The following scenario relates to questions 11 – 15
Izzy designs and manufactures luxury motor vehicles. It is not a listed company, but its board has recently decided that it would like to improve its corporate governance in order to apply best practice. Izzy’s shares are held equally by six shareholders, four of whom are also executive directors. The remaining two shareholders are not involved with Izzy, other than as shareholders.
Izzy has an internal audit department which is managed by Katty John, the chief internal auditor. Katty frequently comments that Izzy’s board does not understand her reports, and does not provide sufficient support for her department and for the company’s internal control systems. SDS & Co, Izzy’s external auditors, have also expressed concern in this area.
Katty has submitted a proposal to the board to establish an audit committee, and this is currently under consideration. The proposed membership of the audit committee is:
Katty John (chief internal auditor)
Shawn David (existing executive director with some financial expertise)
Lexi Mathew (proposed new non-executive director)
Daniel Wilson (proposed new non-executive director)
The board is also considering a significant expansion of the company. However, the company’s bank is concerned by the standard of financial reporting as Izzy’s finance director recently left the company. The board is delaying providing the bank with financial information until a new finance director has been appointed.
As part of its commitment to the effectiveness of the external audit process, the chair of Izzy’s audit committee, Leslie Schiff, is keen to ensure that the external audit makes use of the latest auditing techniques. She has heard about data analytics routines, but is unsure exactly what they entail.
11. Izzy’s internal audit department is currently not well understood or supported by the board.
Which TWO of the following statements describe the main advantages of establishing an audit committee?