What is Audit Committee - Functions of Audit Committee

An audit committee is a committee consisting of non-executive directors which is able to view a company's affairs in a detached and independent way and liaise effectively between the main board of directors and the external auditors.

Audit Committee Work Plan:

Audit committee cater multiple responsibilities in a company, The work plan or functions of audit committee are listed below.
  1. Monitoring the integrity of the financial statement.
  2. Reviewing the company's internal financial controls.
  3. Monitoring and reviewing the effectiveness of internal audit function.
  4. Making recommendations in relation to the appointment and removal of external audit and their remuneration.
  5. Reviewing and monitoring the external auditors' independence and objectivity and the effectiveness of the audit process.
  6. Developing and implementing policies on engagement of the external audit to supply non-audit service.

 Audit Committee Objectives:

  1. Increasing public confidence in the credibility and objectivity of published financial reporting.
  2. Assisting directors (particularly executive directors) in meeting their responsibility of financial reporting.
  3. Strengthening the independent position of a company's external auditor by providing an additional channel of communication.

Advantages / Disadvantages of Audit Committee:

Advantages of Audit Committee:
  1. It provides an internal reporting mechanism compared to reporting to the directors who may wish to hide or amend unfavorable internal audit.
  2. Shareholder and public confidence in published financial information is enhanced because it has been reviewed by an independent committee.
  3. Provides better communication between the directors, the external auditors and management.
Disadvantages of Audit Committee:
  1. Fear that the purpose is to catch the management out.
  2. Non-executive directors being overburdened with details.
  3. Additional cost in terms of time involved.

Considerations for an audit firm before accepting a client

1. Ensure professionally qualified to act.
Consider whether qualified on legal or ethical ground, for example if there would be a conflict of interest another client.

2. Ensure existing resources adequate.
Consider available time, staff and technical expertise.

3. Obtain references.
Make independent inquiries if directors not personally known.

4. Communicate with present auditors.
Inquire whether there are reasons/circumstances behind the change which the new auditors ought to know, also as a matter of courtesy.

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