Audit Committee | Advantages of Audit Committee

 

The audit committee is also likely to review specific accounting and regulatory matters and recent cases that have come before it and make recommendations.

The members of the audit committee must be well versed in accounting principles and the major aspects of accounting practice and should be capable of communicating clearly and effectively with the CPA. 

 

The members of the committee should understand the major areas that will be reviewed during their deliberations. The audit committee does not have the same responsibilities as other committees.

The duties of the audit committee are to ensure that senior management understands the risks and benefits of all major activities and to devise plans for achieving this understanding.

 

 

 The audit committee may conduct periodic reviews of the organization’s management policies, procedures, and practices. 

The audit committee is generally made up of five independent members: one member is the CPA who chairs the board; two members are senior executives from accounting who report to the CPA; one is a member of the accounting profession with at least three years of experience in accounting or business, and two are independent accountants.  

 

 The members of the audit committee should not act in an attempt to impede or alter the work of their colleagues, as they have no managerial authority to do so. The audit committee should assist the CPA in developing policies and procedures, as well as in providing advice on the operation of the business and on internal controls over the organization. If the CPA does agree with the recommendations of the audit committee, they will jointly report their findings to the CEO, company CFO, and the Board of Directors. 

 

 Audit oversight is an important and necessary part of the CPA’s job as an independent auditor. As a result of that oversight, companies that employ accountants are subjected to the risk of fraudulent billing practices. Other types of risks associated with internal control and assurance systems include inaccurate forward booking of assets, improper understated income, ineffective supervision of third-party payment channels, inadequate compliance measures, and information security breaches.

Such risks are inherent in the complexity of a complex organization.

 

 A company that is unable to effectively and efficiently manage its internal and external control environment is prone to risks such as information security breaches, employee fraud and employee burn-out

 

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The audit committee plays a significant role in providing oversight and policy direction for the CPA. Its responsibilities include providing reports and recommendations to the management, including the CEO, to senior management on the status of the CPA’s duties and the results of those duties. The committees must take into consideration any special circumstances that require immediate action by the company. 

 

The members of the audit committees must also report findings of their audits to the Board of Directors, the management of the business, and key personnel to the extent feasible. 

 

 There are certain steps required to be followed when the internal and/or external auditor is rendering his or her services to an organization. 

 

First, when engaging an external auditor, it is important for the CPA to prepare a written evaluation and supporting documents.

 

 Second, an internal and/or external auditor is required to sign an agreement that details the services to be provided. The agreement also outlines the fees that will be charged by the external auditor and stipulates the date on which the services will be rendered. 

Here are some of the key advantages of having an audit committee:

 

Enhanced Accountability

 

An audit committee can enhance the accountability of an organization’s management by providing an independent review of the financial reports and procedures.

 

Improved Financial Reporting

 

Audit committees ensure the accuracy and reliability of financial statements by working closely with internal and external auditors, thereby promoting investor confidence.

 

Risk Management

 

Audit committees are crucial in identifying and managing financial and operational risks. They ensure that robust systems and controls are in place to manage these risks effectively.

 

Regulatory Compliance

 

The committee ensures that the organization complies with all relevant laws and regulations, which can help avoid legal and financial penalties.

 

Fraud Detection

 

Audit committees can help detect and prevent fraudulent activities within the organization by ensuring robust internal controls and effective functioning.

 

Increased Investor Confidence

 

A well-functioning audit committee can increase investor confidence in the company’s financial statements, leading to potentially greater investment and higher share prices.

 

Enhanced Corporate Governance

 

Audit committees are a key element of a strong corporate governance framework by providing oversight of the company’s financial reporting.

 

Independent Oversight

 

Audit committees provide an independent check on the organization’s management and auditors, helping to ensure the integrity of the company’s financial statements and the effectiveness of its internal controls.

 

Conflict Resolution

 

 In case of disagreements between the management and the auditors over financial reporting, the audit committee can provide a neutral platform to resolve such disputes.

 

Communication Channel

 

The committee bridges management, the board of directors, and external and internal auditors, facilitating open and effective communication among all parties.

 

In sum, audit committees play a crucial role in enhancing the integrity and reliability of an organization’s financial information, improving its risk management and internal controls, and thereby increasing the trust of investors, regulators, and the general public.

Disadvantages of audit committee

Despite their advantages, there can also be potential drawbacks of audit committees, which include:

 

Costly to Operate

 

 Audit committees require a significant investment. This includes compensation for the committee members, expenses for meetings, costs for professional advisors, and sometimes additional staff support.

 

Time-Consuming

 

 Audit committee work can be quite time-consuming. The committee must meet regularly, review documents, monitor company procedures, and interact with internal and external auditors. This can strain members who already have their full-time roles within the company or other commitments.

 

Risk of Inadequate Expertise

 

 Audit committees need members with strong finance, law, and operations backgrounds. However, not all organizations have access to board members with this expertise. If the committee lacks the necessary knowledge and skills, its effectiveness can be compromised.

 

Potential for Conflict of Interest

 

 Even though the audit committee is meant to be an independent entity, conflicts of interest can arise if members of the committee have personal or financial ties to the company. This can threaten the objective and impartial functioning of the committee.

 

Dependence on Management

 

Despite its independence, the audit committee often relies on management to provide the information it needs to carry out its work. This dependence may compromise the committee’s ability to assess the information it receives critically.

 

Possibility of Overreliance

 

 There might be a risk that the board, management, or investors could rely too heavily on the audit committee to ensure financial accuracy and compliance, thereby abdicating their responsibility to oversee these matters.

 

Limited Scope

 

The scope of the audit committee is typically restricted to financial reporting processes, audit processes, and a system of internal controls, which means that areas beyond these might need more attention.

 

Resistance to Transparency

 

 Sometimes, audit committees may face resistance from within the organization, especially if management fears that the committee’s activities could reveal sensitive or unflattering information.

 

It’s important to note that while these challenges exist, they can be addressed through careful planning, the thoughtful composition of the committee, adequate resources, and the organization’s commitment to upholding high standards of financial reporting and internal control.