KPMG Audit Committee Guide

Financial reporting oversight is a cornerstone of the audit committee’s responsibilities, ensuring that an organization’s financial statements are accurate, complete, and transparent. This oversight begins with a thorough review of the financial reporting process, which includes understanding the methodologies and assumptions used in preparing financial statements. The audit committee must ensure that these methodologies are consistent with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the jurisdiction. By doing so, the committee helps to maintain the credibility of the financial reports, which is essential for investor confidence and regulatory compliance. Interaction with external auditors is a fundamental aspect of the audit committee’s role, fostering a collaborative environment that enhances the integrity of the financial reporting process. This relationship begins with the selection and appointment of the external auditors, a process that requires careful consideration of the auditors’ qualifications, experience, and independence.

Digitally Transforming Internal Audit to Drive Smarter Audits

Still, some are the key people who could be the entity’s suppliers or customers, and somehow it can affect their decision-making. The audit committee is a combination of non-executive and independent directors working independently from all operation and operating activities of the entity. The first major requirement of the member to become a member of the audit committee is independence. An audit committee is a group of non-executive directors set up by and work under the supervision of the board of directors of an entity.

They help organizations anticipate risks, such as cybersecurity and ESG obligations, rather than just reacting to them. Audit committees are crucial for good corporate governance, ensuring high-quality corporate reporting and building trust with stakeholders. Their responsibilities are broad and ever-evolving, especially with the advent of mandatory sustainability reporting and assurance in many markets. Effective audit committees ensure internal controls and risk management by overseeing the internal audit function, reviewing control effectiveness, and monitoring risk management processes.

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The audit committee must ensure that the chosen auditors possess the expertise necessary to understand the organization’s industry and its unique challenges. The work of the CFO and the finance function has continued to expand beyond financial reporting. Many CFOs today do not have a traditional accounting and financial reporting background. The expanded role of the audit committee means that ongoing education for all members is vital, with some members requiring deeper dives in specific areas.

For listed and other public interest companies, the requirements for audit committees are set by national laws, governance codes and stock exchange rules. What is common across the world, however, is that audit committees have a broad and ever-evolving remit. Currently, this remit is further expanding with the advent of mandatory sustainability reporting and assurance in many markets. As well as overseeing their company’s corporate reporting processes, audit committees oversee internal controls, risk management and the external audit process. Additionally, they may have responsibilities in relation to cybersecurity, taxation and legal compliance, among other areas. An effective audit committee is a strategic enabler of trust and accountability, overseeing financial reporting, internal controls, and regulatory compliance.

Section 177 of The Companies Act, 2013

They also support both the board and the management team to the audit committee requirements make informed strategic decisions. Without the existence of effective audit committees, corporate governance would almost certainly be weaker, and there would be less trust in the information provided by companies. As an audit committee member, you have an essential role in contributing to your company’s success. Your fellow board members depend on your insights as they consider the company’s risk landscape. This involves selecting and appointing the external auditors, as well as reviewing their performance and independence.

Role and Responsibilities of the audit committee

The relationship between the CFO and the audit committee chair is critical and trust and transparency are key. Developing that relationship takes time and it is the chair’s responsibility, particularly when there is a new CFO, to let the CFO know that they have an ally. The relationship between the CFO and the audit committee can vary depending on the company.

• Their primary responsibilities focus on ensuring accurate financial reporting, maintaining effective internal controls, and facilitating proper risk management.
• A series of periodic audit committee-focused publications that examines topics impacting the audit committee’s responsibilities and priorities.
• For example, the committee might examine the assumptions used in valuing complex financial instruments or the methods for estimating provisions for doubtful debts.

Just like other types of committees, an audit committee reports to the company’s board of directors. One of the audit committee functions is also to ensure that an organization operates in compliance with major laws and regulations. The importance of an audit committee is also reflected in the evolving board priorities, with cybersecurity being the focus. This is because an audit committee is responsible for managing cybersecurity practices inside a company, according to Deloitte’s survey. In general, the company that is required to have an audit committee includes a listed company or company that is intended to list on the stock exchange as well as a public interest entity is required to have an audit committee.

These subcommittees can delve deeper into their respective areas and report back to the main committee, ensuring that no aspect of the audit committee’s responsibilities is overlooked. Throughout the audit process, the audit committee is responsible for monitoring auditor effectiveness and audit quality. Some AQIs will relate to the audit practice of the firm (in certain cases, at firm-wide level) while others will relate to the specific engagement. Examples of AQIs include regulatory inspection reports, technical expertise, partner workload and responsiveness, and timing of audit execution, including progress against milestones.

• Special circumstances, such as an internal control deficiency or investigation, require additional discussions.
• All members must have financial literacy, with at least one expert in accounting or a related field.
• This involves a thorough understanding of the organization’s risk management framework and the ability to evaluate whether the internal controls are effective and efficient.
• The Nomination and Remuneration Committee (Section 178) is required for listed and certain public companies, needing at least three non-executive directors, with at least 50% being independent.
• As required by UK good corporate governance, member of the audit committee need to be independent, and one of them need to be a financial expert.

Discover the essential roles and responsibilities of an effective audit committee in ensuring robust financial oversight and governance. Maintaining the committee’s effectiveness requires strong leadership, prioritizing the committee agenda, monitoring its oversight processes, and periodically reassessing its skills and composition. The audit committee, in discussion with the full board, should also periodically reconsider whether its risk oversight responsibilities still make sense as the risk landscape evolves. Healthy dynamics underpin the performance of effective audit committees, in the same way as they underpin the performance of all highly performing teams. Krista Parsons is an Audit & Assurance managing director with Deloitte & Touche LLP and is a part of Deloitte’s Center for Board Effectiveness, which is committed to supporting executives, boards of directors, and others active in governance.

It ensures proper follow-up on reported issues and monitors compliance with ethical standards. Through these efforts, the committee promotes integrity, transparency, and accountability within the organization. Erin has a proven track record of transforming audit functions, driving strategic growth for organizations and developing and leading high-performing audit teams. As an accomplished and highly motivated Chief Audit Executive, Erin excels in developing and implementing robust audit frameworks, ensuring compliance, and fostering a culture of continuous improvement.

Diversity within the audit committee is not limited to professional expertise but also extends to gender, ethnicity, and industry background. This diversity fosters a broader perspective, enhancing the committee’s ability to identify and address potential issues from multiple angles. For instance, a member with a background in technology can provide valuable insights into cybersecurity risks, while someone with legal expertise can help navigate complex regulatory landscapes. Such varied viewpoints contribute to more comprehensive risk assessments and more robust decision-making processes. Another significant responsibility is the review and monitoring of compliance with legal and regulatory requirements. The audit committee must stay abreast of changes in laws and regulations that impact the organization, ensuring that policies and procedures are updated accordingly.

Independence here refers to both independence from operation and independence from any kind of interest involved with the company. By submitting, you agree that KPMG LLP may process any personal information you provide pursuant to KPMG LLP’s Privacy Statement. KPMG has market-leading alliances with many of the world’s leading software and services vendors. In today’s demanding economic and geopolitical environment, boards are playing a critical advisory role. The cooling-off period (the duration of time that needs to pass after any of the above relationships has been terminated) can be as long as five years in some cases.

Indeed, independence is crucial as it allows committee members to make objective decisions without conflicts of interest. Moreover, according to regulations established by the Sarbanes-Oxley Act, public companies must maintain audit committees composed entirely of independent directors. In addition, committee members should possess financial literacy, with at least one member qualifying as a “financial expert” with accounting expertise or related financial management experience. This expertise enables the committee to effectively review complex financial information and address technical accounting issues. By providing confidence in the integrity of corporate reporting, audit committees enable their companies to comply with their regulatory obligations and meet the demands of their stakeholders.

KPMG Audit Committee Guide

Typically audit committees consist of three to five members, who are nominated from within the ranks of the board. In some jurisdictions, regulations may stipulate that other company stakeholders, such as employees, are represented on audit committees. Nevertheless, the committee, as a whole, needs to have the financial expertise and industry understanding to effectively discharge its core duties. It must also be committed to continual upskilling so that it can maintain high performance in an era of rapid change. The audit committee is responsible for reviewing the auditor’s findings and challenging management over audit differences (the known and projected misstatements identified during the audit process).

It also monitors all the changes and developments in regulations and laws that apply to the organization and can affect its effectiveness. Having an audit committee set up and reporting to the board is not mandatory for every company. This committee is sometimes set up as the requirement of law, and regulation of the country or jurisdiction where the entity operating in, and sometimes is set up as adoption of best practices of good corporate governance. In an effective audit committee, dissenting views are heard out, contrarian positions are debated, and open discussion is encouraged.

The audit committee also cooperates with external auditors when there’s a need to discuss certain issues privately. An audit committee member is also responsible for assessing the completeness of all company’s financial reports. It includes ensuring that all the information about contingencies, transactions, and accounting policies is properly presented. An audit committee is made up of independent outside directors, with at least one being qualified as a financial expert. An audit committee is appointed by the board and usually comprises three or seven board directors who are not involved in the company’s management.