Conducting audit procedures is a very important task that ensures that the overall operations and management within the company are well under check, and the company is able to operate as per the standard rules and regulations.
In this regard, it is quite rudimentary to ensure that the Audit Committee is able to address the relevant issues and oversee the overall process to justify their standing within the company.
The Audit Committee of the Board of Directors is established with the aim and objective to assist the Board to oversee and objectively assess the financial performance of the organization, its financial statements, internal controls, financial reporting, accounting standards, legal and regulatory compliance and the independence of its External Auditors and other higher-level management.
The Audit Committee, therefore, is created to ensure that they are able to supervise the process and be accountable and responsible for the relevant actions that are taken in this regard.
For this purpose, the Company Act has been drafted to ensure that all these relevant issues are taken into account, with a clear sense of direction regarding the overall expectations from auditors regarding the process, including that of the Audit Committee, and all necessary inclusions in this regard.
The Terms of
Reference are mandatory to be included in the Final Statements that are
presented. These include a number of things, which include the following:
- Recommendation for appointment
- Remuneration and terms of appointment for the auditors
- Reviewing and monitoring the auditors’ independence
- Review of the overall effectiveness of the audit process
- A thorough examination of the financial statements and the audit report
- Related Party Transactions – Any approval or modification to be duly accounted for
- Scrutiny of any corporate loans, bonds or investments
- Valuation of Assets within the company
- Presence, and effectiveness of financial controls, and risk management systems
- Vigil Mechanism – the existing access to the audit committee chairperson
- Internal and external audit statutory documents and requirements
- Internal Control system
- Scope of overall audit – observations and review of the financial statements
- Observations made by the auditors about the review of the financial statements before submission to the board
- The auditors and the key management personnel – their presence is mandatory when the financial statements are being discussed.
- The auditors and the key management personnel to be present when the financial statements are considered by the Audit Committee – however, they do not have a right to vote.
Therefore, it can be seen that Terms of Reference is basically a document that is created to provide for numerous different questions that might arise regarding the audit process, and the audit committee itself.
Hence, the main criteria are to illustrate a roadmap, that all checkboxes have been taken care of, and there are no issues that still need to be resolved pertaining to the audit committee, or the assurance process.
The overall Terms of Reference provide an added layer of protection, to ensure that all the tasks and processes have been duly carried out.
The audit committee includes specialized members who are external hired independent directors of the company.
They keep an overview of the executive directors and review the company’s financial reports and their performance.
Audit committee reports are the reports published by the audit committee of the company, which gives an overview of the company’s accounting process, financial reporting process, the auditing activities, a report on internal controls policies and efficiencies and compliance with the legislation and rules and regulations of the local authorities.
Purpose of audit committee report:
The information in the audit committee report varies by the nature and industries of companies.
The audit committee members and the executive management, therefore, reach a point to decide what should be the information included and how is it presented.
The audit committee report includes items such as what the company intends to do in the next financial year so they will create an annual plan.
They will also discuss the factors affecting the independence of the audit committee and what factors will impact the output efficiencies of the company such as budget and actual results comparisons.
However, the primary responsibility of the audit committee is to look at the financial reporting process, internal controls, and external auditing activities, therefore, the audit committee report’s major part will include these.
Process of audit
Audit Committee reports are published quarterly so timely information is provided to senior management and shareholders of the company. these reports are scheduled quarterly which delivers the following information.
The report delivered in the first quarter will give an outline of the external audit findings and internal controls and compliance procedures and issues provided by the external auditors.
The second quarter audit report will highlight whether the recommendations provided by the external auditors are followed by the company.
They will also discuss the constraints to the company and how will they affect the company’s operations. The third-quarter report tends again to the external audit activities while in the fourth quarter the report looks at the mission, objectives, and goals of the company for the future.
Outcomes of audit
Improvement of performance of the company:
While the audit committee report is published every quarter and annually, there are expectations of useful outcomes as a result of them. These reports serve a purpose and that is why the members of the committee plan its purposes and arrange the report focusing on those results.
When the audit committee hires and takes recommendations from the external auditors, these recommendations are addressed in the audit committee report to shareholders and the owners of the company.
Other than that, when the audit committee publishes a report, they include the current financial reporting process and its efficiency.
The management of the organization will, therefore, focus on how to improve the financial reporting process which could fulfill the purpose of stakeholders and the owners of the company.
and internal audit function:
The audit committee’s responsibility is to overview the company’s internal controls process and how independent the internal audit function of the company is.
While completing this responsibility, they issue a report on the efficiency of internal audit and internal controls procedures along with recommendations to improve them.
To have a detailed understanding
of audit committee terms of references, it is necessary to know what an audit
committee is and what its responsibilities are.
An audit committee is the major operating committee of a public or listed company that oversees the financial reporting and the required disclosures. According to the rules of the USA and other many countries, it is required to maintain an independent audit committee.
These guidelines of having an audit committee require to include independent outside directors with at least one financial expert. The audit committee oversees the operations of executive directors and reports to shareholders of the company.
Terms of references for audit committee:
The terms of references to the audit committee document the detailed explanation of the audit committee and explain the specific roles and responsibilities of the committee.
These terms of references include guidance for the members of the audit committee about their roles and responsibilities, obligations, about their operations and their period of serving as a member of the committee.
The terms of references of the audit committee are structured to provide the following details to its members.
Roles and responsibilities of the committee:
These references guide the members of the audit committee of their activities and boundaries of work.
Some of the activities expected in many countries and which these references explain are to focus on the company’s reporting process, to provide a channel for the audit process, establishing a standard for the organization’s internal controls, and to comply with the laws and regulations of legislations.
The terms of references of the audit committee’s primary focus are to appoint auditors, set their compensation and discuss the critical points with auditors.
Terms of references of the audit committee also provide a guideline on, what should be the minimum qualification criterion for its members.
Many legislations ask companies to hire at least three independent non-executive external directors. They also ask that at least one of the members of the audit committee must be a financial expert.
They sometimes require members to have a requirement of minimum academic qualification. The audit committee is headed by the chairman of the audit committee who is required to be a non-executive director.
Quorums of meetings:
Some legislations set the minimum number of meetings in a financial year. The most used number of meetings set by legislations are to be not less than four during a year.
Some legislations also set the lowest number of non-executive members of the audit committee to be physically present in the meeting.
If the chairman is not present during a particular meeting, then members of the committee will select a member as chairman of the committee among them.
Some legislations also require
the appointment of secretary for the audit committee who is the secretary of
the company in most instances. Secretary of audit committee schedules the
timings, place and duration and purpose of the meeting.
There are also other terms of references of the audit committees such as in some instances it requires the board meeting minutes to be kept at registered offices of the company and share these with members of the audit committee and other directors if needed.
One purpose of the audit committee according to terms of reference is to look up the function of internal audit along with the internal audit department is required to directly report to the audit committee.
The role of the audit committee in the modern corporate world has been of primitive importance over the past few years.
As a matter of fact, it can be seen that an audit committee is one of the major operating committees of a company’s board of directors that is primarily responsible for overseeing financial reporting and disclosure.
The best audit committees can be described as those which are able to set a considerable and appropriate tone at the top where the prime focus is on ensuring that the organization is able to act in favor of the best interests of its stakeholders.
However, this can only be made possible in environments where there is proper in-depth knowledge, integrity, and people with staunch and unbiased approaches in the form of the audit committee, senior management, and other leadership levels.
Essentially, these members are ideally supposed to bring along a well-grounded knowledge of the industry, general business and financial knowledge and experience and further application-related knowledge to apply such within the organization they are a part of.
Furthermore, the committee is also supposed to have clarity about the overall organization and its inherent risks, which mainly exist as a result of regular involvement and communications within the management, particularly with the auditors, both internal and external.
Therefore, in this regard, it can be seen that the best audit committee members are able to maintain a high degree involvement in the overall state of affairs, which can help them to be active decision-makers in the overall process, in a constructive manner.
The Audit Committee’s Relationship:
In addition to the overall characteristics of the audit committee that has been mentioned earlier, it can also be seen that there are a couple of additional features that need to be accounted for when it comes to selecting the relevant audit committee.
In addition to that, it is also imperative that these expectations from the governing body are also well-defined and properly put across in order to eliminate any confusion that might otherwise exist.
Furthermore, the audit committee’s overall involvement in the financial reports, for both preparation and presentation is also highly crucial. Therefore, it is expected that the overall relationship that is maintained with the audit committee is transparent to a very high extent.
In this regard, the best practice for the audit committees is to ensure that the audit committee members are independent of management.
This would help them to be truly objective and unbiased in the discharge of their duties. Additionally, for the audit committee, to be truly effective, they must be able to resist any attempt by management to compromise financial reporting.
The relationship that exists between the Audit Committee and the management can be described as counterparts in order to ensure that there is smooth functioning within the organization when it comes to integral issues that might hinder the performance, and eventually the repute of the company if not taken care of in a proper manner.
The audit committee charter is a document that is designed to illustrate common or leading practices. The main purpose of this is to encourage customization. It comprises the following parts.
The Audit Committee charter is supposed to have certain
organizational principles, which should ideally provide an introduction,
background, purpose, mandate, authority, composition, information about the
chair, terms of office, and quorum.
In addition to the organizational principles, it can be seen that it is required to have Audit Committee values, Communications, Work Plan, Meeting Agenda, Information Requirements, Executive Sessions, Preparation & Attendance, Conflicts of Interests, and Orientation and Training.
Within the realm of operational procedures, there are a couple of aspects that need to be incorporated.
They mainly include meetings, minutes, required attendance, secretariat services, remuneration of committee members, responsibilities, values and ethics, organizational governance, risk management, fraud, control, and compliance.
OVERSIGHT OF INTERNAL
AUDIT ACTIVITY AND OTHER ASSURANCE PROVIDERS
This part of the document is mainly designed to ensure that there is proper clarity regarding the overall job descriptions that need to be followed, particularly in the context of ensuring that there are no issues when it comes to reinforcing and further implementing the internal checks and balances that are already in place.
In this regard, there are a couple of things that are important. They include internal audit activity, external audit activity, financial statements, and public accountability reporting, other responsibilities, and reporting on audit committee performance.
Despite the fact that this list is not entirely exhaustive, yet it can be seen that there are a couple of aspects that need to be overseen in order to ensure that there is proper clarity of information, as well as roles mentioned in the charter itself.
The main premise behind such a document is enabling the organization to have a foolproof system in place that can identify respective roles for the Audit Committee members, and ensure that they are able to make a positive contribution towards the organization.
From an external point of view, it can be seen that the overall information disclosed in this particular charter help the external stakeholders to get an understanding regarding the internal state of affairs of the organization.
It can be seen as a very vital trust-building tool, that can help external stakeholders to ensure that there is a proper system in place, before they are ready to invest in a company.
Moreover, this Charter forms to be a performance tracker too, since it identifies the aspects that need to be covered by the audit committee.
End of the year, this can further be evaluated by the Board of Directors in order to ensure that there are no loose ends, which have a chance of deterring the overall reputation of the company, to say the least.
Therefore, having a document to track all such aspects becomes increasingly integral, especially in modern-day and age where it gets increasingly hard to establish proper and viable communication tools for the organization.
The audit committee is an integral part of the overall organization when it comes to execution and analysis of issues that impact the overall organization in terms of its functioning and overall performance.
There are certain roles that are expected of the Audit Committee, and they are expected to abide by them in order to have definitive clarity regarding the overall nature of work that is expected of them.
For example, the audit committee is expected to inform the external auditor about any issues that bother them in terms of the overall functioning of the organization.
However, in order to achieve the expected roles, it can be seen that there are a couple of issues and aspects that the audit committee should follow in order to ensure that they are able to meet their targets and deadlines. Some of these ‘best practices’ are mentioned below:
Audit committee work plan:
This helps the audit committee to ensure that they are able to contribute positively to the organization. However, in order to do so, it gets rudimentary to get a basic understanding of the overall tasks and objectives that need to be fulfilled.
Communication and effective coordination is the key to success in this regard. Regular meetings are supposed to be conducted in order to ensure that there is proper clarity regarding the overall issues that need to be tackled so that a practical solution can be devised in order to get the best results.
Interaction with the audit firm:
Cooperation with the audit firm is also a very crucial and integral part of this case. This is essential because of the fact that there are numerous issues regarding which the auditor has more knowledge and expertise.
Therefore, in order to remove any what-ifs or confusion, it is required of the audit committee to establish a smooth working relationship with the audit team.
As a matter of fact, it can be seen that no meeting of the audit committee is complete without a series of in-camera meetings with the external auditor, management, and committee members only.
In this regard, it is the chairperson’s responsibility to include these meetings on every audit committee meeting agenda and ensure that sufficient time is set aside for them at each meeting.
Disclosure of audit fees:
Clause 49 II (D) empowers the audit committee to recommend to the board the audit fees to be paid to the statutory auditors and approve payment to statutory auditors for any other services rendered by them.
Statement of corporate governance practices:
The revised clause 49 of the listing agreement with the stock exchanges in its Annexure VI suggests that the following be included in the Report on Corporate Governance in the Annual Report of the companies with reference to the audit committee.
Evaluation of the external auditor:
The fundamental responsibility of the audit committee is to evaluate the external auditor’s performance.
Clause 49 empowers the audit committee to recommend to the board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees and approval of payment to statutory auditors for any other services rendered by the statutory auditors.