What Are Roles and Responsibilities of Audit Committee?

Audit committee, in the real corporate world, has been stay for long time & the perception of its responsibilities & roles are evolved once in a while. This post aims to highlight responsibilities & roles of audit committee in the past & recent years.

There were varied views on audit committee’s roles & responsibility in the European Union & United States —which then followed by the rest of the countries—before 2000s, but a certain consensus has emerged in recent years following the promotion of audit committee function in corporate governance by market regulators & professional bodies.

What is Audit Committee?

In brief words, audit committee can be express as a group of minimum three persons who oversee quality & integrity of the firm’s accounting & reporting practices.

Searching online & offline auditing literature, one may determined various explanation about audit committee. A common term consistently appeared among the explanation is the “oversight responsibility.” Because of this oversight responsibility, audit committee members must be independent with no connection to firm management.

Hence, in brief words, an audit committee can be express as a group of minimum three independent directors with no connection to the firm management, which are an operating component of the board of directors, with responsibility for internal controls & financial reporting oversight.

In the real corporate world, an audit committee often invites members of management or others to attend committee meetings & even to join in on the deliberations . Hence, any such invited outside guests cann’t be full voting members. & the roles of the committee is much more than overseeing financial reporting practices, depending on sizes of the organization, like: legal & regulatory compliance, corporate governance practices; risk management.

Who Does Establish Audit Committee & How?

Audit committee is established by the board of director in short its called BOD—which is a formal entity given the responsibility for the total governance of that firm for its owner lenders or investors.

Because all members of the board can be held legally liable through their actions on any problem, & a board & its committees enact most of its formal business through resolutions, which become matters of firm record.

The firm of the board’s many committees, including the audit committee, is established through such a resolution. Such resolution is an instance of corporate governance setting the rules by which a corporation operates. This type of resolution is documented in the records of the board & not normally revised unless some circumstances require a replace.

While not published in yearly reports & the like, the existence of appropriate board resolutions becomes problems in matters of regulation & litigation only when a board needs to rely on an authorizing resolution. After SOx became U.S. law in the year 2002, various corporate board audit committee–authorizing resolutions were updated to make them compliant. Or esle, such resolutions are often almost one-time things.

Here is an instance firm board resolution authorizing their audit committee:

Board Resolution Instance That Authorizes the Audit Committee

LDP firm Corp Board of Directors

Board Resolution No. 25, January 23, 2013

The Board of Directors authorizes an audit committee to contain of 5 directors who are not officers of LDP Organization. The Board will designate 1 member of the Audit Committee as a Financial Expert Authority, per the requirements of the Sarbanes-Oxley Act, & elect 1 member to serve as its chair for a term of three years. The LDP firm Chief Executive Officer may attend Audit Committee meetings as a non-voting member at the invitation of the Audit Committee.

The LDP firm Audit Committee is responsible for:

  • Determining that LDP firm internal controls are effective & formally reporting on the status of those controls on an yearly basis with quarterly updates.
  • Recommending an external auditor to be selected on an yearly basis through a vote by the shareholders.
  • Taking action, where appropriate, on significant control weaknesses reported by internal audit, the external auditors, & others.
  • Approving an yearly plan & budget submitted by the external auditor.
  • Approving yearly audit plans to be submitted by the outside auditor as well as by internal audit.
  • Approving the appointment & ongoing service of Internal Audit’s Chief Audit Executive.
  • Approving the yearly internal audit plan & recommending areas for additional internal audit work as appropriate.
  • Reviewing & distributing the audited financial statements submitted by the outside auditor.
  • Establishing an LDP firm whistleblower program that allows officers, employees, & other stakeholders to report financial accounting errors or improper actions & to investigate & resolve those whistleblower calls without any retribution to the original whistleblower.
  • Circulating a Code of Ethics to senior officers & obtaining their assent on a quarterly basis.
  • Begin appropriate actions depend on any recommendations by the outside auditor or the Director of Internal Audit.
  • Maintaining records on other consulting activities as directed by the Sarbanes Oxley Act. An Audit Committee meeting will be held at minimum concurrently with each scheduled Board meeting & at other times as required.

The Audit Committee will meet privately with the outside auditor or the Chief Audit Executive to assess the total internal control environment & to evaluate the independence of the audit function.

Composed: Corporate Secretary

The New York Stock Exchange (NYSE) suggested proposed board audit committee charters in the year December 1999 but with no requirement that an audit committee must have such a charter. The Sarbanes Oxley (SOx) Act, hence, has now directed that each and every  board audit committee should develop its own formal audit charter to be published as part of the yearly proxy statement.

The aim of a board audit committee charter is to define the audit committee’s responsibilities regarding:

  • Assessment, Identification & management of financial risks & uncertainties
  • Continuous improvement of financial systems
  • Financial disclosures & Integrity of financial statements
  • Compliance with legal & regulatory requirements
  • Independence, qualifications & performance of independent outside auditors
  • Resources, Capabilities & performance of the internal audit department
  • Full & open communication with & among the independent accountants, internal auditors, management, counsel, employees, the audit committee, & the board

The audit committee is required to go before its all board of directors & obtain authorization, through this charter document, for board audit committee activities. Though there is no single required format or directed contents for this charter document, but the New York Stock Exchange has published a model charter that has been adopted by many public corporations. Formats vary from one firm to another, but audit committee charters normally include:

  1. Aim & authority of audit committee
  2. Audit committee configuration
  3. Meetings time table
  4. Audit committee Methods
  5. Audit committee basic activities:
  • Corporate governance activity
  • Public reporting activity
  • Independent accountants activity
  • Accounting & Audits activity
  • Extra activities
  1. Audit committee optional activities:
  • Independent – accountants activity
  • Internal audits activity
  • Accounting activity
  • Controls & systems activity
  • Public reporting activity
  • Compliance oversight responsibilities activity
  • Risk assessments activity
  • Financial oversight responsibilities activity
  • Employee profit plans investment fiduciary responsibilities activity
  1. Audit committee limitations

A nice example of an simple-to-follow charter, can be found online, is Accenture Plc’s audit committee charter, found on its Web-site (http::/www.accenture,com/us-en/company/governance/committees/Pages/corporate-governance-audit-committee.aspx), which will be used as an instance to explain each of the audit committee’s roles on this article.

Not each corporation is a Accenture in terms of size & resources & not each firm registered in the U.K, of course, but all corporations in the U.S. with SEC registration should conform to SOX rules. Limited entities willn’t have the resources or need to release a Web based audit committee charter. But they still should have an independent directors’ audit committee, as directed by SOX, as well as an audit committee charter. This is the type of board of directors’ resolution document that must be part of corporate records.

 

Audit Committees in the Past

The explanation of audit committee presented on the above section is what it is today. In past decade, many audit committees met only quarterly for detail sessions in conjunction with regular board meetings; those meetings often were limited to little more than approving the external auditor’s yearly plan & their quarterly & annual-end reports & reviewing internal audit activities in what appeared to be less more than a perfunctory basis.

While The New York Stock Exchange  rules, even prior to SOx, required that audit committees consist of only outside directors, in the past maximum audit committee directors often appeared to be buddies of the chief executive officer (CEO) with apparently small evidence of true independent actions.

Internal audit’s Chartered Audit Executive (CAE) has all the time had a direct reporting relationship to the audit committee, but often this was small more than a theoretical relationship where the Chartered Audit Executive had limited contact with the audit committee beyond planed board meetings. SOx has now exchanged all of that.

During the 1st years of this millennium, a major problems that evolved from the collapse of Enron & the related financial scandals was the fact that boards & their audit committees weren’t exercising a limited level of independent corporate governance.

The Enron audit committee was highlighted as an instance of what was not right. It was reported to have met some thirty minutes per calendar quarter prior to the organisation’s fall. Given the size of Enron at that time & the various directions it was pursuing, the audit committee is attention appeared to be restricted at best.

Even before the fall of Enron, the SEC was becoming interested in seeing audit committees acting as more self-sufficient, effective managers of a firm’s external & internal auditors. In the year 1999 the Blue Ribbon Committee on “Improving the Effectiveness of Corporate Audit Committees” was formed by the SEC, NYSE, AICPA, & others. It problem a series of recommendations on improving the operations, independence & effectiveness of audit committees.

The stock exchanges then adopted new self-sufficient director audit committee standards as listing requirements to be phased in over the next eighteen months, & the Auditing Standards Board  (ASB) of the AICPA raised standards for external auditors with respect to AICPA audit committees. The subsequent financial failures of Enron & others showed these initiatives were not sufficient. The outcome was the legislative work that led to SOx.

Today, hence the passage of SOx, audit committees have expanded responsibilities & internal audit has a much responsibility to best serve its audit committee. Although an audit committee typically has regular contacts basically with the CAE, all internal auditors must have an understanding of this so much important relationship.

Now, let’s discuss the current audit committee roles & responsibilities in more brief

Current Roles & Responsibilities of Audit Committee

Many literatures have highlighted the roles & responsibilities of audit committee. Lin et al. (year 2008) for instance, notes that audit committee oversight responsibilities & roles  is for raise rules compliance, internal control, sound corporate financial reporting & auditing processes.

Chen et al. (2008) notes that while the basic responsibilities of the audit committees are to assist the board with it is duties in overseeing the corporation is reporting & audit requirements, it also:

  • monitors the integrity of the organization’s reporting system & financial statements ;
  • ensures that the firm complies with legal & regulatory requirements;
  • monitors independent auditors’ independence & qualifications ;
  • monitors the performance of the organization’s internal & external auditors; and
  • monitors compliance with corporate legality & ethical standards, involve the maintenance of preventive fake controls.

Chambers (2005) discussed 4 responsibilities of audit committees, which are given below:

  • advising board on the reliability of financial details;
  • advising board in internal control & risk management ;
  • dealing with external auditors;
  • managed the internal audit process.

Among many areas of audit committee roles & responsibilities, next we will see 5 main areas where audit committees perform particular roles:

 

Roles in the Financial Reporting Area

The financial process & ensuring reliable financial details is one of the most prime functions of the audit committee. While the audit committee must not become involved in daily operations, there is force from the oversight role for the audit committee to get more involved in ensuring the integrity of the financial reporting process. Educators & experts have studied about effective audit committee processes for managed financial reporting. These studies normally noted that audit committees are expected to:

  • Review overall financial statements, whether interim or yearly, before they are approved by the Board of Directors & publicly disseminated to ensure their accuracy, objectiveness & timeliness.
  • Review overall existing accounting policies, & concentrate on the impact on the financial statements of some changes in accounting policies involving the likely effect of some contemplated changes.
  • Evaluate exposure to fake.
  • Appraise key management estimates, valuations & judgments where they are thought to be material to the financial statements.
  • Estimate the adequacy of financial statement disclosures.
  • Review adequacy of organization’s structure, involving management’s implementation of internal controls.
  • Review all significant transactions, especially those that are nonroutine & those that might be questionable, illegal, or unethical.

If you check on the Accenture Plc’s charter documents, you will determined the below roles:

  • Review, in consultation with the independent auditors & the internal auditors, the integrity of the firm’s internal & external financial reporting processes & controls. In this regard, the Committee must obtain & discuss with management & the independent auditors all reports from management & the independent auditors regarding: (i) all critical accounting practices & policies  to be used by the organization; (ii) analyses prepared by management and the independent auditors setting forth significant financial reporting problems & perception made in connection with the preparation of the financial statements, including all alternative treatments of financial information within normally accepted accounting principles that have been discussed with the firm’s management, the ramifications of the use of the other disclosures & treatments, & the treatment preferred by the independent auditors; (iii) major problems regarding accounting principles & financial statement presentations, including any significant changes in the firm’s selection or application of accounting principles; (iv) major problems as to the adequacy of the organisation’s internal controls & some special audit steps adopted in light of material control deficiencies; & (v) some other material written communications between the independent auditor & the organization’s management;
  • Review consistently the effect of regulatory & accounting initiatives, moreover off-balance sheet structures, on the financial statements of the organization;
  • Establish regular systems of reporting to the Committee by each of management, the independent auditors & the internal auditors regarding any significant judgments made in management is preparation of the financial statements & some significant risky encountered during the course of the review or audit, including any restrictions on the scope of work or access to requested details.
  • Review some significant disagreement between management & the independent auditors or the internal auditing department in connection with the preparation of the financial statements & management is response to such matters;
  • Review & talk about with the organization’s internal auditors: (i) the internal audit function, involving its authority, independence , responsibilities & reporting obligations; (ii) the proposed audit schedule for the coming year; (iii) the coordination of that proposed audit plan with the firm’s independent auditors; & (iv) the outcome of the internal audit program, & perform a specific review of any significant issues; and
  • Review & talk about with the independent auditors the responsibilities, budget & staffing of the organization’s internal audit function.

Roles in the Internal Audit Area

The audit committee can strengthen the entity’s internal audit function by ensuring that management has established & is maintaining an adequate & effective internal audit structure. Also, after discussion in the Treadway Commission’s Report identified the interaction between the internal audit function & the AC that should ensure the internal audit function’s effectiveness & objectivity.

Here are specific roles, in the internal audit area, expected to be done by the audit committee:

  • Appointment of the Chief Audit Executive– The CAE typically reports administratively to firm management, but the audit committee is responsible for the hiring & dismissal of this internal audit executive. The objective here is not to deny firm management the right to name the person who will administer the internal audit department, which serves the combined needs of firm management & the audit committee. Rather, the significance of the audit committee’s participation is to ensure the independence of the internal audit function when there is a need to speak out regarding issues identified in the review & appraisal of internal controls & other firm activities.
  • Approval of Internal Audit Charter – An internal audit charter serves as a basis or authorization for each effective internal audit program. An adequate charter is specifically important to define the responsibilities & roles of internal audit & it is responsibility to serve the audit committee accurately. It is here that the mission of internal audit should clearly provide for service to the audit committee also to senior management. The audit committee’s responsible for approving this internal audit charter, just as the full board’s responsible for approving the audit committee’s charter.
  • Approval of Internal Audit Plans & Budgets – Preferably, the audit committee must have developed an overall understanding of the total internal audit needs of the firm. This high-level appraisal covers various special control & financial-reporting problem, allowing the audit committee to find the portion of audit or risk assessment want to be performed by either internal audit or any providers. The audit committee is responsible for reviewing & approving all internal audit budgets & higher-level plans. This responsibility is compatible with the audit committee’s role as the ultimate co-ordinator of the total audit effort. The committee is review of all internal audit plans is essential if the plans & policies for the future are to be find most effectively.
  • Audit Committee Review & Action on Significant Audit Findings – An audit committee is more important responsibility is to review & take action on significant audit findings reported to it by the external & internal auditors, management, & others. While the audit committee has responsibility for all of areas, our focus here is on the significance of internal audit to report all importance findings to the audit committee promptly & regularly. Part of this reporting will occur through internal audit is distribution of overall audit reports to the audit committee as sub part of the SOx requirements. Reacting to significant audit findings requires a combination of competence, understanding, & co-operation by all of the major parties of interest: internal audit, external auditors, management & the audit committee itself.

 

Roles Related to External Auditors’ Activities

The audit committee is a important instrument for initiating direct contact with the independent or external auditor, taking part in the selection of the external auditor, & promoting effective communication between the corporate directors independent auditor. Audit committee members dependency on external auditors in performing their fault.

An audit committee has a crucial responsibility for hiring the external audit company, approving its proposed audit plan & budget, & releasing the audited financial statements. While countless aspects of this arrangement have remained not changed over time, SOx has caused some crucial changes here.

External auditors no longer can both perform & then approve their internal controls assessments, nor are any consulting arms of public accounting firm allowed to install financial applications that should be subject to external audit review. The major public accounting firms no longer have these consulting divisions, and, as discussed, public accounting firms are prohibited from outsourcing the internal audit services for the organisation they audit.

Audit committees should be sensitive & aware to these changes. SOx requires that the audit committee approve all external audit services, involving comfort letters, as well as any non audit services provided by the external auditors.

External auditors are still allowed to provide tax services also certain de minimis service exceptions, but they are disallow from providing these nonaudit services contemporary with their financial statement audits:

  • Bookkeeping & other services associated to the accounting records or financial statements of the audit client.
  • Financial information technology implementation & design.
  • Valuation services or Appraisal , fairness opinions, or contribution-in-kind reports
  • Internal audit out posting services
  • Human resource support activities or management function.
  • Dealer or broker, investment advisor, or investment banking services
  • Legal services & other expert services non related to the audit
  • Any other services that the Public firm Accounting Oversight Board find outs to be not permitted

Even though their external auditors are disallow from performing these activities, corporations still will need to contract for & obtain many of these types of services. These should be treated as special contracting arrangements, reported as part the yearly financial reports It is within the best interests of the external audit firm to not become involved with such nonaudit services.

If you examine on the Accenture Plc’s charter documents, you will determined the following character are expected from the committee, in the external auditors’ activities:

  • Retain or change the firm’s independent auditors & approve all audit engagement terms & fees;
  • Oversee the work of any registered public accounting firm employed by the organization, involving the resolution of any disagreement between management & the independent auditor regarding financial reporting, for the goal of preparing or issuing an audit report or related work;
  • Approve, in advance, any permissible non audit engagement & any audit or relationship between the independent auditors & the firm;
  • Review, at least yearly, performance, the qualifications & independence of the independent auditors & present its result with respect to the independent auditor to the Board. In managing its evaluation & review, the Committee must:
  • Review & Obtain a report by the organisation’s independent auditors explaining: (i) the auditing firm’s internal quality-control plan of action; (ii) any material problem raised by the most recent internal quality control review, or peer review, of the auditing firm, or by any inquiry or investigation by governmental or professional authorities within the preceding 5 years, respecting one or more independent audits carried out by the auditing firm, & some steps taken to deal with any such problems; & (iii) all relationships between the firm & the independent auditors.
  • Make sure the rotation of the reviewing partner & lead audit partner  on at least that plan required by the Exchange Commission & Securities, the Public firm Accounting Oversight Board or any other applicable authority. As part of its review, the Committee shall authenticate with any independent auditors retained to provide audit services in fiscal year that the lead (or coordinating) audit partner (having basic responsibility for the audit), or the audit partner responsible for reviewing the audit, has unperformed audit services for the firm in any of the 5 previous fiscal years of the firm prior to her or his appointment.
  • Take into account the opinions of management & the Organization’s internal auditors.
  • Receive from the independent auditors such written statements as required by the Public firm Accounting Oversight Board Rule 3526 or any other applicable rules, & recommend to the Board and/or management like actions it deems appropriate to make sure the independence of the external auditors;
  • Review with the independent auditors any audit issues or difficulties & management’s response.
  • Set clear hiring policies to be implemented by the firm for employees or former employees of the independent auditors to make sure the independence of the Organization’s outside auditors is not compromised under the rules of the Exchange Commission & Securities.
  • Discuss with management & the independent auditors the Organization’s policies & guidelines with respect to risk management & risk assessment. The Committee must discuss the organization’s major financial risk exposures & the steps management has taken to monitor & control such exposures. Like reviews shall include the following:
  • A quarterly review with the Chief Operating Officer (or such other executive or executives with basic responsibility for risk oversight) of the Organization’s risk management & firm risks;
  • An yearly review (or more regularly as appropriate) with such person or persons of the process by which the company manages its company risks; and
  • An yearly review with the chair of each of the Finance Committee of the risk assessment process the Compensation Committee undertaken by those committees with respect to the chance overseen by those committees.
  • Roles in the Risk Management & Corporate Governance Areas

Audit committees play important role in managing risk of the business. Apart from the above discussed 4 key roles, audit committees presume any corporate governance responsibilities for the firm. In the case of corporate governance responsibilities, audit committees are await to:

  • Enhance & Facilitate communication between the BoDs & the external auditors.
  • Review corporate practices & policies in the light of ethical considerations
  • Monitor the manner in which the Organization’s affairs are conducted and, where applicable, compliance with the Organization’s code of corporate conduct
  • Review important transactions outside entity’s general business
  • Review adequacy of management information systems

If you examine on the Accenture Plc’s charter documents, you will find out the following roles in the external auditors’ activities:

Discuss with management & the independent auditors the Organization’s policies & guidelines with respect to risk management & risk assessment. The Committee must discuss the Organization’s alot financial risk exposures & the steps management has taken to monitor & control such exposures. Such reviews shall involved the following:

  • A quarterly review with the Chief Operating Officer (or such other executive or executives with primary responsibility for risk oversight) of the Organization’s risk management & firm risks;
  • An yearly review (or more usually as appropriate) with such person or persons of the process by which the firm manages its firm risks; and
  • An yearly review with the chair of each of the Finance Committee & the Compensation Committee of the risk assessment process undertaken by those committees with respect to the risks inspect by those committees.

5.  Roles within the source Programs & Codes of Conduct Areas.

SOx rules state the audit committee must established plan of action for the retention, receipt & treatment of complaints regarding accounting, internal accounting controls, auditing matters, involving procedures for the confidential, anonymous submission by employees of concerns regarding auditing matters or questionable accounting.

The the legal counsel as well as CAE often are the only non-CEO & CFO links between the corporation & the audit committee. Internal audit often offer its services to the audit committee—often to the appoint financial expert—to establish communication procedures & documentation  in these areas:

  • Documentation logging whistleblower calls– SOx mandates that the audit committee begin a formal whistleblower program where employees can increase their concerns regarding not proper audit & controls matters with  unfear of retribution. A big firm may already have an ethics function, where these matters can be handled in a secure manner. When a smaller firm does not have such a resource, internal audit must offer its facilities to log in such whistleblower communications, recording the name, date & time of the caller for disposition & investigation.
  • Disposition of whistleblower matters– Even much important than logging in initial whistleblower calls, documentation should be maintained to record the nature of any follow-up investigations & related dispositions. Although the SOx-mandated whistleblower program doesn’t have any cash reward program, complete documentation covering actions taken as well as any net savings must be maintained.
  • Codes of ethics –SOx makes the audit committee responsible for developing a code of ethics or conduct for a corporation’s senior officers (CEO & CFO).

The audit committee should to outline a set of rules for proper conduct & have those senior officers acknowledged that they have understand & read & agree to abide by them. Audit committee, if the firm has the program, is expected to ensure the program is effectively running, not just for a limited set of senior officers but for the whole organization.

 

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