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About Audit Committee

Forums › Ask CIMA Tutor Forums › Ask CIMA P3 Tutor Forums › About Audit Committee

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by Ken Garrett.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • January 19, 2024 at 10:29 am #698640
    yizhen1
    Participant
    • Topics: 2
    • Replies: 1
    • ☆

    Hi,
    there is a question about audit committee from BPP practise question for chapter 4.
    The question is :
    Company J collects data from various digital sources to provide a big data analysis service for the sports industry. Its clients include football and rugby clubs as well as athletics and swimming coaches and it aims to support elite triathletes as well. Due to the increasing take-up of its services, the company urgently needs to expand and will soon pass the threshold in the country
    where it operates that requires the adoption of corporate governance best practice.
    J currently employs two NEDs who will be considered for the various committees that are expected to be formed. The company also has an internal audit team which is currently overseen by these NEDs. However, analysis of the company’s financial performance is undertaken by the Finance Director as both of the NEDs are ex-Olympic athletes with no business experience. They do understand the industry and the technology used by J, having pioneered some of it during their own sports careers.

    From the information above, which of the following statements about Company J’s current
    corporate governance arrangements is correct?
    Select ALL that apply.
    A. The company can satisfactorily appoint an audit committee from its existing employees.
    B. The company can satisfactorily operate an audit committee using its existing employees.
    C. The company can satisfactorily recommend the appointment of further directors using its
    existing employees.
    D.The company can satisfactorily oversee the internal audit function using its existing
    employees.
    E. The company can satisfactorily manage the relationship with its external auditors using its
    existing employees.

    The explanation of correct answers ( A, C,D) is Audit committees require at least three NEDs unless the company is small, when only two are required. Company J has only just become big enough to need to adopt corporate governance best practice so the two NEDs currently employed are sufficient. However, while they have enough NEDs, they are not suitably qualified for the demands of the audit committee due to not having any financial experience. This will also mean that they are unlikely to be able to appoint external
    auditors.

    However, the existing NEDs understand the business well enough to currently manage the internal
    audit team so could continue to fulfil this role.

    The appointment of further directors is usually undertaken by the board but recommendations
    usually come from the nominations committee which only needs the majority of it to be NEDs to
    follow corporate governance best practice, so could be undertaken using existing employees.

    My confusion: from the text books, it mentioned that for Aduit committee, it should have at least one financial expert, so I don’t think they can appoint such committee since neith of their NEDs meets this requirement.

    Plus: why they cannot appoint external auditors?

    January 24, 2024 at 6:22 am #698974
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10591
    • ☆☆☆☆☆

    I think it’s a very bad question. For example, I don’t understand the distinction between (a) and (b). What’s meant by ‘satisfactorily appoint’ if you can’t ‘satisfactorily operate’?

    And yes, one member should have financial knowledge.

    I suggest you ignore this question.

  • Author
    Posts
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