Executive Summary
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Audit committees are a fundamental part of the proper governance of any organization, together with executive management and internal as well as external audit.
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An audit committee can only be as effective as is permitted by the information it receives.
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The relationship between the committee and the chief audit executive (CAE) is critical to the successful functioning of the audit committee.
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The relationship will be effective in an environment of mutual trust and common understanding.
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Of all the committees involved in the management and control of an organization, perhaps the audit committee has the most significant impact on the life of the CAE.
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Although, in general, all audit committees fulfill a similar function within the organization, the nature of the organization itself can prescribe a particular emphasis in the working of the audit committee. This, in turn, affects the nature of the relationship between the CAE and the committee as a whole.
The Role of the Audit Committee
The audit committee is intended, overall, to assist an organization to achieve an effective internal control structure derived directly from the tone at the top. The authority of an audit committee is drawn from the board of directors, the rules and regulations of the organization, and any relevant governance legislation of the country or countries within which the organization operates.
This role, of necessity, involves ensuring that the risk management process remains both comprehensive and ongoing instead of the annual process that is implemented in many organizations. Corporate policies regarding legal compliance, compliance with corporate codes of conduct, and conflicts of interest must be maintained and policed. In addition, the audit committee has a duty to review both current and pending legislation as it relates to corporate governance within the country or countries wherein it operates. Communication is the key to good governance and includes ensuring that the financial statements presented to the shareholders are both understandable and reliable, and facilitating internal communication with senior management and internal audit. Communication with internal audit should go beyond the scheduled committee meetings, and the CAE should be encouraged to communicate with the chair of the audit committee directly. The audit committee, as a whole, should meet privately with the CAE at least annually to seek assurances about the independence of the internal audit function.
To ensure effective use of internal auditing, the audit committee would normally review internal audit plans as well as reports and significant findings. It would seek to ensure that internal auditing is carried out by professionals with a comprehensive understanding of the business systems and processes as well as of the corporate culture within the organization.
The audit committee relies on the internal audit function to provide objective opinions, information, and, when necessary, education to the audit committee, while the audit committee in turn will provide oversight and validation to the internal audit function. In today’s environment this could include the outsourcing or co-sourcing of all or part of the internal audit function; however, the audit committee should ensure that the role of the CAE remains within the organization itself.
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