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4.1 Audit Report: Explain why a qualified audit report is not a good reflection of a company - NSC Accounting - Question 4 - 2020 - Paper 1
Question 4
4.1 Audit Report: Explain why a qualified audit report is not a good reflection of a company. Provide TWO points. 4.2 The Board of Directors: Explain why it is impo... show full transcript
Worked Solution & Example Answer:4.1 Audit Report: Explain why a qualified audit report is not a good reflection of a company - NSC Accounting - Question 4 - 2020 - Paper 1
Step 1
Audit Report: Explain why a qualified audit report is not a good reflection of a company. Provide TWO points.
Answer
A qualified audit report indicates potential issues with the financial statements:
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Financial Clarity Issues: If certain information in the financial statements is unclear or missing, stakeholders may question the accuracy and reliability of the report. This lack of clarity can prevent shareholders from making informed decisions.
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Impact on Stakeholder Confidence: A qualified report may suggest insufficient audit evidence or lack of internal controls, which could lead to negative perceptions of the company’s governance. This may deter potential investors and erode existing shareholders’ confidence, prompting them to sell their shares.
Step 2
The Board of Directors: Explain why it is important for a company to include non-executive as well as executive directors on the Board of Directors.
Answer
Incorporating both executive and non-executive directors is crucial for balanced governance:
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Diverse Perspectives: Executive directors are involved in the daily operations, while non-executive directors bring an independent viewpoint. This diversity helps in making well-rounded and unbiased decisions.
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Checks and Balances: Non-executive directors serve as watchdogs for the executive team. Their oversight can help mitigate risks, ensuring that the interests of all stakeholders are adequately represented.
Step 3
The Remunerations Committee: Explain the role/responsibility of this committee and give a reason why this committee is necessary.
Answer
The Remunerations Committee plays a vital role in maintaining fairness and accountability:
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Role/Responsibility: This committee is responsible for reviewing and approving salaries, bonuses, and other forms of compensation for executives. Their oversight ensures that remuneration packages are aligned with company performance and industry standards.
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Reason for Necessity: Establishing this committee helps prevent fraud and ensures transparency in compensation practices. It also aligns the interests of the executives with those of the shareholders, promoting a culture of fairness.
Step 4
Directors engage with clients on a regular basis in an effort to negotiate contracts and to increase sales and services. Explain why there should be a company policy for all gifts, donations or resources received by the directors from clients to be declared to the board by the directors concerned. Provide TWO points.
Answer
Establishing a policy for declaring gifts and donations is essential for maintaining ethical standards:
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Transparency: Declaring gifts ensures transparency in the relationship between directors and clients, helping to avoid conflicts of interest. This transparency fosters trust among stakeholders, as it shows the company is committed to ethical dealings.
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Mitigation of Bias: The policy helps to mitigate situations where directors might favor clients based on received gifts or donations, thus ensuring that decisions made are in the best interest of the company and not unduly influenced by outside incentives.