Chapter 4

CHAPTER 4
REVIEW QUESTIONS
1. Assume that management had determined that its organization’s audit committee is not
effective. How do the weaknesses in audit committee affect management’s evaluation of
internal control over financial reporting? Would an ineffective audit committee constitute
a material weakness in internal control over financial reporting? State the rationale for
your response.
 The audit committee can expect to review significant accounting and reporting
issues and recent professional and regulatory pronouncements to understand the
potential impact on financial statements. An understanding of how management
develops internal interim financial information is necessary to assess whether
reports are complete and accurate. Audit committees meet separately with
external auditors to discuss matters that the committee or auditors believe should
be discussed privately. The committee also reviews proposed audit approaches
and handle coordination of the audit effort with internal audit staff. When an
internal audit function exists, the committee will review and approve the audit
plan, review staffing and organization of the function, and meet with internal
auditors and management on a periodic basis to discuss matters of concern that
may arise. Where an entity has determined that there is a need to have a separate
internal audit function. The internal audit function usually evaluates and monitors
the adequacy and effectiveness of the internal control systems and so plays a vital
role in managing risks. Internal auditors usually report to the audit committee
directly. The audit committee must monitor the scope of the internal auditor’s
work and review their reports and management responses.
2. Why is there a need for a corporation to maintain a comprehensive and cost-efficient

communication channels to shareholders and other investors?
 The corporation should maintain a comprehensive and cost-efficient
communication channels to shareholders and other investors for disseminating the
relevant information. This channel is crucial for informed decision-making by
investors, stakeholders and other interested users. Hence, it is essential for the
company to have a strategic and well-organized channel for reporting.
3. What is the objective of the company in having a strong and effective internal control
system?
 The objective of the company in having a strong and effective internal control
system and an enterprise risk management framework in the conduct of its
business, taking into account its size, risk profile and complexity of operations.
An effective internal control system embodies the management oversight and
control culture, risk recognition and assessment, and correcting deficiencies.
4. What is the purpose of having an independent internal audit function in a publicly-listed

corporation?
 The purpose of having an independent internal audit function is the company
should provide an independent and objective assurance, and consulting services
designed to add value and improve the company’s operations.
5. Give at least four (4) responsibilities of the Chief Audit Executive.

 The four responsibilities of the Chief Audit Executive (CAE) are the following:
(1) periodically reviews the internal audit charter and presents it to senior
department and the Board Audit Committee for approval, (2) establishes a risk-
based internal audit plan, including policies and procedures, to determine the
priorities of the internal audit activity, consistent with the organization’s goals, (3)
spearheads the performance of the internal audit activity to ensure it adds value to
the organization, and (4) reports periodically to the Audit Committee on the
internal audit activity’s performance relative to its plan.
6. Enumerate the activities of the Risk Management department in a publicly-listed

corporation.
 The activities of Risk Management department are the following: (a) defining a
risk management strategy, (b) identifying and analyzing keys risks exposure
relating to economic, environmental, social and governance (EESG) factors and
the achievement of the organization’s strategic objectives, (c) evaluating and
categorizing each identified risk using the company’s predefined risk categories
and parameters, (d) establishing a risk register with clearly defined, prioritized
and residual risks, (e) developing a risk mitigation plan for the most important
risks to the company, as defined by the risk management strategy, (f)
communicating and reporting significant risk exposures including business risks,
control issues and risk mitigation plan to the Board Risk Oversight Committee,
and (g) monitoring and evaluating the effectiveness of the organization’s risk
management processes.
7. To what may the shareholders’ rights relate?

 The shareholders’ rights relate to the pre-emptive rights, dividend policies, right
to nominate candidates to the Board of Directors and nomination process.
8. How many participation of employee in corporate governance be encouraged?

 The participation of employee in corporate governance should be encouraged are:
(1) health, safety and welfare, (2) training and development’ and (3)
reward/compensation for employees, encourages employees to perform better and
motivates them to take a more dynamic role in the corporation.
9. True or False. Sustainability reporting includes voluntary corporate disclosures about

sustainability initiatives, plans, and associated outcomes.
 True
10. True or False. The terms non-financial reporting, corporate social responsibility, and
triple bottom-line are each sustainability-related terms.
 True
11. Define the terms non-financial reporting, corporate social responsibility reporting, and
triple bottom-line reporting. How do these terms relate to sustainability reporting?
 The non-financial reporting is a form of transparency reporting where businesses
formally disclose certain information not related to their finances, including
information on human rights. The corporate social responsibility reporting is a
periodical (usually annual) report published by companies with the goal of
sharing their corporate social responsibility actions and results. Then, triple
bottom-line reporting aims to measure the financial, social, and environmental
performance of a company over time. The three terms relate to sustainability
reporting in terms of the report synthesizes and makes public the information
organizations decide to communicate regarding their commitments and actions in
social and environmental areas.
12. What factors have driven the demand for sustainability reporting?
 The factors driven the demand for sustainability reporting are investor interest,
socially responsible investment funds and the down jones sustainability.
13. Why is there a demand for independent assurance on sustainability reporting?

 There is a demand for independent assurance on sustainability reporting because
of the existing literature on sustainability reporting and assurance suggests that
independent assurance of sustainability reporting is necessary to build credibility
and establish trust between stakeholders, and to increase its value and usefulness.
14. In unethical for a company to provide a sustainability report, but provide no assurance on
the reliability of the information contained therein?
 The sustainability report is the disclosure and communication of environmental,
social, and governance (ESG) goals as well as a company’s progress towards
them. The benefits of sustainability reporting include improved corporate
reputation, building consumer confidence, increased innovation, and even
improvement of risk management. It improves financial relations by providing a
unified message and avoiding off-message statements. Since the report is
produced on the basis of internal consensus, it constitutes a regular source of
reliable information. With this, to provide sustainability report is unethical
because if you have no assurance in providing a report then there is a tendency
that your information is not reliable and it will be unethical to the company or
other organizations.

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CHAPTER 4

2. Why is there a need for a corporation to maintain a comprehensive and cost-efficient

4. What is the purpose of having an independent internal audit function in a publicly-listed

5. Give at least four (4) responsibilities of the Chief Audit Executive.

6. Enumerate the activities of the Risk Management department in a publicly-listed

7. To what may the shareholders’ rights relate?

8. How many participation of employee in corporate governance be encouraged?

9. True or False. Sustainability reporting includes voluntary corporate disclosures about

13. Why is there a demand for independent assurance on sustainability reporting?

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