CONTENTS OF DIRECTOR’S REPORT

CONTENTS OF DIRECTOR’S REPORT

WHAT IS DIRECTOR’S REPORT

A Directors Report has remained relevant despite the emergence of new reporting tools such as the Operating and Financial Review. The quoted companies are required to include an Operating and Financial Review in their annual accounts. The Operating and Financial Review or the Management's Discussion and Analysis of Results of Operations and Financial Condition, as it is popularly known, provides a better picture of a company. The Operating and Financial Review discusses and analyzes a company's performance. Yet a Directors Report remains unique because it is a direct communication from the directors to the shareholders.

Companies are legally obliged to include a Directors Report in their annual accounts. Companies House requires companies to include a Directors Report in their annual accounts. Other documents that companies need to file with Companies House include a profit and loss account, a balance sheet, an auditors' report, notes to the accounts and group accounts if any. A directors report will give you information on all the directors of a specific company. This information can be used to judge the direction that a company may take in the future in relation to the other companies that the directors hold directorships at.

What should be included in a Directors Report?

Companies House, however, does not specify the content of the Directors Report. It directs companies to follow the directives of the Companies Act 1984. A Directors Report is mandatory according to the Companies Act 1985. The Act specifies the content that should be included in a Directors Report.

Contents of the directors’ report

1. Directors Reports should provide a review of the company's business.
2. The Directors Report should disclose the dividend that the directors are recommending and the amount which they wish to carry to the reserves.
3. The directors report should also highlight any changes to the board of directors.
4. Other issues that should be included in a Directors Report are details of subsidiary undertakings, directors' interests, details of annual general meeting, statement of responsibilities and the details of the directors' remuneration report.
5. The principal activities of the company

With corporate governance becoming a critical issue worldwide, a section on corporate governance has become a fixture in the Directors Report. This section reveals the extent to which a company is complying with provisions of the revised Combined Code on corporate governance. Corporations are also including information relating to the composition of their board in the Directors Report. The number of independent directors on the board has become important after the recent raft of accounting scandals.

Although a Directors Report resembles an Operating and Financial Review in many respects, there are certain areas where it differs. The Directors Report contains additional information such as

Ø  dividend recommendation,

Ø   details of the directors'

Ø   remuneration report,

Ø  .the names of the persons who, at any time during the financial year, were directors of the company;

Ø   the principal activities of the company in the course of the year;

The Operating and Financial Review, by contrast, focuses on the operational and financial performance of a company.

In the past few years, the front-end of the annual report has become heavy with several messages from the senior management. In addition to the chairman's message, most annual reports contain a letter from the chief executive, business review and more recently, the Operating and Financial Review. The Directors Report, as a result, has been pushed to the middle of the annual report, closer to the financial statements and the auditor report.

With annual reports of most companies comprising several reports from the senior management in addition to directors information repetition of facts has become endemic. While the Directors Report continues to remain unique due to the nature of its communication, the introduction of an Operating and Financial Review may necessitate a rationalisation of the messages from the senior management.

Principal activities

The Group’s principal activity is the development, patenting and sale of products based on microbial technology

Review of the business

A review of the business and the future developments of the Group is presented in the Chairman’s

Statement and the Chief Executive’s Review

Going concern

The directors have prepared cash flow forecasts for the Group that reflect the Group’s forecast revenuesand costs. It is envisaged by the directors that existing cash resources together with these forecast revenuestreams will provide adequate funds for the foreseeablefuture.In the event that the Group is unable to achieve its forecast revenues, the directors have a plan in placeunder which they will make adjustments to costs so that the business can continue to exist within its currentfunding arrangements. As a result, the directors have formed a view that adequate funds will be available and all its subsidiary companies for at least the next year following approval of thesefinancial statements.The financial statements havetherefore been prepared on a going concern basis. The financial statementsdo not contain any adjustments which would result if the Group does not generate sufficient revenue andfree cash flows from its trading activities or if any future fund raising exercise was not successful.

Key performance indicators

Management uses a range of performance measures to monitor and manage the business. Certain of theseare particularly important in the generation of shareholder value and are considered key performance indicators are as follows:

      The cash resources of the Group

      The level of sales and repeat sales

      The timeliness and efficiency of the research and development team

      Manpower levels and their effectiveness

Risks and uncertainties

Risks and uncertainties are inherent in all businesses and our group is no exception. Risk management is seen as an important element of internal control and is used to mitigate the Group’s exposure to such risks.

Commercial Risks

      Our performance depends on our continued ability to develop sales channels

      Our performance also depends heavily on our patent protection

      We are also affected by the lead times in conducting trials and gaining the decision to purchase

Processes to manage the impact on the business of each of the above risks are embedded in our operations.

The directors and other senior management actively monitor these processes, and the actions which arise,to ensure risks are effectively managed.

Operational Risks

Health and safety, employer’s and public liability risks are monitored by way of regular updates to our Board.

Financial Risks

The Group manages financial and treasury risk through active working capital management. Monitoring of cash flow and currency exposure is undertaken at Board level on a monthly basis.

Research and development

The Group invests in the research and development of further anti-microbial products and has 4 employees in its research and development department. It also uses the services of highly regarded research institutions to supplement the internal resource. In the opinion of the directors, continuity of investment in this area is essential for the maintenance of the Group’s market position and for future growth.

Political and charitable donations

The Group made a charitable donation for every year. It did not make any political donations during the year.

Disabled employees

The Group gives full consideration to applications for employment from disabled persons where a handicapped or disabled person can adequately fulfil the requirements of the job.Where existing employees become disabled, the Group’s policy wherever practicable is to provide continuing employment under normal terms and conditions and to provide training and career development and promotion to disabled employees wherever appropriate.

Employee involvement

The directors meet staff on a regular basis to keep them appraised of important issues within the Group.

Payment policy

Appropriate payment terms have been negotiated with each supplier and undisputed accounts are generally settled, once requested, in accordance with the agreed terms. The Company had 45 days of purchases outstanding in trade creditors.

Awareness of  auditing information

At the date of approval, so far as each of the directors is aware, there is no relevant audit information of which the auditors are unaware and they have taken all the necessary steps to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information

WHAT IS INTERNAL AUDITING COMMITTEE

Internal auditing is a profession and activity involved in helping organizations achieve their stated objectives. It does this by using a systematic methodology for analyzing business processes, procedures and activities with the goal of highlighting organizational problems and recommending solutions. Professionals called internal auditors are employed by organizations to perform the internal auditing activity.
The scope of internal auditing within an organization is broad and may involve topics such as the efficacy of operations, the reliability of financial reporting, deterring and investigating fraud, safeguarding assets, and compliance with laws and regulations.
Internal auditing frequently involves measuring compliance with the entity's policies and procedures. However, Internal auditors are not responsible for the execution of company activities; they advise management and the Board of Directors (or similar oversight body) regarding how to better execute their responsibilities. As a result of their broad scope of involvement, internal auditors may have a variety of higher educational and professional backgrounds.
Publicly-traded corporations typically have an internal auditing department, led by a Chief Audit Executive ("CAE") who generally reports to the Audit Committee of the Board of Directors, with administrative reporting to the Chief Executive Officer.
The profession is unregulated, though there are a number of international standard setting bodies, an example of which is the Institute of Internal Auditors ("IIA"). The IIA has established Standards for the Professional Practice of Internal Auditing^[1] and has over 150,000 members representing 165 countries, including approximately 65,000 Certified Internal Auditors.

           

              

            A         ABJECT

                U             ULTERIOR

                D            DISCREPANCY

                 I             IS

                T             THROWN AWAY

With increasing attention to financial reporting - by legislators, regulators, security analysts, institutional investors, and others – the roles of boards of directors, audit committees, corporate management, and external and internal auditors are changing. The relationships between these entities are being reshaped by legislation and regulations. The process of identifying emerging principles, practices, and tools for the internal auditor's role in internal controls over financial reporting is defined by Securities and Exchange Commission of Pakistan (SECP) as Code of Corporate Governance (CCG).

Code of Corporate Governance (CCG)

Governance is a buzz word today. At times, though, it may not precisely be understood. For a common understanding, it may be the process which is employed to run government state affairs encompassing entire spectrum of activities, they may be administrative, legal, religious, socio-political,economic  

In the contemporary political thought, it is governance process which leads to overall national development, in particular, economic development. Economic development is unimaginable and cannot even be dreamed off without there-being 'good governance' in place. It is such an essential ingredient that without it even the on-going development process would get retarded. Contemporary political historybears testimony to this fact and for that matter our own country is a classic example of it.

Requirement of Internal Auditor according to CCG

As per CCG “There shall be an internal audit function in every listed company. The head of internal audit shall have access to the chair of the Audit Committee. All listed companies shall ensure that internal audit reports are provided for the review of external auditors. The auditors shall discuss any major findings in relation to the reports with the Audit Committee, which shall report matters of significance to the Board of Directors".

Appointment & Qualification

There is a weakness in CCG that the qualification of Internal Auditor is not mentioned so can any one be Internal Auditor? The answer is no. Then who are eligible for this post? The eligible ones are the qualified members of ICMAP, IIA, ICAP and other accounting bodies’ members.

Purpose of Audit Committees

Audit committees and internal auditors have common goals. A good working relationship with internal auditors can assist the audit committee in fulfilling its responsibility to the board of directors, shareholders, and other outside parties. This position statement summarizes the appropriate relationship between audit committees and internal auditing. Audit committee responsibilities encompass activities which are beyond the scope of this statement, and in no way intends it to be a comprehensive description of audit committee responsibilities.

            Every public company have an audit committee organized as a standing committee of the board of directors. The establishment of audit committees in other organizations is encouraged, including not-for-profit and governmental bodies.

Composition of Audit Committee

According to CCG “The Board of Directors of every listed company shall establish an Audit Committee, which shall comprise not less than three members, including the chairman. Majority of the members of the Committee shall be from among the non-executive directors of the listed company and the chairman of the Audit Committee shall preferably be a non-executive director. The names of members of the Audit Committee shall be disclosed in each annual report of the listed company”.

Frequency of Meetings

The Audit Committee of a listed company shall meet at least once every quarter of the financial year. These meetings shall be held prior to the approval of interim results of the listed company by its Board of Directors and before and after completion of external audit. A meeting of the Audit Committee shall also be held, if requested by the external auditors or the head of internal audit.

Attendance at Meetings

As described in CCG “The CFO, the head of internal audit and a representative of the external auditors shall attend meetings of the Audit Committee at which issues relating to accounts and audit are discussed.

Provided that at least once a year, the Audit Committee shall meet the external auditors without the CFO and the head of internal audit being present.

Provided further that at least once a year, the Audit Committee shall meet the head of internal audit and other members of the internal audit function without the CFO and the external auditors being present”.

Authority  Of Internal Audit Committee

The audit committee has authority to conduct or authorize investigations into any matters within its scope of responsibility. It is empowered to:

      Appoint, compensate, and oversee the work of any registered public accounting firm employed by the organization.

      Resolve any disagreements between management and the auditor regarding financial reporting.

      Pre-approve all auditing and non-audit services.

      Retain independent counsel, accountants, or others to advise the committee or assist in the conduct of an investigation.

      Seek any information it requires from employees — all of whom are directed to cooperate with the committee's requests — or external parties.

      Meet with company officers, external auditors, or outside counsel, as necessary.

Responsibilities Of IA & AC

Consider an Annual Opinion on Internal Control

Internal audit should be the CEO and CFO’s best source of assurance about internal control. If these officers must stand behind an entity-wide opinion, it only makes sense that they ask for…..

The first step is to base the annual audit plan on the control model. This should not replace a risk-based audit plan. The organization’s major risks should always be the primary driver of internal audit activities. Rather, it should come after the risk assessment, to ensure that audit coverage will support an opinion on control for the organization as a whole. The basic steps are:

1. Use the existing risk assessment process to identify the organization’s major risks.

2. Identify audits and other assurance projects to address the risks.

3. Identify the Objectives and Components that will be covered in these audit projects, and to what extent each will be covered. Depending on the organization, this might be done informally, or by writing the names of projects, or by coding at a more detailed level.

4. Based on this analysis, estimate the extent of coverage for each cell (e.g., heavy, moderate, light, none)

5. Re-think potential assurance projects. Will the coverage support an opinion on internal control at the end of the year, with legitimate audit evidence for each category that falls within the organization’s chosen scope? If not, how can the plan be modified to provide the needed coverage?

In performing this analysis, several things should be kept in mind:

-The approach should not override the risk-based

approach. Where there are gaps, the two approaches should be creatively reconciled. Perhaps the same audit projects, but with modified tools/techniques, would do the job. Perhaps a few lower-risk audits can be replaced. Or there may be other options.

-Audits performed in the recent past or planned for the near future can be taken into consideration. Everything does not have to be covered every year, as long as the overall assurance is reasonable.

-Some of the categories will be more important than others for a given organization and a given point in time. If the HIA chooses to give an opinion on all three Objectives, for example, this does not mean devoting 1/3 of audit time to Operations, 1/3 to Finance, and 1/3 to Compliance. It means giving enough coverage to each Objective and Component—based on the real-world risks facing the organization—to enable the year-end opinion on internal control. The audit plan, of course, changes throughout the year, as risks and audit resources change.

 Internal Audits of Specific Financial Control Processes

The audit department might want to do annual audits of specific processes that are central to financial reporting and disclosure. What these processes are will vary from organization to organization. Examples are Inventory, Accounts Receivable, Accounts Payable, the Closing Process, Sales, Purchases, and Authorizations.

      Consider the effectiveness of the company's internal control system, including information technology security and control.

      Understand the scope of internal and external auditors' review of internal control over financial reporting, and obtain reports on significant findings and recommendations, together with management's responses.

      Review with management and the chief audit executive the charter, plans, activities, staffing, and organizational structure of the internal audit function.

      Ensure there are no unjustified restrictions or limitations, and review and concur in the appointment, replacement, or dismissal of the chief audit executive.

      Review the effectiveness of the internal audit function.

      On a regular basis, meet separately with the chief audit executive to discuss any matters that the committee or internal audit believes should be discussed privately.

As far as Audit Committees are concerned they generally exercise responsibility in three important areas:

      Financial reporting.

      Corporate governance.

      Corporate control

Financial Reporting

The responsibility of internal audit committees in the area of financial reporting is to provide assurance that financial disclosures made by management reasonably portray the company's:  plans and long-term commitments.

Specific steps involved in carrying out this responsibility include:

      Recommending the independent accountants.

      Overseeing the external audit coverage, including:

      Auditor engagement letters.

      Estimated fees.

      Timing of auditor visits.

      Coordination with internal auditing.

      Monitoring of audit results.

      Review of auditor performance.

      Review of non audit services.

      Reviewing accounting policies and policy decisions.

      Examining the financial statements, including:

      Interim financial statements.

      Annual financial statements, auditors' opinion, and management letters.

      Other reports requiring approval by the board of directors prior to submission to the Securities and Exchange Commission or other government agencies.

With respect to the review of accounting policies and policy decisions, a useful approach would be to require from the chief accounting officer a concise summary of all significant accounting policies underlying the financial statements. This summary should be updated as necessary and reviewed by both the independent accountants and the internal auditor.

Corporate Governance

The responsibility of audit committees in the area of corporate governance is to provide assurance that the corporation is in reasonable compliance with pertinent laws and regulations, is conducting its affairs ethically, and is maintaining effective controls against employee conflict of interest and fraud.

The specific steps involved in carrying out this responsibility include:

      Reviewing corporate policies relating to compliance with laws and regulations, ethics, conflict of interest, and the investigation of misconduct and fraud.

      Reviewing current/pending litigation or regulatory proceedings bearing on corporate governance in which the corporation is a party.

      Reviewing significant cases of employee conflict of interest, misconduct, or fraud.

      Requiring the internal auditor to report in writing annually the scope of the reviews of corporate governance and any significant findings.

CORPORATE CONTROL OF INTERNAL AUDIT COMMITTEE

The responsibility of audit committees for corporate control includes an understanding of the company's key financial reporting risk area and system of internal control. The committee should monitor the control process through internal auditing.

"The scope of the internal audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance in carrying out assigned responsibilities." The internal auditing is required to:

      Review the reliability and integrity of financial and operating information and the means used to identify, measure, classify and report such information.

      Review the systems established to ensure compliance with those policies, plans, procedures, laws, and regulations which could have a significant impact on operations and reports.

      Review the means of safeguarding assets and, as appropriate, verify the existence of such assets.

      Appraise the economy and efficiency with which resources are employed.

      Review operations or programs to ascertain whether results are consistent with established objectives and goals and whether the operations or programs are being carried out as planned.

Significant Development

There are two significant developments in CCG which made Internal Auditors more Powerful:

      Internal Auditor functionality reports to Chairman of Audit Committee - which is composed of Board of Directors. Chief Executive can not force Internal Auditor to pass any thing rather he has to comply with Internal Auditor. Now Internal Auditor not only has to check Accounts but also he has to keep an eagle eye on CFO, CEO, Secretary and Board of Directors regarding their workings, policies and decisions. He also has to verify the implementation of the policies.

      The second significant development is that now it has become mandatory to present the Internal Audit report to the External Auditors for review. Then it is qualified. If there is any weakness or malfunctioning carried on in an organization so it will not be concealed anymore and will be taken in account and will be accounted.

ASSIGNMENT#1

FINANCIAL REPORTING

CONTENTS OF DIRECTOR’S REPORTINSTITUTE OF AUDIT & ACCOUNTANCY

UNIVERSITY OF MANAGEMENT AND TECHNOLOGY