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Corporate governance refers to the way an organization is controlled and operated. It designates a process whereby shareholders and suppliers of funds assure themselves of an efficient utilization of their resources, security of their funds and a return on their investment. It is usually spearheaded by the management of an organization which includes the board of directors of a company which act on behalf of its shareholders. And this creates the agency theory. Companies participate in corporate governance because of the principle of equal treatment of all the shareholders, taking care of third parties’ interest in the firm, integrity of the management team and disclosure of relevant information to the general public to enable them to make informed decisions.
Corporate governance leads to the agency problem between the shareholders and the management of the company. This includes an internal act committed by by one or more persons to misrepresent the financial statement of the company with intent of misleading and thus resulting in a fraud. The fraud can take the form of misappropriation of assets, alteration of records and documents, misappropriation of accounting polices, creative accounting, suppression of the effects of a transaction from the books and engaging in money laundering.
Fraud within an organization can be detected by the implementation of adequate accounting and operation systems. In order to achieve efficient corporate governance, the company should have a board of directors appointed by the shareholders in an annual general meeting, the auditors should also be appointed competitively and the company should have a non-executive committee which would be able to look into the affairs of the company in a more detached manner from the management and the main board (Ira. H. Jolles 2002).
Test of control refersto tests which seek to provide audit evidence that the internal control procedures are applied as prescribed.
| Control procedure/activity | Test of control |
| Segregation of duties between the sales and receivables in the organization, between the dispatch and accounting departments. | Making enquiries about the conduct of duties by the various departments. |
| Matching of the invoices with the local purchase orders and sales receivables, and their sequential referencing. | This would involve taking a sample of the sales invoices and trying to get evidence that the company made a comparison of the details in the local purchase order and in the sales orders. |
| Signing of the documents for authorization purposes. | The goods dispatch note should be signed by the customer and another person. |
| The review of the accounting accuracy of the invoices by a second and third person. | The sales invoices should be reviewed to obtain evidence that they were reviewed by a second and third person. |
| Documenting collection of cash. | This would involve observing the process, asking questions about the process and reconciling the bank statements with the cash books. |
| Obtaining credit approvals for the extension of credit days from 45 to 60 | This would involve checking the credit policy of the company. It would involve selecting a sample of the transactions and checking the approval process |
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