ToTCOOP+i O3 o4 unit-3_final_version_en

House Keeping
 Health & Safety
 Security
 Classroom agreement
 Breaks
 Trainer Introduction
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STRATEGIC PARTNERSHIP FOR INNOVATING THE TRAINING
OF TRAINERS OF THE EUROPEAN AGRI-FOOD COOPERATIVES
Financial Risk
Management
Unit 3

Programme Overview
1. Programme Introductions
2. Introduction to Terminology
3. Financial Risk
4. Solvency & Liquidity
5. Credit / Counterparty Risk
6. Cashflow Risk
7. Financing
8. Reckless Trading
9. Internal Audit

ABC of ME
You have been hired by the Creative Classroom Company to
illustrate a poster to help children learn their ABCs. By happy
coincidence, you and your first name are the subject of the poster!
1. First, take a piece of flipchart paper and write your name
vertically down the left side.
2. Next, choose a word that starts with each letter of your name.
The words should describe something about you. Write those
words horizontally across the paper, using the letters of your
name as the first letter of each descriptive word.
3. After you have listed your words, draw an accompanying
picture to illustrate each.
4. When you are finished, tape your poster to the wall.

N -
A -
M -
E -
ABC of ME - Example
NOVICE DRIVER
ALWAYS HELPING OTHERS
MUPPETS – LIKE THEM
ECSTATIC TO BE HERE

Risk Management
What do you want to get
from today?

Financial Risk Management
Aims:
The aim of this module is to enable learners to:
 be able to analyse the sources of financial risk as well as the importance
of implementing effective financial risk management procedures in
business entities.
 Learners will also learn to how to mitigate financial risks using a variety
of financial derivatives.
Objectives: by the end of this module, learners will be able to:
 Analyse how futures and forward markets operate and be able to
calculate theoretical forward and futures prices and values
 Analyse and apply a variety of hedging and trading strategies using
options.
 Evaluate hedging strategies using forwards, futures, options and swaps to
hedge identified financial risks in currencies, interest rates, commodities
and shares and to evaluate the outcomes of these strategies
 Evaluate the need for sound financial risk management policies and
procedures in organisations and to make ethical decisions

Programme Outline:
 Terminology
 What is Financial Risk Management - FRM
 Sources of Financial Risk
 Stages of FRM
 Solvency
 Liquidity
 Credit
 Cash Flow
 Financing
 Reckless Trading
 Internal Audit

Introduction to terminology
Derivatives
A derivative security is a financial contract whose
value is derived from an underlying asset e.g.
A stock options value depends upon the value of
a stock on which the option is written
A futures contract’s value depends on the “spot
price” (price for buying now)

Forward contract
A forward is an agreement between a buyer
(“long”) and a seller (“short”) to trade:
A specified quantity of an asset
At a specified price (forward/delivery price)
At a specified time (maturity/delivery date) and
place

Options
A call option is an option to buy a certain asset
by a certain date for a certain price (the strike
price).
A put option is an option to sell a certain asset
by a certain date for a certain price (the strike
price)
Warrants
Warrants are options that are issued (or written)
by a corporation or a financial institution.

Swaps
A swap is a contract between 2 counterparties to
exchange a series of cash payments
A swap is used when a party wants to hedge some
risks or transform the nature of some cash flows,
e.g. an interest rate swap which transforms a
floating rate risk to a fixed rate risk
Facilitated by a swap dealer who then finds an
offsetting swap.

Financial risk is a broad category of risk directly
related to money. It includes risks in areas such as
investments, assets, securities, markets, credit,
business operations and the economy.
Financial Risk

Financial risk is the probability that some event
will cause an undesirable outcome on the financial
health of your business.
Financial Risk

Three main sources of Financial Risk
 Arising from exposure to changes in market
prices, such as interest rates, exchange rates,
and commodity prices.
 Arising from the actions of and transactions
with other organisations, such as vendors,
customers, and counterparties in derivatives
transactions
 Resulting from internal actions or failures of
the organisation, particularly people, processes
and systems
Financial Risk

 Process to deal with the uncertainties resulting
from financial markets
 Involves assessing the financial risks facing an
organisation and developing management
strategies in line with business objectives.
 Strategies for financial risk management often
involve derivatives
What is Financial Risk Management?

 Financial Risk Management is an Ongoing
process
Stages in Financial Risk Management include:
Financial Risk
 Identify and prioritise financial
risks
 Determine appropriate level
of risk tolerance
 Implement risk management
strategy in line with business
policy and objectives
 Measure, report, monitor and
refine as needed.

Financial Risk
Examples of Financial Risk include

In Groups of 3-4
Draw pictures of your
interpretation of what
financial risk management
and your role as a director is
about.
No words. Only pictures
allowed.
Report to the larger group.
Pick a spokesperson.
Group Exercise 1 – 10 minutes

Run Break Timer – 15 minutes

Solvency, is the degree to which the current
assets of an individual or entity exceed the
current liabilities of that individual or entity.
Solvency can also be described as the ability of a
corporation to meet its long-term financial
commitments and to accomplish long-term
expansion and growth.
A solvent organisation is one that owns more
than it owes, in other words, it has a positive
net worth and a manageable debt load.
Solvency

Solvency ratios, also called leverage ratios,
measure a organisation’s ability to sustain
operations indefinitely by comparing debt levels
with equity, assets, and earnings.
In other words, solvency ratios identify going
concern issues and a organisations ability to pay
its bills in the long term.
Better solvency ratios indicate a more
creditworthy and financially sound
organisation in the long-term.
Solvency Ratio’s

Liquidity risk is a financial risk that for a certain
period of time that financial asset or commodity
cannot be traded quickly enough in the current
market without impacting the market price.
It implies that you pay/receive inappropriate
amount for assets
It may mean you are
going to have
cash flow problems
Liquidity Risk

Solvency and liquidity are both terms that refer to an organisation’s
state of financial health, but with some notable differences.
Solvency vs Liquidity
Solvency refers to an
organisation's capacity to
meet its long-term financial
commitments
A solvent organisation is one
that owns more than it owes;
in other words, it has a
positive net worth and a
manageable debt load
Liquidity refers to an organisation’s
ability to pay short-term
obligations; the term also refers to
its capability to sell assets quickly
to raise cash.
an organisation with adequate
liquidity may have enough cash
available to pay its bills, but it may
be heading for financial disaster
down the road.
Solvency and liquidity are equally important, and healthy organisations
are both solvent and possess adequate liquidity.

The risk that a counterparty will not settle an
obligation for full value, either when due or at any
time thereafter.
Also simply known as “bad debt”
Credit Risk can take three forms:
1. Default Risk
2. Downgrade Risk
3. Settlement Risk
Credit or Counterparty Risk

Default Risk
Exposure to loss due to non-payment by a
borrower of a financial obligation when it
becomes payable
Downgrade Risk
The risk that a bond price will decline due to a
downgrade in its credit rating.
Settlement Risk
The risk that a borrower delays in
settling a financial obligation within
a given contract period
Credit or Counterparty Risk

Why do Organisations Fail?
 Not Profitable?
Cash Flow
Actually, it’s
 The Lack of Cash
Flow – not Profit
 Profit is Key, but does
not guarantee
success.

 Transactions which increase the cash position
of the entity are called as inflows of cash.
 Transactions which decrease the cash position
as outflows of cash.
Cash Flow

Why the need for a Cash Flow Statement?
 For to highlighting the cash generated from operating
activities .
 For to planning the repayment of loan schedule and
replacement of fixed assets, etc.
 For to the projection
of future investing and
financing plans of the
enterprise.
 For to efficient and
effective management
of cash.

Why the need for a Cash Flow Statement?
The statement of cash flow shows three main
categories of cash inflows and cash outflows,
namely:
Operating Activities
Investing Activities
Financing Activities

 Cash sale
 Cash received from
debtors
 Cash received from
commission and fees
 Royalty and other
revenues
Cash Inflow & Outflow - Operating Activities
 Cash purchase
 Payment to creditors
 Cash operating
expenses
 Payment of wages
CASH INFLOW CASH OUTFLOW

 Cash sale of plant and
machinery, land and
Building, furniture,
goodwill
 Cash sale of investments
made in the shares and
debentures of other
companies
 Cash receipts from
collecting the Principal
amount of loans made to
third parties.
Cash Inflow & Outflow - Investing Activities
 Purchase of fixed assets
i.e. land, Building,
furniture, machinery etc
 Purchase of Intangible
assets i.e. goodwill, trade
mark etc.
 Purchase of shares and
debentures
 Purchase of Government
Bonds
 Loan made to third
parties

 Issue of Equity and
preference share
capital for cash only.
 Issue of Debentures,
Bonds and long-term
note for cash only
Cash Inflow & Outflow - Financing Activities
 Payment of dividends
to shareholders
 Redemption or
repayment of loans
i.e. debentures and
bonds
 Redemption of
preference share
capital
 Buy back of equity
shares.

Cash Flow
The Primary Role of Strategic Governance
1. What activities/projects is the organization
currently funding?
2. What value are these investments returning?
3. What alternative investments could generate
higher value?

Run Break Timer – 60 minutes

What’s in your Wallet
 Directions: “Pick a coin from your wallet. Look
at the date. I’d like you to think on one thing
that happened that year that impacted your
financial situation (good or bad!) .
 Then, we’ll go
around the table
and ask you to
share briefly
your year.”
Welcome Back

A = 1
B = 2
C = 3
D = 4
E = 5
F = 6
G = 7
H = 8
I = 9
J = 10
K = 11
L = 12
M = 13
N = 14
O = 15
P = 16
Q = 17
R = 18
S = 19
T = 20
U = 21
V = 22
W = 23
X = 24
Y = 25
Z = 26

 Is the act of providing funds for business
activities
 simply put, it is the act of bringing money into
an organisation.
 Businesses can
be financed in a
number of ways
Financing

There are two main types of financing
 Debt
 Equity
Financing

 Debt must be paid back, but it is often cheaper
than raising capital due to tax considerations.
 Equity does not need to be paid back, but it
relinquishes ownership to the shareholder
 Most organisations
use a combination
of both to finance
their Business
activities
Financing

 Debt financing is a
simple concept wherein
you borrow money from
banks, lenders or other
financial institutions
with the promise of
paying back the
borrowed amount, plus
the agreed interest at a
later date.
 Equity financing involves
bringing in investors or
partners who provide
capital in exchange for a
share in the ownership of
the business.
 These partners generally
invest because they believe
in the business idea &
expect to make profits out
of it when the business
becomes successful.

 Businesses generally use a combination of both
these sources of finance depending on the
industry & their risk appetite.
 For more riskier businesses, equity financing is
considered more viable.
 For the traditional & stable businesses, debt is
considered more suitable.
Financing

 Reckless trading is where a director is
knowingly a party to the carrying on of any
business of the company in a reckless manner.
 The most common occurrence of reckless
trading is where it can be shown that the
directors have permitted the company to incur
liabilities without having reasonable grounds to
believe that those debts would be paid.
Reckless Trading

 Reckless trading can lead to
personal liability for
directors.
 Failure to keep proper books of account is
another offence that can lead to personal
liability
However
 if the director can show that he/she took
reasonable steps or appointed another
competent and reliable person to keep the
company accounts he/she can avoid liability.
Reckless Trading

The audit committee assists the board of directors
fulfil its corporate governance and overseeing
responsibilities in relation to an entity's financial
reporting, internal control system, risk
management system and internal and external
audit functions.
Role of Internal Audit

Audit Committees
What is an Audit Committee?
 An audit committee is a committee of directors which
may be required by law or otherwise to regularly assess
the validity of the Co-operative’s financial and other
reporting arrangements, as well as overseeing its
internal and external audit processes.
 The Committee may also have further responsibilities
assigned to it by the Board of Directors .
 However at all times, the ultimate responsibility for
ensuring that the Co-operative complies with its legal
requirements remains with the full Board.

Audit Committees
What is the value of an Audit Committee?
 An audit committee helps to minimise financial,
operational and compliance risks for the Co-operative.
 It independently scrutinises the financial and other
information made available to the Board of Directors
and assists the Board in determining the validity of a Co-
operative’s financial statements and in enhancing the
quality of financial reporting.
 It also monitors the ongoing value of the external audit
in the interests of shareholders in particular and keeps
under review the performance of any internal audit
function within the Co-operative.

Audit Committees
Are we required to establish and Audit
Committee?
 Not necessarily.
 In most jurisdictions, the statutory requirement
to establish an Audit Committee only applies to
Public companies or “large” private companies,
not Co-operatives.
 However, the Audit Committee is an important
structure to aid Co-operative Boards to manage
financial and other risks more effectively.

Financial Risk Management and the
Role of the Audit Committee
 Audit Committee is a sub-Committee
Delegated a function but not a responsibility
All directors equally responsible
 Best practice - every board should what is best suited
for its particular circumstances.
 Arrangements - proportionate to the task, vary
according to size, complexity and risk profile

The Audit Committee
 Has a particular role, act independently, ensure proper
financial reporting and internal controls
 An open and transparent working relationship with a
high level of mutual respect are essential.
 Must be prepared
to take a robust stand
 to provide information freely
to listen to their views and
to talk through the issues openly

The Audit Committee
 Management is obliged to properly inform committee
 The board should ensure full cooperation from directors
and staff, all information to be provided
 Executive board members (if they exist) – duty to
provide all the information

The Audit Committee
 Core functions: expressed in terms of ‘oversight’,
‘assessment’ and ‘review’ of a particular function.
 It is not the duty to carry out functions that properly
belong to others
To do so could undermine the responsibility of others
 Should be satisfied that proper systems and allocation of
responsibilities are in place – they should not seek to do
the monitoring themselves.

The Audit Committee
However,
 the high-level oversight function may lead to detailed
work. Must intervene if there are signs that something
may be seriously amiss.
For example, committee not satisfied with explanation provided,
may need to seek independent advice

The Audit Committee
Have wide-ranging, time-consuming and
sometimes intensive work to do.
Companies need to make the necessary
resources available.
Including suitable payment to committee
members themselves. They bear significant
responsibility and time commitment to the job.
Induction and training should be provided to
members as required

Establishment and terms of reference
 The committee should have at least three (suggested) members.
 Main role and responsibilities should be set out in written terms of
reference and should include:
 to monitor the integrity of the financial statements, including any formal
announcements, and review significant financial reporting judgements;
 to review the internal financial controls and, the company’s internal control
and risk management systems (if no separate committee);
 to monitor and review the effectiveness of the internal audit function;
 to make recommendations to the board, for approval in general meeting,
in relation to the appointment of the external auditor, the remuneration
and terms of engagement;
 to review and monitor the external auditor’s independence and objectivity
and the effectiveness of the audit process;
 to develop and implement policy on the engagement of the external
auditor to supply non-audit services; and
 to report to the board on how it has discharged its responsibilities.

Terms of Reference
 The Board of Directors should prepare and approve written terms of
reference outlining the audit committee’s role.
 These terms of reference should be available for information at the
Annual General Meeting and reviewed annually by the Board.
 The terms of reference should specify how to discharge its
responsibilities, and outline the programme of meetings.
 The audit committee should, at least annually, meet the external
and internal auditors, without management being present, to
discuss issues arising from the audit.

Membership and Appointment
 The board should establish an audit committee of at
least three independent non-executive directors.
 In smaller companies the company chairman may be a
member of, but not chair.
 At least one member of the committee must have
recent and relevant financial experience.
 Appointments should be made by the board on the
recommendation of the nomination committee, in
consultation with the audit committee chairman.
 Appointments - up to three years, (may be extended,
with a cap), members must continue to be independent.

Meetings of the Audit Committee (1)
 The chairman and company secretary, decide the frequency and
timing of meetings.
The number of meetings depends on the role and responsibilities
Recommended at least three meetings per year,
 Only the chairman and members entitled be present at the meeting.
Non-members may attend for a particular meeting or a particular
agenda item – if agreed by committee
It is to be expected that the external audit lead partner and finance
director will be invited regularly to attend.
Others may be invited to attend.

Meetings of the Audit Committee (2)
 Sufficient time should be allocated for the meeting.
A sufficient interval should be allowed between audit committee
meetings and main board meetings to allow any work arising from the
audit committee meeting to be carried out and reported to the board as
appropriate.
 The committee should, at least annually, meet the external and internal
auditors, without management, to discuss matters relating to its remit and
any issues arising from the audit.
 Formal meetings of the audit committee are the heart of its work.
However, they will rarely be sufficient. The chairman and committee
members, may wish to keep in touch on a continuing basis with the key
people involved in the company’s governance.

Resources
 Sufficient resources should be provided
 Access to the services of the company secretariat on all audit
committee matters including:
assisting the chairman in planning the audit committee’s work,
drawing up meeting agendas,
maintenance of minutes,
drafting of material about its activities for the annual report,
collection and distribution of information and
provision of any necessary practical support.
 Company secretary – issues information and papers in timely manner
 Funds available if / when independent advice is required

Skills, experience and training
 Desirable that committee member with recent and relevant
financial experience has a financial qualification.
 Level of financial literacy among the other members will vary.
 Provide induction programme for new members.
Outlining the role, terms of reference and expected time
commitment, an overview of the co-operative’s business model
and strategy, etc.
 On-going and timely training should be provided. It may
include, for example,
understanding financial statements,
applicable accounting standards and recommended practice;
the regulatory framework for the co-operative’s business;
the role of internal and external auditing and risk management.
 Training may take various forms, including attendance at
formal courses and conferences, internal company talks and
seminars, and briefings by external advisers.

Relationship with the Board
 The Board decides the role of the audit committee
 The committee undertakes tasks on behalf of board, results reported to
and considered by the board.
 The terms of reference – tailored for individual co-operative
 Review annually; terms of reference, committees own
effectiveness and recommendations made to the board.
 Committee reports to the board - how it discharged its
responsibilities, including:
 significant issues considered and addressed regarding the financial
statements;
 Assessment & recommendation - external audit / auditor; and
 Any other issues.
 Disagreements: between audit committee and the board, allow
adequate time for discussion, with view to resolving the matter.

Role and responsibilities
Financial Reporting (1)
 Financial Statements : Committee reviews and
reports to the board on, significant financial
reporting issues and judgements made
 It is management’s, not the audit committee’s,
responsibility to prepare complete and accurate
financial statements
 Committee should consider significant
accounting policies, any changes to them and
any significant estimates and judgements.
Management should outline the methods used

Financial Reporting (2)
Considering the external auditor’s view, the
committee must consider whether
appropriate accounting policies, estimates
and judgements have been made.
The committee should review the clarity and
completeness of disclosures made.
Where, the committee is not satisfied with
any aspect of the proposed financial
reporting, their views expressed to board.

Whistleblowing (Protected Disclosures)
 The committee - review process which staff may
raise concerns
 Objective – ensure
arrangements are in place
for the proportionate and
independent investigation
and for appropriate follow-
up action.

Internal controls and risk management systems
 Review the co-operative’s internal financial controls and risk
management systems (if no separate committee)
 Management responsible;
 the identification, assessment, management and monitoring of risk,
 for developing, operating and monitoring the system of internal control and
 for providing assurance to the board that it has done so.
 The audit committee* receives reports from management on
effectiveness of the systems and conclusions of testing carried out.
 The audit committee* reviews and approves the statements in the
annual report on internal control and the management of risk.
*unless it is expressly dealt with by the Board or a Risk Committee

The Internal Audit Process
Monitor and review the effectiveness of internal
audit function
If no internal audit function, review annually is it
required, recommendation to the board, absence
explained
The need will vary depending on specific factors
including the scale, diversity and complexity of
activities and cost/benefit considerations.
An adequately resourced internal audit function
may provide such assurance and advice.
Other functions within the co-operative may also
provide assurance and advice covering specialist
areas.

When assessing the need for an internal audit
function, consider any changes to trends, co-
operative’s activities, markets or other external
environment factors, which have increased / may
increase risks faced by the co-operative.
If no internal audit function, management must
apply other monitoring processes to ensure the
system of internal control is functioning as
intended. The audit committee - assesses
whether such processes provide sufficient and
objective assurance.

 Review and approve the function’s remit, considering
complementary roles (internal/external audit functions)
 Ensure necessary resources and access to information is
provided to carry out its function
 The audit committee should approve the appointment
or termination of the head of internal audit

The Review of the work the committee should:
Internal auditor - direct access - board chairman
/audit committee, accountable to audit
committee;
review / assess the annual internal audit work
plan;
receive results periodically from internal auditors
review and monitor management’s
responsiveness to findings and
recommendations;
Annual meeting with head of internal audit
without management; and
monitor / assess the role and effectiveness of the
internal audit function - risk management system.

The External audit process
Audit committee is the body responsible for
overseeing the company’s relations with the
external auditor.

Appointment and tendering
Committee’s primary responsibility,
recommendation of appointment,
reappointment, removal external auditors
If the board does not accept the
recommendation, statement in annual
report outlining why views differ
Committee’s recommendation - based on
objective assessments. If new appointees
considered - tendering process

 Committee annually assess external auditors, and
report to the board on,
their qualification, expertise and resources, and
independence of and effectiveness of the audit process,
recommendation to shareholders external auditor be
reappointed.
 Assessment should cover all aspects of the audit service
provided by the audit firm.

Annual audit cycle
At start of cycle, committee ensures appropriate
audit plan in place
Committee considers whether work plan appears
consistent with the scope of the audit
engagement.
Committee – reviews the findings with external
auditors. Review should:
discuss any major issues that arose
(resolved/unresolved);
review key accounting and audit judgements; and
review levels of errors identified – obtain
explanations

Annual audit cycle
Committee: review audit representation letters
Committee: consider information provided is
complete and appropriate.
On-going monitoring process, committee
review management letter – including
management’s responsiveness to findings and
recommendations.

Annual audit cycle
At end of cycle, committee assess the effectiveness. Committee
should:
review – did auditor meet agreed audit plan, reasons for
any changes obtained;
consider the robustness and perceptiveness of the
auditors;
obtain feedback; conduct from key people involved;
review and monitor content of management letter, any
recommendations have they been acted upon, if not
reasons why; and
report to the board; effectiveness - external audit process.

Annual audit cycle
 Committee assess independence and objectivity of the
external auditor annually, considering relevant laws,
regulation and professional requirements, including non-
audit services. Relationships review ensure auditor’s
independence and objectivity.
 Committee seek reassurance that the auditors and their staff
are independent and objective. Obtain from the audit firm,
annually, information about policies and processes for
maintaining independence.
 Committee develop and recommend policy to board
regarding non-audit services. Policy reviewed regularly.
Provision of services should not impair the external auditor’s
independence or objectivity.

Communications with Members
 Terms of reference of the audit committee, including its role and
the authority should be available. Annual report section outlines
the work of the committee in discharging those responsibilities.
 The audit committee section should include, inter alia:
a summary of the role of the audit committee;
the names and experience level of all members during the period;
the number of audit committee meetings;
the significant issues considered in relation to the financial statements
and how these issues were addressed;
Explanation of the assessment; effectiveness of the external audit
process, approach taken to the appointment or reappointment external
auditor, and length of tenure current audit firm, any contractual
obligations restricting choice; and
Non-audit services, how auditor’s objectivity and independence is
safeguarded.

Challenging questions for members
of Audit Committees to ask
Self-assessment of committee effectiveness
 Have recent developments created a need for a review of the work of the audit committee?
 Are the audit committee’s terms of reference appropriate?
 Is the role of the committee vis-à-vis the board sufficiently clear?
 How does the audit committee benchmark against others?
 Is the committee’s membership sufficiently independent with appropriate experience and
expertise?
 Do steps need to be taken to avoid audit committee overload?
 What should be on the audit committee’s agenda for the coming year?
 Does the audit committee meet often enough and at the right times of the year?
 Does the audit committee understand and concur with the significant risks facing the Co-
operative?
 Is the audit committee properly informed on a timely basis of relevant matters by
management and the auditors?
 Does the audit committee utilise internal and external audit effectively?
 Do changes need to be made to how the audit committee reports to the board as a whole?

Financial and wider reporting issues
 Could the directors be accused of manipulating the figures and disclosures in
published information?
 Are there any aspects of the financial reporting which could attract the
attention of the Financial authorities?
 What is the overall quality of the Co-operative’s financial reporting, including
its reported earnings?
 Are there areas where revenue or earnings recognition could be pushed too
far?
 Can the overall level of prudence be questioned?
 Are the accounting estimates fair and reasonable?
 If any significant changes are being made to accounting policies, are they
likely to be challenged?
 Can the going concern statement be supported?

External audit
 Is the audit more than just a mere compliance exercise?
 Is management putting undue pressure on the auditors to limit their work?
 Does the audit ‘home in’ on the issues that really matter?
 Is there sufficient audit coverage across the company or group?
 What safeguards are there over threats to the auditors’ independences?
 Why aren’t unadjusted misstatements in the draft financial statements
detected by the auditors being corrected?
 Is there a risk of the financial statements being qualified by the external
auditors?
 Do the external auditors communicate adequately with the audit
committee?
 Is the external audit partner and his or her firm delivering what they
promise?
 What recommendation should be made to the board about the audit
appointment?

Risk management and internal control
 To what extent should the audit committee be involved in
reviewing the effectiveness of internal control?
 Does the system of internal reporting give early warning of
matters that are going wrong?
 Is responsibility for each of the Co-operative’s significant risks
sufficiently owned by a member of the executive team?
 To what extent is there a need to raise the awareness of those at
more junior levels to the importance of risk management?

Internal audit
 Where there is no internal audit function, should the audit committee
recommend to the board that such a function be established?
 Can the audit committee do more to support an existing internal audit
function?
 What are the reporting lines for internal audit and does the function have
effective terms of reference?
 Does the scope of internal audit work address the significant risks?
 Is the internal audit function adequately resourced?
 What are the areas of the company about which internal audit function has
concern? Including potential problem areas?

Fraud and ethics
 Does the company have the right ‘tone at the top’?
 Do circumstances exist that could increase the potential for fraud?
 Are effective anti-fraud policies and procedures in place and operating
efficiently?
 Have arrangements been established to deal with situations of suspected or
actual fraud?
 Are inappropriate shortcuts being taken which could ultimately damage the
Co-operative’s reputation?
 Is there a code of corporate conducts and is it distributed to all employees?
 How are breaches in the Co-operative’s code of corporate conduct dealt
with?
 Do any irregularities that have come to the audit committee’s attention
indicate more widespread actual or potential problems?

New economy issues
 Has a proper analysis been prepared of the risks associated with e-business
activities?
 What has been done to establish internet security and anti-fraud controls?
 Have the legal, regulatory and tax implications of e-business been properly
considered?
 Can the back office systems cope with the demands of web architecture and of the e-
business strategy?
 What steps are being taken to ensure that joint venture partners adhere to proper
conduct and control standards?
 What procedures have been put in place to obtain assurance about the integrity of
processes that have been outsourced?
 Are the accounting practices for e-business appropriate?
 Does the going concern basis for the preparation of the financial statements remain
appropriate?
 What controls exist over the reporting of financial information on the company’s
website?

Questions

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