What is an audit committee? What does an audit committee do and who sits on the committee? Here’s a quick guide audit committees and the roles and responsibilities of the audit committee and why it is a central part of any good board of directors.
A quick guide to audit committees should not simply follow relevant codes and regulations. An audit committee is a key element of an organisation’s governance structure, operating under the board’s direction and is often the difference between success and failure.
The roles of the audit committee
A committee’s responsibilities and roles will be listed in its terms of reference, which must be reviewed annually and recommended to the board.
A guide to an audit committees remit will typically include the following:
- Risk management and internal controls
- An internal audit process that includes recruitment and resourcing
- Statements of financial position and governance
- A process for external audits
- Compliance reports
- Regulatory reports
- Key performance data (KPIs)
- Information about its activities communicated to shareholders
Clearly, the audit committee is concerned with much more than just financial controls and external audits.
Financial controls are important, but statistics show that mismanagement of strategic risks is the biggest threat and source of loss for organisations.
An internal audit’s responsibilities, therefore, extend beyond the internal control framework, including aspects of operations, strategy, governance, and finance.
An effective audit committee
There is more to a good audit committee than simply checking to make sure that it complies with relevant codes and regulations – it must also address organisational risk, and challenge the reports of management and external auditors to ensure robust compliance.
As a guide to audit committees and when evaluating the effectiveness of the audit committee, you should pay attention to:
- Committee appointments
- Committee members’ backgrounds, skills, and training
- Members’ participation in meetings
- Meeting frequency and attendance
- The committee’s resources and supports
- The committee’s relationship with its assurance providers
- The committee’s relationship with senior management
- The relationship between the audit committee and the board
In summary – a guide to audit committees
- An audit committee can benefit all companies, regardless of their size or type of operation, since it plays an important role in corporate governance and helps guarantee the organisation’s success.
- For an audit committee to be successful, it must be composed of the right people, with the right mindset and relevant expertise.
- Audit committees do not have a set size but are typically composed of at least three independent individuals.
- An audit committee member must approach responsibilities with a questioning mind and a healthy sense of professional scepticism.
The members’ library of boardroom templates
Did you know that members of the Corporate Governance Institute have access to a library of boardroom templates? For example, there is this useful boardroom template that details the Terms of Reference for the Finance, Audit and Risk Committee. You can download it for free below.