Understanding the Audit Committee Function: Key Roles and Responsibilities

Published on October 21, 2024

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Who Are the Members of an Audit Committee?

The audit committee, as a rule, consists of directors elected to the company’s board of directors. These individuals, who are often non-executive directors with relevant experience in accounting, financial reporting, and risk management, are rotated to encourage independence and objectivity.

Below are some of the important qualities that members of the audit committee exhibit:

1. Independence: Members of the audit committee ought to be free from the company’s management to eliminate any board conflicts of interest.
2. Financial Expertise: There should be at least one member from the committee who possesses expertise in either accounting or financial management.
3. Diverse Skills: Individuals with skills that cover members’ areas such as risk management, compliance, and regulatory affairs should be included.

Statistical Insight: In the report from the World Economic Forum in 2019, Deloitte noted that 75% of the worldwide audit committees experience challenges because of the fast-paced regulatory changes, which explains the need for such members.

What Is the Main Function of the Audit Committee?

The evaluation of an organization’s auditing practice together with its outer auditing functions is the core responsibility of primary audit committees. The primary audit committee functions with other companies to facilitate correct procedures in the report of financials given that it is correct, open and as per the laws of the land.

Main Functions Include:

• Review of Financial Statements: Confirming that identified financial results are presented fairly in accordance with relevant accounting standards.
• Auditor Oversight: Respecting boundaries set for management over the work of internal and external audit and promoting their objectivity.
• Compliance Oversight: Monitoring the legal and regulatory compliance of the organization.

Example: For instance, in India, under Companies Act 2013, ‘The Audit Committee shall ensure the financial dissemination complies with the national financial reporting framework,’ thus its importance.

Role of the Audit Committee in Risk Management

Further, risk management is an intrinsic part of the audit committee function. The committee is actively involved in the recognition, appraisal and alleviation of both the financial and operational risks that the organization is susceptible to.

Key Responsibilities in Risk Management:

1. Risk Identification: Risk awareness in any undertaking such as financial, operational and compliance exposures.
2. Risk Mitigation: A series of actions taken to avert risks and keep the firm at all time indomitable.
3. Oversight of Internal Controls: Establishing the presence of internal control systems that are effective for risk management.

Data Point: A KPMG survey conducted amongst audit committee members revealed that 85% of them had risk management as one of their priority roles and thus it is one of the cornerstones of their mandates.

Role of the Audit Committee in Corporate Governance

The audit committee’s role in corporate governance is crucial to ensure that there is transparency, accountability, and trust in the internal processes of a corporation. Besides financial reporting, the committee is also charged with the responsibility of ensuring that moral governance is observed.

Ways It Supports Corporate Governance:

1. Supervision of Ethical Practices: The audit committee is charged with the ethics of the management in regards to the law and other regulations.
2. Facilitating Integrity: The audit committee, by way of analyzing the financial revelations of the company, enables the completion of the figures of financers to the honest state of the company amidst its wealth.
3. Whistleblower Mechanisms: Incase of Violations: Numerous audit committees also come into bearing mechanisms where employees or other persons within the organizations can report organizational vices that are unethical.

Real World Example: In India, the capital market regulator, Securities and Exchange Board of India (SEBI) has made it mandatory for all the companies listed on the stock exchanges to have an audit committee to cultivate accountability and transparency.

Audit Committee Function in Corporate Governance

Looking at corporate governance, the audit committee is involved in a variety of activities. It provides the alignment of functions that serves to keep the balance sheet of the organization intact. The committee also plays a role in the reporting of financial and non-financial activities and the assurance of quality in the processes carried out by the company, increasing the trust in the operations of the business by its stakeholders.

Specific Functions in Corporate Governance:

• Financial Management: Evaluation and endorsement of financial disclosures prior to their submission to the board of directors.
• Audit Management: Effectiveness and autonomy of internal and external audit functions.
• Governance: The process of identifying, prioritizing and complying with external and internal controls that are relevant to the organization’s operations.

Statistical Support: According to the results of PwC’s Annual Corporate Directors Survey, 92% of board members are confident about the audit committee’s ability to enhance cooperation among other board committees.

Functions of the Audit Committee in India

The functions of audit committees in India are stipulated in the Companies Act of 2013 and SEBI regulations. These regulations state that companies must have audit committees responsible for financial reporting, risk management, and compliance with regulations.

The salient features and responsibilities in India are:

• Approval of Related Party Transactions: The audit committee is responsible for approving any financial dealings of the company with its related parties.
• Compliance with Indian Accounting Standards: Financial reporting – ensuring compliance with Indian Accounting Standards (Ind AS) and legal obligations.
• Internal Audits: The functioning of internal audits will be monitored to ensure that they are carried out free of bias.

India-Specific Insight: As per the Companies Act, it has been made compulsory for all listed companies to constitute an audit committee underlining its significance in the Indian corporate environment.

Powers of the Audit Committee

The powers of the audit committee come with the rationale that the members will be vested with enough powers to carry out their responsibilities. These powers are not the same for all companies but mostly include the following:

Core Powers Include:

1. Access to Financial Information – The committee is allowed unrestrained access to all financial information, employees and auditors.
2. The Committee Has The Authority To Appoint Or Remove An External Auditor – The audit committee has the mandate to appoint external auditors and has supervisory roles over them.
3. Review and Approve Audits – The committee is authorized to review and accept both internal and external audit reports.

Final Say

The audit committee function plays an important role in the triangulation of corporate governance, financial accountability, and risk management. While reviewing financial statements and stamping regulatory compliance, in addition to control of risks, the audit committee helps to reinforce the internal accountability framework of the corporation. Whether you are based in India or any other region of the world, a well laid down audit committee is a requirement for the success of any business in the long run.

Find out how Felix Advisory can assist in improving your company’s audit strategy today!

FAQs

1. What is the role of the audit committee?

The audit committee oversees financial reporting, auditing processes, and compliance with regulatory standards, ensuring transparency and accountability in a company’s operations.

2. Who should be a member of the audit committee?

Audit committee members are typically non-executive directors with expertise in accounting, financial reporting, and risk management to maintain objectivity and independence.

3. How does the audit committee help in risk management?

The audit committee plays a key role in identifying and mitigating risks by implementing effective internal controls and overseeing risk management policies.

4. What are the powers of the audit committee?

The audit committee has the authority to access financial data, hire external auditors, and review audit reports to ensure financial integrity.

5. How does the audit committee contribute to corporate governance?

The audit committee ensures ethical conduct, financial transparency, and regulatory compliance, which are essential for good corporate governance.