CPA Audit Committees
CPA Audit Committees: Audit committees have a big job to do in an organisation—tough when the members have other responsibilities and the audit committee role is a part-time job with huge accountability.
In a U.S. publicly traded company, an audit committee is an operating committee of the board of directors charged with oversight of financial reporting and disclosure. Committee members are drawn from members of the company’s board of directors, with a Chairperson selected from among the committee members. A qualifying (cf. paragraph “Composition” below) audit committee is required for a U.S. publicly traded company to be listed on a stock exchange. Audit committees are typically empowered to acquire the consulting resources and expertise deemed necessary to perform their responsibilities.
The role of audit committees continues to evolve as a result of the passage of the Sarbanes-Oxley Act of 2002. Many audit committees also have oversight of regulatory compliance and risk management activities.
Not for profit entities may also have an audit committee.
CPA Audit Committees
In India, according to Section 177(1) of the Companies Act 2013, the Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
As per Rule 6 (Committees of the Board) of the Companies (Meetings of Board and its Powers) Rules, 2014, the Board of directors of every listed companies and the following classes of companies shall constitute an Audit Committee and a Nomination and Remuneration Committee of the Board:
All public companies having:
- Paid-up Capital ≥ 10 Crore;
- Turnover ≥ 100 Crore;
- Loans + Borrowings + Debentures + Deposits ≥ 50 Crore.
Internationally, the audit committee is a committee of the board of directors responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results both internal and external. The committee assists the board of directors fulfill 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. Its role is to provide advice and recommendations to the board within the scope of its terms of reference / charter. Terms of reference and requirements for an audit committee vary by country, but may be influenced by economic and political unions capable of passing legislation. The European Union directives are applied across Europe through legislation at the country level. Although specific legal requirements may vary by country in Europe, the source of legislation on corporate governance issues is often found at the European Union level and within the non-mandatory corporate governance codes that cross national boundaries.
CPA Audit Committees
Boards of Directors and their committees rely on management to run the daily operations of the business. The Board’s role is better described as oversight or monitoring, rather than execution. Responsibilities of the audit committee typically include:
- Overseeing the financial reporting and disclosure process.
- Monitoring choice of accounting policies and principles.
- Overseeing hiring, performance and independence of the external auditors.
- Oversight of regulatory compliance, ethics, and whistleblower hotlines.
- Monitoring the internal control process.
- Overseeing the performance of the internal audit function.
- Discussing risk management policies and practices with management.
The duties of an audit committee are typically described in a committee charter, often available on the entity’s website.
- European Union: Directive 2006/43/EC, article 41.2: (…) the audit committee shall, inter alia: (a) Monitor the financial reporting process; (b) Monitor the effectiveness of the company’s internal control, internal audit where applicable, and risk management systems; (c) Monitor the statutory audit of the annual and consolidated accounts; (d) Review and monitor the independence of the statutory auditor or audit firm, and in particular the provision of additional services to the audited entity.
- Public sector: Cf. Standard INTOSAI GOV #9100
CPA Audit Committees: Role in oversight of financial reporting and accounting
Audit committees typically review financial statements quarterly and annually in public companies. In addition, members will often discuss complex accounting estimates and judgments made by management and the implementation of new accounting principles or regulations. Audit committees interact regularly with senior financial management such as the CFO and Controller and are in a position to comment on the capabilities of these managers. Should significant problems with accounting practices or personnel be identified or alleged, a special investigation may be directed by the audit committee, using outside consulting resources as deemed necessary.
External auditors are also required to report to the committee on a variety of matters, such as their views on management’s selection of accounting principles, accounting adjustments arising from their audits, any disagreement or difficulties encountered in working with management, and any identified fraud or illegal acts.
CPA Audit Committees: Role in oversight of the external auditor
Audit committees typically approve selection of the external auditor. The external auditor (also called a public accounting firm) reviews the entity’s financial statements quarterly and issues an opinion on the accuracy of the entity’s annual financial statements. Changing an external auditor typically also requires audit committee approval. Audit committees also help ensure the external auditor is independent, meaning no conflicts of interest exist that might interfere with the auditor’s ability to issue its opinion on the financial statements.
- European Union: Directive 2006/43/EC, article 41.3 and 41.4: “In a public-interest entity, the proposal of the administrative or supervisory body for the appointment of a statutory auditor or audit firm shall be based on a recommendation made by the audit committee. The statutory auditor or audit firm shall report to the audit committee on key matters arising from the statutory audit, and in particular on material weaknesses in internal control in relation to the financial reporting process.”
CPA Audit Committees: Role in oversight of regulatory compliance
Audit committees discuss litigation or regulatory compliance risks with management, generally via briefings or reports from the General Counsel, the top lawyer in the entity. Larger corporations may also have a Chief Compliance Officer or Ethics Officer that report incidents or risks related to the entity’s code of conduct.
CPA Audit Committees: Role in monitoring the effectiveness of the internal control process and of the internal audit
Internal control includes the policies and practices used to control the operations, accounting, and regulatory compliance of the entity. Management and both the internal auditing function and external auditors provide reporting to the audit committee regarding the effectiveness and efficiency of internal control.
- IIA Practice Advisory: Cf. PA1110-1 paragraphs 2 and 3 (where the “board” means “an organization’s governing body, such as a board of directors, supervisory board, (…) any other designated body of the organization, including the audit committee to whom the chief audit executive may functionally report)
- European best practice for the role of the Audit Committee in overseeing internal audit: cf.
CPA Audit Committees
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