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Audit Committee and Internal Control Assignment -

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Task 1 - Examine the corporate governance report of a selected public listed company to ascertain the compliance of the company with the Code of corporate governance for public listed companies in the sultanate of Oman (2016) - principle 10: Audit Committee and Internal Controls.

Answer - Analysis of the Audit Committee and Internal Control requirement in the National Bank of Oman

Introduction

The boards of directors of the companies are having the responsibility for ensuring the accuracy of the transactions of the company and the risk management. Thus it is the duty of the board to ensure that the top management is having proper Internal Control management and also risk management systems to ensure the protection of the shareholder's interest and the assets of the company.

Summary

The companies are controlled and directed by the Corporate Governance. The Corporate Governance is being maintained by the Board of Directors which are being appointed from the shareholders. The Audit Committee is an important committee appointed by the board and it helps in maintaining the integrity in relation to the financial statements of the company, and thus also ensures high level of effectiveness in the Internal Control .

Principle 10: Audit Committee and Internal Control

The boards of directors are required to form an Audit Committee and they also need to specify the number of members. They must also specify the function to be performed by the members of the committee. The composition of the Audit Committee must be as under:

  • The committee must be at least three directors and the majority of the directors need to be the Independent Directors of the board.
  • One member of the Audit Committee must possess the expertise in relation to finance and accounting.
  • The chairperson of the Audit Committee is to be selected from the committee members who are the Independent Directors of the company

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The Audit Committee helps the Board of Directors in the various tasks:

  • It will help the board in the verification and the validation of the overall efficiency of the top management in regard to implementation of the directions given for the operations in the company and also the fulfillment of the guidelines given by the board.
  • The monitoring and the evaluation of the accuracy and effectiveness of the Internal Control System.
  • It will help in creation of the policies in order to safeguard the material, manpower, and other resources of the company and also protect the assets of the company.

The quorum is being found in the Audit Committee meetings if the Independent Directors are present in majority. The chairperson of the Audit Committee is being elected in the first meeting of the Audit Committee and the independent director can only hold the position of a chairperson in the Audit Committee.

The Audit Committee created by the board needs to submit the annual plan to the board by which it will specify and discharge the task and the competencies.

The competencies of the Audit Committee are as follows:

  • Reviewal of the system for the Internal Audit in the company and will also submit the viewpoint and the recommendation on the Internal Audit report.
  • Follow up of the remedial actions to be taken in regard to recommendation on the Internal Audit reports.
  • Giving recommendation in regard to appointment of the external auditor and the committee must maintain the independence while giving recommendation.
  • Consideration of the Audit Plan with the External Auditor
  • Reviewing the financial statements prepared quarterly and annually before presenting them to the board and also giving true opinion on the statements.
  • Reviewing the Accounting Policies used in preparation of Financial statements
  • Ensuring effective level of the Internal Control by evaluation of the Internal Audit report and also the discussion with the appointed external consultant.
  • It acts as the communication channel between the auditors and the boards of directors.
  • Risk management plan need to be prepared which will specify the different risks, procedure for risk identification, monitoring risk and measuring the level of risk. It will also specify the method of regular examination and detection of new risk and also the steps for risk mitigation.
  • Set up the programs and policies for risk management in company.

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Implementation of the Audit Committee and Internal Control requirements in the National Bank of Oman

The National Bank of Oman is having a well managed system in relation to the risk management. They maintain proper balance between the level of risk in the company and the results of the company.

The Audit Committee in the National bank of Oman consists of four members from which three are the Independent Directors of the company. Eight meetings were held by the committee in the year 2018. The authorities and the responsibilities in relation to the Audit Committee are being approved by the Charter of Audit Committee and approved by the board on annual basis.

Hence the analysis of the Corporate Governance report-2018 of the National Bank of Oman shows that company is complying with all the requirements of the principle-10 Audit Committee and Internal Control in relation to the composition, specification and also the tasks of the committee.

The responsibilities of the Audit Committee includes giving recommendation in regard to external auditor, discussion of the audit plan with the external auditors, approval of the non-audit services that are being assigned to the external auditors, proper review of the budgeting, staffing, and the compensation of the division appointed for performing audit, review the appointment of the Internal Auditors, reviewing the effectiveness in the function of the Internal Audit, review and discussion of matters of critical importance with the Internal Auditor, review the response of the management to the findings of the Internal Audit in order to assess the effectiveness of the Internal Audit, assessment and reporting the performance of the Audit Committee in comparison to the annual plan to the Board of Directors, undertaking meetings with the auditors separately in order to know their view point so as to enhance the effectiveness of compliance and also the level of the Corporate Governance, reviewing the process of financial reporting and they are also reviewing the changes in the accounting policies and the and estimates, and also the deviation of the accounting from the IFRS and also undertaking proper discussion with the auditors and the management in relation to the fact. The Audit Committee also ensures that the related party transactions are in accordance with the policy of the bank and also the CMA Code of Corporate Governance.

Rationale of implementation of Audit Committee in listed companies

The Audit Committee had become an important part of the functioning in the listed companies. The main function to be performed by Audit Committee is to provide information in regard to the process of the financial reporting, the auditing process, the system of internal reporting in the company, and also ensure the rules and regulations compliance.

The Audit Committee also reviews the significant issues related to reporting and accounting and also the recent changes in order to analyze their impact on the company's financial statements. They also assess the financial information of the interim period in order to ensure the accuracy and completeness of the financial reports. They undertake the review of audit results in accordance with the audited standards.

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They undertake separate discussion with both the auditors appointed for external audit and internal audit so as to discuss the critical affairs and hence also help in maintaining coordination amongst the organization. The Audit Committee is also having authority over the budgets and the work done by the external auditors, hence it helps in providing protection to the investors in relation to the trust on the financial reports that are being released by the listed companies.

Thus Audit Committee is very helpful for maintaining the protection of investors and the adequate function in relation to the capital markets by ensuring that the investors of listed companies are having all the information that is being required by them in order to make decisions.

Conclusion

The Audit Committee helps in reviewing the financial statements and also ensuring that they are made in compliance with relevant standards. The Audit Committee ensures that the reports are in compliance with the law in relation to the management of risk. Hence they help in maintaining effective level of Internal Control. The Audit Committee is also the authority that is satisfying the Board of Directors and also the shareholders of the company that company is having proper controls in relation to different operations of the business. The Audit Committee also ensures that the practices which are undertaken in the company are ethical in nature. It also ensures that the estimates and judgments in relation to the accounting concepts are being applied on reasonable basis in order to ensure the correct view of the financial position of the company. It also helps in achieving effectiveness in the internal and external audits.

Task 2 - According the principle 1 of the Code of Corporate Governance for Public Listed Companies in Sultanate of Oman (2016), "The purpose of Corporate Governance is to set out processes by which corporates are controlled and directed to create efficient enterprises contributing to building a strong, transparent and competitive national economy".

Answer - Roles of Board of Directors as per different research theories

Introduction

The Board of Directors are the company shareholders. The election of the directors is done by the shareholders of the company and the election of managing director is done by shareholders of company. Hence the Board of Directors is a body which is been created and the position of the Board of Directors is above the management of the company and is also held accountable to different users of the financial statements of the company.

Role of Board of Directors

The role of Board of Directors is to avoid the interest conflict which may arise amongst different persons. They may also help in maintaining fairness in the company and also confidentiality. The company needs to have Board of Directors in order to ensure Accountability towards the company. It also provides that the decisions taken by the management are being reviewed in the best possible manner. The other role of the Board of Directors is to achieve the prosperity of the company by adequate controlling and directing the affairs of the company towards the interests of different stakeholders of the company. The Board of Directors are also required to deal with different issues that may arise in relation to the Corporate Governance, Corporate Social Responsibility and also the ethics applicable to the Corporate Sector. The Board of Directors are required to use the resources in the best possible manner in order to achieve success.

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1. The stewardship theory by Davis and Donaldson, 1991 provides that the managers are being trusted that they are having due competence in order to administer and manage the resources of the corporate and the resources are being utilized in the best possible manner to maximize the interest of the shareholders as the Board of Directors are having full information in regard to the strength, weakness, threats and opportunities of the corporate

2. The agency theory by Gospel and Jackson, 2008 provides that there is imperfection in regard to the relationship between the providers of capital that is the principals and the fiduciary which are acting as the agents for managing the capital. There is separation of management and ownership in the corporate culture. This theory points out that the interest of the shareholders and the directors managing the operations are different. Thus this theory concentrates that practice of Corporate Governance should be adequately followed by the directors in order to maintain the performance of the company irrespective of the divergence of interest.

3. The research dependence theory by Ulrich and Barney, 1984 provides that the resources which are being required by the company should be acquired by the Board of Directors through the contact network in order to ensure efficiency and effectiveness so as maintain the quality in the performance of the corporate. Hence this theory concentrates on the success of the organization by maximizing the power of the directors to acquire the scarce and necessary resources. Hence the Board of Directors can accordingly acquire the important resources in an effective manner. As per Peck and Tacheva, 2007 the board is also considered as the spanners of boundary which will secure different resources such as capital, venture, and knowledge required for the success of the company. As per Siciliano 1996, the board members should be from diverse areas as it will help in having broad network of corporate which will lead to improvement in the financial performance of the company.

The Board of Directors needs to fulfill the following tasks as per the resource dependence theory and the stakeholder theory:

As per Selznick 1966, they need to take up the option for external influences. The boards of directors are being considered as the source for securing the links to different shareholders in the environment of business.

As per Mintzberg 1983, they need to establish contacts in order to raise funds. Thus the directors need to maintain the contacts with the new people in order to secure their requirement for the resources.

As per Mintzberg 1990, they need to take up steps in order to enhance the reputation of the corporate in the market. The boards of directors are the representatives of the company in the society and thus they make undertake actions in favor of society in order to build of public image.

As per Zahra 1990, they need to give adequate advice to the company in order maintain Corporate Governance. The Board of Directors need to review and analyze the financial results in order to propose the changes and hence can also give recommendations in order to make changes in the strategies of the company.

As per legislative theory of Williams 1979, it is the Board of Director's responsibility is to perform roles of control as the source of discipline which is independent and thus make alignment of the shareholders interest with the interest of the management.

As per Demb and Neubauer 1990, the Board of Directors is also considered as the mechanism of governance as they help in adding value to the corporation by proper review of the process of working of management of the company and also acts as the auditor of the company.

Thus the Board of Directors is performing different roles as per different theories in order to make decision making. The resource theory and the stakeholder theory specify the service roles of the board. The agency theory, decision control theory and legalistic theory specify the control theory of the Board of Directors.

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