Handbag et al produce handbags. They also supply them internationally and through a network of sales outlets throughout the UK. They traditionally only made handbags but have latterly moved into a broad range of accessories to take advantage of the latest trends in the market place. In particular, purses now make up 40 per cent of their sales. They have expanded rapidly over the last two years and are now a major UK producer. You are the auditors of Handbag et al and have been approached by the directors for advice on corporate governance and internal controls. They are aware that with their rapid growth, their obligations as directors have increased and they should be taking much more interest in the level of controls within the company. They are also considering establishing an audit committee and would like your advice in this area. You have recently completed the annual audit of Handbag et al and are aware that very little has been done to promote sound governance within the company.

Discuss

● The role of the directors in relation to corporate governance and controls;

● the potential role of the audit committee and the factors that Handbag et al should consider in making a decision on whether to go ahead with the formation of the committee.