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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
Explain why a qualified audit report is not a good reflection of a company. Provide TWO points.
Answer
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Lack of Transparency: A qualified audit report indicates that certain information in the financial statements is either missing or unclear. This raises concerns about the reliability of the reported figures, which could mislead shareholders and other stakeholders regarding the company’s actual financial health.
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Potential Financial Risks: The existence of insufficient audit evidence for significant items can suggest underlying issues, such as inadequate internal controls or even potential fraud. This creates a negative perception and might lead stakeholders to question their investments, potentially resulting in a decline in share price.
Step 2
Explain why it is important for a company to include non-executive as well as executive directors on the Board of Directors.
Answer
Including both non-executive and executive directors is vital for several reasons:
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Objectivity in Decision-Making: Non-executive directors provide an independent perspective on the board, which can help to objectively challenge the decisions made by executive directors. This balance can lead to better governance and decision-making.
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Broader Expertise: Non-executive directors often bring diverse experience and knowledge from different sectors. This enriches the board's overall competency and can lead to more effective oversight and strategic direction.
Step 3
Explain the role/responsibility of this committee and give a reason why this committee is necessary.
Answer
The Remunerations Committee is responsible for:
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Compensation Oversight: They review and approve salaries, bonuses, and other earnings of directors to ensure that the remuneration is aligned with company performance and industry standards.
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Preventing Conflicts of Interest: This committee helps to avoid situations where directors could set their own pay, ensuring that remuneration practices are transparent and fair.
The necessity of this committee lies in its role in upholding management accountability and maintaining stakeholder trust through appropriate and reasoned compensation practices.
Step 4
Explain why there should be a company policy for all gifts, donations or resources received by the directors from clients. Provide TWO points.
Answer
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Transparency and Accountability: A clear policy helps ensure that all gifts and donations are disclosed and recorded, reducing the risk of conflict of interest and maintaining transparency in director-client relationships.
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Preventing Ethical Misconduct: By establishing guidelines for acceptable gifts and donations, the policy helps protect directors from being influenced in their decision-making processes, thus safeguarding the integrity of the company.