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Greetings Tutor, I hope you are doing well.
Can you please help me with the following question-Scenario
Bluebird Co is a retail company planning to list on a stock exchange within the next six months. Management has been advised by the company’s auditors about the need for compliance with corporate governance provisions.The finance director is looking to recruit non-executive directors, as he understands that Bluebird Co will need to establish an audit committee. The finance director has cautioned the board of Bluebird Co that it should be aware of the limitations inherent in having too much of its financial assurance responsibility handled in an audit committee.
Requirement –
Which TWO of the following are limitations inherent in having too much financial assurance responsibility handled in an audit committee?A.The full board may abdicate its responsibilities to the audit committee
B.Judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human error
C.Directors who are not audit committee members may not fully grasp major accounting or risk issues
D.There is increased risk that controls will be circumvented by collusion or inappropriate management override.If you have the Q, you presumably also have the answer – so what is it about the answer that you do not understand? And where has it come from? (Whose publication?)
Also, although the scenario is based on a past exam (Bluebird Enterprises), it was not an OT-case Q.
Apologies for not being able to provide complete information.
This a practice question from Study Hub.
The correct answer is A, C.Frankly, I failed to understand the question at first place and ended up choosing wrong options. In addition the answer section does not provide any specific explanation. So, technically i failed to understand both the question and the answer.
For “inherent limitations” think risks. I would rule out B and D on the basis that these describe limitations in internal control (see page 72 of our notes) – so they have nothing to do with audit committees (neither generally, nor in the specific context of considering financial responsibilities.
A is a correct answer because the board of directors is collectively responsible for the financial statements (they are signed by the chair on behalf of the board). There is a risk that the board as a whole would rely too much on the audit committee rather than fulfil its obligations.
C is similar, in that a board needs to be “balanced” (e.g. between execs and non-execs), so the financial expertise should not be concentrated in the NEDs who make up an audit committee.
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