ACCA AAA ^INT Syllabus A. Regulatory Environment - Audit Committees - Notes ^{3 / 3}

Structure of the Committee

• At least one member of the committee should have recent and relevant financial experience.

• There should be at least 3 non executive directors.  In the case of smaller companies, this may be 2.

Role of the committee

1. To improve the quality of financial reporting

2. To increase the confidence of the public in the financial statements.

3. Assist directors in meeting their responsibilities in respect of financial reporting.

4. Provide a channel to external auditors to report concerns or issues.

5. Review the company’s system of internal controls.

6. Strengthen the position of internal audit by providing greater independence from management.

7. Appointment of external auditor.

Advantages of a committee

• Independent Reporting

  Provides internal audit with an independent reporting mechanism.  Without this management may be tempted to hide unfavourable reports.

• Frees up Executive time

  Leaves top executives free to manage by providing expertise on financial reporting

• Corporate Governance monitored

  Ensures that corporate governance requirements are brought to attention of the board

• Appropriate Internal Controls

  Should ensure that an appropriate system of internal control is maintained.

• Better Communication

  Better communication between the directors, external audit and management is facilitated.

• Strengthens external audit independence

  Strengthens independence of external audit as their appointment is now not made by the board.

Disadvantages of Committee

1. Executive directors may perceive it as a threat to their authority.

2. Finding non executive directors with appropriate expertise may be difficult.

3. Additional costs will be involved.

4. Too much detail may be thrust upon non executive directors.

Why does the external auditor speak first to the Audit Committee?

1. To ensure independence between the board and the audit firm. 

   The audit committee consists of independent NEDs, who can therefore take an objective view of the audit report.

2. The audit committee has more time to review the audit report and other communications (eg management letters) than the board. 

   The auditor should therefore benefit from their reports being reviewed carefully

3. The audit committee can ensure that any recommendations from the auditor are implemented. 

   The NEDs can pressurise the board to taking action on auditor recommendations

4. The audit committee also has more time to review the effectiveness and efficiency of the work of the external auditor than the board. 

   The committee can therefore make recommendations on the re-appointment of the auditor, or recommend a  different firm if this is appropriate