption. Exchange of gifts is considered bribery in this firm. Employees are highly prohibited to accept offers such as lunch, entertainment as well as promotional gifts. But in other auditing firms gifts are allowed under certain conditions.
REQUIRED:
Discuss the situations where gifts might be considered as bribe and vice versa.
(5
marks)
(c) Assume you are a senior auditor in one of the big firms in Tanzania. Recently, your firm has recruited new audit assistants to assist you in your section. One of the issues to orient your new staff is about threats to auditor’s independence.
REQUIRED:
Identify and explain any five types of threats to an auditor’s independence.
(5 marks)
(Total: 20 marks)
___________▲____________
SUGGESTED SOLUTIONS
B6 – MANAGEMENT, GOVERNANCE AND ETHICS
MAY 2017
ANSWER 1
(a) The Effects of Government Policies on Businesses
Governments establish many rules and regulations that guide businesses. Businesses will normally change the way they operate when government changes these rules and regulations. Government economic policy and market regulations have an influence on the competitiveness and profitability of businesses. Business owners must comply with regulations established by their central and local governments.
Market Catalyst
The government can implement a policy that changes the social behavior in the business environment. For example, the government can levy taxes on the use of carbon-based fuels and grant subsidies for businesses that use renewable energy. The government can underwrite the development of new technology that will bring the necessary change. Imposing on a particular sector more taxes or duties than are necessary will make the investors lose interest in that sector. Similarly, tax and duty exemptions on a particular sector trigger investment in it and may generate growth. For example, a high tax rate on imported goods may encourage local production of the same goods. On the other hand, a high tax rate for raw materials hampers domestic production.
Political stability
Government policy will always depend on the political culture of the moment. Policy crafted in a politically stable country will be different from that formed in an unstable country. A stable political system can make business-friendly decisions that promote local businesses and attract foreign investors. Unstable systems present challenges that jeopardize the ability of government to maintain law and order. This has a negative effect on the business environment.
Government Spending
Governments get money to spend from taxation. Increased spending requires increases in taxes or borrowing. Any tax increase will discourage investment, especially among entrepreneurs, who take, the risks of starting and managing businesses. Reduction in private investments shrinks production of goods and services. That, in turn, may lead to the elimination of jobs.
Interest Rates
Government policy can influence interest rates, a rise in which increase the cost of borrowing in the business community. Higher rates also lead to decreased consumer spending. Lower interest rates attract investment as businesses increase production. The government can influence interest rates in the short run by printing more money, which might eventually lead to inflation. Businesses do not thrive when there is a high level of inflation.
Regulations
Trade regulations, the minimum wage, and the requirements for permits or licenses have effects on business. For example in some countries, periodic health inspections must be carried out in all restaurants. Business might spend a lot of money and time to comply with regulations that ultimately prove to be ineffective and unnecessary. Fair and effective regulations, however, promote business growth.
(b) Different Types of Internal Controls
Generally speaking there are two types; preventive and detective controls. Both types of controls are essential to an effective internal control system. From a quality standpoint, preventive controls are essential because they are proactive and emphasize quality. However, detective controls play a critical role by providing evidence that the preventive controls are functioning as intended.
Preventive Controls are designed to discourage errors or irregularities from occurring. They are proactive controls that help to ensure departmental objectives are being met. Examples of preventive controls are:
(i) Segregation of Duties; Duties are segregated among different people to reduce the risk of error or inappropriate action. Normally, responsibilities for authorizing transactions (approval), recording transactions (accounting) and handling the related asset (custody) are divided.
(ii) Approvals, Authorizations, and Verifications; Management authorizes employees to perform certain activities and to execute certain transactions within limited parameters. In addition, management specifies those activities or transactions that need supervisory approval before they are performed or executed by employees. A supervisor’s approval (manual or electronic) implies that he or she has verified and validated that the activity or transaction conforms to established policies and procedures.
(iii) Security of Assets (Preventive and Detective); Access to equipment, inventories, securities, cash and other assets is restricted; assets are periodically counted and compared to amounts shown on control records.
Detective Controls are designed to find errors or irregularities after they have occurred. Examples of detective controls are:
(i) Reviews of Performance: Management compares information about current performance to budgets, forecasts, prior periods, or other benchmarks to measure the extent to which goals and objectives are being achieved and to identify unexpected results or unusual conditions that require follow-up.
(ii) Reconciliations: An employee relates different sets of data to one another, identifies and investigates differences, and takes corrective action, when necessary.
(iii) Physical Inventories.
(iv) Audits.
(c) Prons of Kant’s ethical theory
· Protect individuals against abuses, being exploited, or disregarding their claims in pursuit of benefits for others.
· Prohibits arbitrary favoritism, making ethics universal in its consistency
· Insists that people justify their actions, especially harmful ones.
· Makes priority out of preventing harm; promoting happiness or welfare is more discretionary.
Cons of Kant’s ethical theory
· Unclear how specific rules have to be (e.g. can one consistently be a racist without contradicting one’s own will: only against nonwhites, not self?).
· Rigidity: Never lie? (e.g to Nazis about harboring Jews?)
· Emotionally challenged: Kant claims it must be the wish of every rational agent completely to rid his/her self of emotional inclinations.
· Only “rational” beings count (directly) in ethics?
ANSWER 2
(a)
Importance
of vision and mission statements
(i) The vision and mission statements provide a reason of purpose to organizations and instill the employees with a sense of belonging. Vision and mission statements are personification of organizational identity and carry the organizations dogma and motto.
(ii) A vision and mission statements define in which the organization operates. Since they define the reason for existence of the organization, they are indicators of the direction in which the organization must move to actualize the goals in the vision and mission statements.
(iii) The vision and mission statements serve as central points for individuals to identify themselves with the organization. It gives them a sense of direction.
(iv) The vision and mission statements help to translate the objectives of the organization into work structures and to assign tasks to that who are responsible for actualizing.
(v) Finally, vision and mission statements provide a philosophy of existence to the employees. They need meaning from the work to do and the vision and mission statements provide the necessary.
(b) Characteristics and habits of boards that meet the test of strategic governance. Highly effective boards:
(i)
Create a culture of inclusion
(ii) Uphold basic fiduciary principles.
(iii) Cultivate a healthy relationship with the president.
(iv) Select an effective board chair.
(v) Establish an effective governance committee.
(vi) Delegate appropriate decision-making authority to committees.
(vii) Consider strategic risk factors.
(viii) Provide appropriate oversight of academic quality.
(ix) Develop a renewed commitment to shared governance.
(x) Focus on accountability.
(c)
Strengths of
ethical relativism
(i) Relativists believe in tolerance and respect for other people’s societies. Relativism is the only practical moral philosophy for society today, since mass migration has made a massive difference in societies. It rejects the idea that a group’s moral norms are superior to any other. This respect for diversity produces a peaceful and harmonious society.
(ii) Relativism rejects moral imperialism (one culture/society forcing their “superior” morals on another culture/society). Most of the 20th Century wars were fought for ideological/cultural reasons. Relativism rejects the unique truthfulness of any ideological position.
(iii) Language isn’t neutral – culture determines language. Words vary in their meaning from society to society, language to language. Words like “goodness” or “justice”, “truth” or “freedom” mean different things in different parts of the world and at different times in history.
(iv) Truth lies in the ideas of the masses. “Truth is with the crowd and error with the individual” – Louis Pojman. The selfishness of the individual is weakened by the needs of the group - the views of the crowd filter out the selfishness of the individual. However, groups may not always filter out personal prejudices; they might amplify them. (I think we all know an example that refutes this strength; were the Nazis morally right? Was that crowd doing the ethically right thing because they all believed they were?)
(v) With subjective relativism the individual’s character determines their morals. Most ethical theories ignore the personality of the individual. Subjective relativism puts personality to centre stage.
ANSWER 3
(a) Important of strategy to a business
(1) A well designed business strategy will offer a guide on how your business is
performing internally.
(2) A strategy can identify trend and opportunities in the future. It can examine the broader changes in market such as political, social or technological changes as well as consumer changes.
(3) A business strategy creates a vision and direction for the whole organization.
(4) By creating a business strategy a company can create a competitive advantage and ultimately understand more about themselves and where they are going.
(b) Features of good corporate governance
Good governance has 8 major characteristics. It is participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive, and follows the rule of law. Good governance is responsive to the present and future needs of the organization, exercises prudence in policy-setting and decision-making, and that the best interests of all stakeholders are taken into account.
1. Rule of Law
Good governance requires fair legal frameworks that are enforced by an impartial regulatory body, for the full protection of stakeholders.
2. Transparency
Transparency means that information should be provided in easily understandable forms and media; that it should be freely available and directly accessible to those who will be affected by governance policies and practices, as well as the outcomes resulting therefrom; and that any decisions taken and their enforcement are in compliance with established rules and regulations.
3. Responsiveness
Good governance requires that organizations and their processes are designed to serve the best interests of stakeholders within a reasonable timeframe.
4. Consensus Oriented
Good governance requires consultation to understand the different interests of stakeholders in order to reach a broad consensus of what is in the best interest of the entire stakeholder group and how this can be achieved in a sustainable and prudent manner.
5. Equity and Inclusiveness
The organization that provides the opportunity for its stakeholders to maintain, enhance, or generally improve their well-being provides the most compelling message regarding its reason for existence and value to society.
6. Effectiveness and Efficiency
Good governance means that the processes implemented by the organization to produce favorable results meet the needs of its stakeholders, while making the best use of resources human, technological, financial, natural and environmental – at its disposal.
7. Accountability
Accountability is a key tenet of good governance. Who is accountable for what should be documented in policy statements. In general, an organization is accountable to those who will be affected by its decisions or actions as well as the applicable rules of law.
8. Participation
Participation by both men and women, either directly or through legitimate representatives, is a key cornerstone of good governance. Participation needs to be informed and organized, including freedom of expression and assiduous concern for the best interests of the organization and society in general.
(c) Difference between law and ethics
|
BASIS OF COMPARISON |
LAW |
ETHICS |
|
Meaning |
The law refers to a systematic body of rules that governs the whole society and the actions of its individual members. |
ethics is a branch of moral philosophy that guides people about the basic human conduct. |
|
What is it? |
Set of rules and regulations. |
Set of guidelines. |
|
Governed by |
Government. |
Individual, Legal and Professional norms. |
|
Expression |
Expressed and published in writing. |
They are abstract. |
|
Violation |
Violation of law is not permissible which may result in punishment like imprisonment or fine or both. |
There is no punishment for violation of ethics |
|
Objective |
Law is created with an intent to maintain social order and peace in the society and provide protection to all the citizens. |
Ethics are made to help people to decide what is right or wrong and how to act. |
|
Building |
Law has a legal binding. |
Ethics do not have a binding nature. |
ANSWER 4
(a) Steps in formulating business strategy
1. Setting Organizations’ objectives
The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives.
2. Evaluating the Organizational Environment
The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors’ strengths and weaknesses.
3. Setting Quantitative Targets
In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments.
4. Aiming in context with the divisional plans
In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.
5. Performance Analysis
Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist.
6. Choice of Strategy
This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.
(b) Types of Political Corruption
1. Payoffs and Bribes
Bribery may be one of the most common types of political corruption. By definition, bribery is the act of giving money, goods or services to an official in exchange for favourable treatment. For example, a local building, contractor may pay thousands of dollars to a city council member to be the first choice for a permit to begin a new development contract.
2. Graft and Embezzlement
Some elected officials are tasked with the oversight of large sums of money. This money may be earmarked for local projects like building renovation or development contracts. If the official overseeing these projects diverts some of that money into their personal accounts, they have committed an act of embezzlement. This activity is also known as “graft”. It can occur anytime an official chooses to use funds owned by another person or group for their own personal benefits.
3. Blackmail and extortion
Political offices can provide their officials with a great deal of power. When an official uses their power and influence to threaten another person into behaving a certain way, the official is committing political extortion. Political blackmail is a related crime. This type of corruption can occur when an elected representative threatens to reveal incriminating information about someone in order to coerce that person into cooperating with them.
4. Preferential Treatment
Elected representatives are expected to exercise fairness and discretion when issuing appointment for jobs, contracts and other benefits. Preferential treatment is a type of political corruption that occurs when an official lets their appointments be influenced by inappropriate or illegal factors.
(c) Ethical case
Candidates is supposed to show that the ethical case under this scenario is the whole issue of conning. It is both unethical practice as well as criminal offence.
ANSWER 5
(a)
There are at
least five ways by which the Internet and e-commerce are useful for developing
country entrepreneurs
(1) It facilitates the access of artisans and SMEs to world markets.
(2) It facilitates the marketing of agricultural and tropical products in the global market.
(3) It provides avenues for firms in poorer countries to enter into B2B and B2G supply chains.
(4) It assists service-providing enterprises in developing countries by allowing them to operate more efficiently and directly provide specific services to customers globally.
(5) It facilitates the promotion and development of tourism of developing countries in a global scale.
(b)
Types of fraud
in procurement processes:
1.
Eliminating or
reducing competition
Even before we get into what we tend to consider the procurement process (tenders, evaluation, supplier selection, negotiation), fraud can focus on simply eliminating or reducing competition and competitive pressure. Assuming an organization stands to benefit from this, clearly that both increases their chance of winning the business, and may also enable the fraudster to achieve a return that is greater than they could under true open competition. Within this heading, we can define these fraud “species”.
Single tender
Engineering a situation whereby only one organization is invited to bid.
Extending contracts
Achieving a contract extension instead of a competitive process.
Tailoring the specification
In order to favour a particular bidder who may then be the only supplier (or one of a few) who can meet the specification.
Discouraging other bidders from competing
By bribing those other organizations, offering them other inducements, or indeed through threats.
2.
Biased supplier
selection
Once we get into the competitive process, there are further routes that the fraudster can take to subvert the fair and open process. They centrearound making the supplier selection decision biased in some way towards a particular bidder or bidders. Here are the key areas:
Inside information
Enabling the preferred supplier to position their bid successfully by giving them information other bidders do not have.
Design of the evaluation process
Introducing an unfair bias or element of the process to favour one firm (the fraudster).
Marking of bids
Biased marking and evaluation of the tenders revived to favour the fraudster.
3.
“Corrupt”
contract negotiation and management
This can be a subtle area for corruption. It usually involves collusion, with the buyer and supplier agreeing terms, conditions or payments that are not truly competitive and therefore provide some advantage to the fraudster. This can happen even if the supplier (fraudster) won the competition ‘fair and square’, but it is more usually associated with fraud earlier in the process (e.g. the supplier selection was biased and then the fraudster is offered generous contract terms). Here are the key examples.
Contract change
Once supply is under way, agreeing changes to the contract that gain are not in the contracting authorities best interests.
Contract extension
Either in scope, volume or time, again where this is against the best interests of the buyer.
4.
Over or false payment
In these cases, basically the fraudster receives payment that does not genuinely reflect the actual goods or services provided. This can happen with the help of someone from within the contracting authority; or can be a ‘solo’ fraud committed by the external fraudster. This category probably we suspect accounts for the greatest number of frauds committed in the public contracting area. Types of fraud include the following:
Over-billing quantity
9against what was delivered) – this includes invoicing for more than the actual amount provided, or for goods or services that were not provided at all.
Over-charging
Invoicing at prices higher than agreed in the contract.
Over-buying
Collusion between internal staff and fraudster leads to over-buying and invoicing of goods or services that were provided – but were not required.
Fake invoices
Invoices submitted from a fraudster that is not a supplier to the contracting authority at all.
(c)
The importance
of organizational culture
· The culture decides the way employees interact at their workplace. A healthy culture encourages the employees to stay motivated and loyal towards the management.
· The culture of the workplace also goes a long way in promoting healthy competition at the workplace. Employees try their level best to perform better than their fellow workers and earn recognition and appreciation of the superiors. It is the culture of the workplace which actually motivates the employees to perform.
· Every organization must have set guidelines for the employees to work accordingly. The culture of an organization represents certain predefined policies which guide the employees and give them a sense of direction at the workplace. Every individual is clear about his roles and responsibilities in the organization and know how to accomplish the tasks ahead of the deadlines.
· No two organizations can have the same work culture. It is the culture of an organization which makes it distinct from others. The work culture goes a long way in creating the brand image of the organization. The work culture gives an identity to the organization. In other words, an organization is known by its culture.
· The organization culture bring all the employees on a common platform. The employees must be treated equally and no one should feel neglected or left out at the workplace. It is essential for the employees to adjust well in the organization culture for them to deliver their level best.
· The work culture unites the employees who are otherwise from different back grounds, families and have varied attitudes and mentalities. The culture gives the employees a sense of unity at the workplace.
· Every employees is clear with his roles and responsibilities and strives hard to accomplished the tasks within the desired time frame as per the set guidelines. Implementation of policies is never a problem in organizations where people follow a set culture. The new employees also try their level best to understand the work culture and make the organization a better place to work.
· The work culture promotes healthy relationship amongst the employees. No one treat work as a burden and moulds himself according to the culture.
· It is the culture of the organization which extracts the best out of each team member. In a culture where management is very particular about the reporting system, the employees however busy they are would send their reports by end of the day. No one has to force anyone to work. The culture develops a habit in the individuals which makes them successful at the workplace.
ANSWER 6
(a) Actions
to be taken by the Board of Directors in managing risks
(i)
Review with management the company’s
risk tolerance, the ways in which risk is measured in an aggregate,
company-wide basis, the setting of aggregate and individual risk limits
(quantitative and qualitative, as appropriate), the policies and procedures in
place to hedge against or mitigate risks, and the actions to be taken if risk
limits are exceeded;
(ii)
Review with management the categories of
risk the company faces, including any risk concentration and risk
interrelationships, as well as the likelihood of occurrence, the potential
impact of those risks and mitigating measures;
(iii)
Review with management the assumptions
and analysis underpinning the determination of the company’s principal risks
and whether adequate procedures are in place to ensure that new or materially
changed risks are properly and promptly identified, understood and accounted
for in the actions of the company;
(iv)
Review with committees and management
the board’s expectations as to each group’s respective responsibilities for
risk oversight and management of specific risks to ensure a shared understand
as to accountabilities and roles;
(v)
Review company’s executive compensation
structure to ensure it is appropriate in light of the company’s articulated
risk appetite and to ensure it is creating proper incentives in light of the
risks the company faces;
(vi)
Review the risk policies and procedures
adopted by management, including procedures for reporting matters to the board
and appropriate committee and providing updates, in order to assess whether
they are appropriate and comprehensive;
(vii) Review
management’s implementation of its risk policies and procedures, to assess
whether they are being followed and are effective;
(viii) Review
with management the quality, type and format of risk-related information
provided to directors;
(ix)
Review the steps taken by management to
ensure adequate independence of the risk management function and the processes
for resolution and escalation of differences that might arise between risk
management and business functions;
(x)
Review with management the design of the
company’s risk management functions, as well as the qualifications and
backgrounds of senior risk officers and the personnel policies applicable to
risk management, to assess whether they are appropriate given the company’s
size and scope of operations;
(b) Distinction between a gift and bribery
A
gift is something of value given without the expectation of return; a bribe is the
same thing given in the hope of influence or benefit. Gifts and bribes can be monetary, actual
items or they can be tickets to a sporting event, entertainment, travel rounds
of golf or restaurant meals.
Even
if we agree that giving to bribe or coerce someone into influencing a decision
or outcome is wrong, it is increasingly difficult to decide where to draw the
line between permissible and impermissible actions. Sometimes accepting these gifts and amenities
may be a proper part of a business relationship. In some situations, however, accepting them
may be a serious breach of business and professional ethics, and perhaps even a
violation of the law.
Policies
and practices on handling gifts and invitations to special events vary from
company to company. For some the
potential harm to an organization’s credibility is not worth the risk and they
ban all gifts to employees, excluding personal gifts from friends and
family. Other organizations accept
gifts, but when received, donate them to a non-profit organization. Then there are some organizations where gifts
received must be declared and it is maintained in registers. In other organizations, unsolicited gifts are
shared with all employees. If everyone
benefits equally, it may lessen the perception that the gift was intended to
influence the action of a single employee.
(c) Types of threats to auditor’s independence
1.
Self-review
threat
These occur when
the auditor has also prepared some of the accounting for the fund.
2.
Self-interest
threat
This threat
emerges when, for example, an auditor has only one client or one client
represents a significant proportion of their business.
3.
Multiple
referrals threat
This arises when
an auditor receives a large number of referrals from the one client or one
client represents a significant proportion of their business.
4.
Ex-staff and
partners threat
This happens
when a staff member or partner leaves to start their own business and performs
audit for their former employer.
5.
Advising threat
This threat
occurs when an SMSF auditor also provides financial advice for the client.
6.
Relationship
threat
Relationship
threats are broad and generally cover anything that involves the auditor
knowing the trustees, members, or accountant on a personal level.
______________ 5 ______________
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