Responsibilities of audit committees
Thursday, 26 July 2007
Sabbir Ahmed
Corporate governance guidelines issued by the Securities and Exchange Commission (SEC) in February 2006 through a SEC notification made audit committees mandatory for the listed companies. According to the guidelines, the audit committee is a sub-committee of the Board of Directors (BOD). The main responsibility of the committee is to assist BOD in ensuring that the financial statements reflect true and fair view of the affairs of the company and also in putting in place a good monitoring system within the business. The committee is accountable to the BOD. The guidelines also suggest that the duties of the committee should be clearly set forth in writing. The guidelines, however, have not made clear - how the committee will ensure that the financial statements reflect true and fair view of the affairs of the company and how the committee will ensure a good monitoring system within the business. This write-up is an effort to gather thoughts concerning functions and responsibilities of the audit committee, as propounded by professionals for achieving the objectives of the guidelines and to help the listed companies in setting forth the duties of the committee.
The audit committee is an essential part of the corporate reporting process. Its primary responsibility is to oversee (on behalf of the board) the integrity of the financial information, its reliability, financial policies and procedures, and internal control systems implemented by management, to protect the interests of shareholders and other stakeholders. In the contemporary corporate world, audit committees are performing various jobs for the greater confidence of the investors. Audit committees either do not prepare financial reports or they do not conduct audits. But they have an essential part to play in ensuring the integrity and transparency of corporate reporting. The UK Smith Report on Audit Committees Combined Code Guidance stated, "Audit committees should, for example, satisfy themselves that there is a proper system and allocation of responsibilities for the day-to-day monitoring of financial controls but they should not seek to do the monitoring themselves".
PricewaterhouseCoopers, a big four international audit firm, in its publication, "Audit Committees" - Good Practices for Meeting Market "Expectations" identified audit committee responsibilities, which are mentioned in the beneath.
* Evaluate whether senior management has set an appropriate 'control system' by establishing procedures for the assessment and management of risk.
* Understand the systems of controls implemented by management for the approval of transactions, recording of data and compliance of financial statements with relevant requirements.
* Enquire whether internal control recommendations made by the external and internal auditors have been implemented by management.
* In reviewing the financial statements and other financial information, be alert to possible indications of fraud.
* Review significant accounting and reporting issues, including recent professional and regulatory pronouncements, and understand their impact on the financial statements.
* Review schedules of adjusted and non-adjusted items and obtain explanation from the external auditor and management as to why errors remain unadjusted.
* Read the directors' or management letter of representation to the auditors on the financial statements and consider issues addressed in the letter.
* Review the financial statements and determine whether they are complete, reflect appropriate accounting policies, contain adequate disclosure and are consistent with the information known to committee members.
* Review other sections of the annual report, particularly management commentary, and consider whether the information is adequate and consistent with members' knowledge about the company and its operations.
* Review the results of the external audit.
* Ascertain how management develops and summarises interim and preliminary results information, and the extent of external and internal audit involvement in the review of such information.
* Agree with management appropriate procedures for the preparation and review of other types of financial information, for example summary financial statements, regulatory returns and debt circulars.
* Review the systems implemented by management for monitoring compliance with financial laws and regulations.
* Obtain regular updates from management regarding compliance and the results of management's investigation and follow-up of any instances of non-compliance.
* Review the findings of any examinations by regulatory agencies.
* Assess whether all legal and regulatory compliance matters have been considered in the preparation of the financial statements.
* Review the programme for monitoring compliance with any code of ethics, and periodically obtain updates from management regarding compliance.
* Ensure the company has appropriate mechanisms for dealing with financial accounting and reporting issues raised by employees, investors, members of the public and others.
* Review the qualification, performance and compensation of the auditors and make recommendations to the board for the appointment of the external auditors.
* Consider the independence of the external auditors.
* Review the proposed audit plan and scope of work.
* Consider the findings from the financial statements audit and ensure management responds to the findings.
* Seek auditors' views on the effectiveness of the company's governance process.
* Review the activities, resources and organisational structure of the internal audit function.
* Consider the findings and recommendations of the internal auditors, and whether management responds to the findings.
* Review the effectiveness of the internal audit function.
...........................................
The writer is a Chartered Accountant. He can be reached by email to [email protected]
Corporate governance guidelines issued by the Securities and Exchange Commission (SEC) in February 2006 through a SEC notification made audit committees mandatory for the listed companies. According to the guidelines, the audit committee is a sub-committee of the Board of Directors (BOD). The main responsibility of the committee is to assist BOD in ensuring that the financial statements reflect true and fair view of the affairs of the company and also in putting in place a good monitoring system within the business. The committee is accountable to the BOD. The guidelines also suggest that the duties of the committee should be clearly set forth in writing. The guidelines, however, have not made clear - how the committee will ensure that the financial statements reflect true and fair view of the affairs of the company and how the committee will ensure a good monitoring system within the business. This write-up is an effort to gather thoughts concerning functions and responsibilities of the audit committee, as propounded by professionals for achieving the objectives of the guidelines and to help the listed companies in setting forth the duties of the committee.
The audit committee is an essential part of the corporate reporting process. Its primary responsibility is to oversee (on behalf of the board) the integrity of the financial information, its reliability, financial policies and procedures, and internal control systems implemented by management, to protect the interests of shareholders and other stakeholders. In the contemporary corporate world, audit committees are performing various jobs for the greater confidence of the investors. Audit committees either do not prepare financial reports or they do not conduct audits. But they have an essential part to play in ensuring the integrity and transparency of corporate reporting. The UK Smith Report on Audit Committees Combined Code Guidance stated, "Audit committees should, for example, satisfy themselves that there is a proper system and allocation of responsibilities for the day-to-day monitoring of financial controls but they should not seek to do the monitoring themselves".
PricewaterhouseCoopers, a big four international audit firm, in its publication, "Audit Committees" - Good Practices for Meeting Market "Expectations" identified audit committee responsibilities, which are mentioned in the beneath.
* Evaluate whether senior management has set an appropriate 'control system' by establishing procedures for the assessment and management of risk.
* Understand the systems of controls implemented by management for the approval of transactions, recording of data and compliance of financial statements with relevant requirements.
* Enquire whether internal control recommendations made by the external and internal auditors have been implemented by management.
* In reviewing the financial statements and other financial information, be alert to possible indications of fraud.
* Review significant accounting and reporting issues, including recent professional and regulatory pronouncements, and understand their impact on the financial statements.
* Review schedules of adjusted and non-adjusted items and obtain explanation from the external auditor and management as to why errors remain unadjusted.
* Read the directors' or management letter of representation to the auditors on the financial statements and consider issues addressed in the letter.
* Review the financial statements and determine whether they are complete, reflect appropriate accounting policies, contain adequate disclosure and are consistent with the information known to committee members.
* Review other sections of the annual report, particularly management commentary, and consider whether the information is adequate and consistent with members' knowledge about the company and its operations.
* Review the results of the external audit.
* Ascertain how management develops and summarises interim and preliminary results information, and the extent of external and internal audit involvement in the review of such information.
* Agree with management appropriate procedures for the preparation and review of other types of financial information, for example summary financial statements, regulatory returns and debt circulars.
* Review the systems implemented by management for monitoring compliance with financial laws and regulations.
* Obtain regular updates from management regarding compliance and the results of management's investigation and follow-up of any instances of non-compliance.
* Review the findings of any examinations by regulatory agencies.
* Assess whether all legal and regulatory compliance matters have been considered in the preparation of the financial statements.
* Review the programme for monitoring compliance with any code of ethics, and periodically obtain updates from management regarding compliance.
* Ensure the company has appropriate mechanisms for dealing with financial accounting and reporting issues raised by employees, investors, members of the public and others.
* Review the qualification, performance and compensation of the auditors and make recommendations to the board for the appointment of the external auditors.
* Consider the independence of the external auditors.
* Review the proposed audit plan and scope of work.
* Consider the findings from the financial statements audit and ensure management responds to the findings.
* Seek auditors' views on the effectiveness of the company's governance process.
* Review the activities, resources and organisational structure of the internal audit function.
* Consider the findings and recommendations of the internal auditors, and whether management responds to the findings.
* Review the effectiveness of the internal audit function.
...........................................
The writer is a Chartered Accountant. He can be reached by email to [email protected]