Introduction to the audit committee

The audit committee delivers oversight of internal and external audits and the financial reporting and controls operating within an organisation. It is largely backwards-facing, reviewing existing processes and procedures for efficacy and undertaking historical reviews of financials, actions and issues. The main area of divergence from this is in respect of reviews of audit plans and their alignment to strategy and the future of the organisation.

The audit committee is often merged with the risk committee, in which case the oversight of risk as a whole is monitored. Where these committees are separate, the audit committee would maintain oversight of financial risk within the company, coordinating with the risk committee to ensure that no risks fall between these two forums or are duplicated.

Within financial reporting and controls, the audit committee provides specific
oversight of:

• the financial reporting systems in place within the organisation and their effectiveness
• the controls and associated financial risk management systems
• compliance with applicable laws and regulations
• where requested, the annual report and other external financial reporting on behalf of the board.

Oversight of internal and external audit incorporates:

• the audit process itself, reflecting the process where an internal audit function exists or where this function is not in place
• the interaction between internal and external audit processes
• the appointment process for external auditors.

Terms of reference

While the prevalence of an audit committee is relatively universal in large companies across countries, differences in its roles and responsibilities can be seen under different legislation and should be considered if looking at the audit committee across jurisdictions or when expanding governance controls across multiple countries. 

In general, the framework for the audit committee terms of reference is standard concerning the meeting schedule aligning to audit and financial reporting timetables.

Given the importance of the financial oversight that the audit committee undertakes,
and its reporting to the board, the audit committee should also report to members or shareholders, most prevalently via the annual report, the details of any issues that
remain outstanding between the committee and the board.

The terms of reference should reflect the size and requirements of the organisation, including whether an internal audit function is in place. Where it is not, the audit committee role should include an annual review as to whether one should be implemented and, if the audit committee errs towards its creation, should advise the board accordingly. The decision of whether to implement an audit function or not then rests with the board or the executive committee on their behalf. If the board decides not to implement an audit function against the recommendations of the audit committee, this should be documented in both the board and audit committee minutes, with content reflecting why the decision was made and any additional considerations given.

Composition

It is the board’s responsibility to determine the composition of the audit committee. However, best practice is to appoint at least two, and preferably three, independent non-executive directors, with at least one member of the committee having recent and relevant financial experience. The chair of the board should not ordinarily be a member of the audit committee.

Duties, responsibilities and tasks

Detail within the terms of reference will reflect the dual role of oversight of financial reporting and controls and internal and external audit. Financial reporting and controls encompass all elements of financial reporting, related systems and controls and the application of regulatory and legislative requirements and responsibilities.