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Role of Audit

Committees

in Corporate

Governance

Group Members

Hafiz Mohammad Umer Mohammad Umer Arslan Nawaz Mohsin Khan Okasha Safdar Qaiser Ayuob L1F11MCOM0149 L1F11BCMH2022
Hafiz Mohammad Umer
Mohammad Umer
Arslan Nawaz
Mohsin Khan
Okasha Safdar
Qaiser Ayuob
L1F11MCOM0149
L1F11BCMH2022
L1F11MCOM2165
L1F11MCOM0156
L1F11BCMH2023
L1F11MCOM2158

Introduction

In recent years, continuous change in the way that companies do business has become standard practice and this change will continue at an accelerated pace

The corporate governance approach to financial reporting requires a culture in which management accepts the function of the board of directors and its audit committee to oversee management.

Audit committee is an operating committee of the Board of Directors which is charged with oversight of financial information reporting & its disclosure and internal controls.

Introduction (cont)

An audit committee’s responsibility will vary depending upon the entity’s complexity, size, and requirements.

Numbers of Audit committee’s members are also defined by law in some countries like in US maximum number of audit committee will be six and in Pakistan minimum numbers of audit committee members are three.

Introduction (cont)

Typically major responsibilities of audit committee are

Overseeing the financial reporting and disclosure process,

Monitoring choice of accounting policies and principles,

Oversight of regulatory compliance,

Ethics, and whistleblower hotlines, and practices with management.

Audit committees in United Kingdom (UK)

Companies with a Premium listing of equity shares in the UK are required under the Listing Rules either to comply with the provisions of the Code or to explain to shareholders why they have not done so.

Audit committee arrangements need to be proportionate to the task, and will vary according to the

size, complexity and risk profile of the company.

All directors remain equally responsible for the company’s affairs as a matter of law

The audit committee, like other committees to which particular responsibilities are delegated (such as the remuneration committee), remains a committee of the board.

Audit committees in United Kingdom (UK)

(cont)

The board should establish an audit committee of at least three, or in the case of smaller companies’ two, independent non-executive directors.

Appointments to the audit committee should be made by the board on the recommendation of the nomination committee, in consultation with the audit committee chairman.

Appointments should be for a period of up to three years, extendable by no more than two additional three- year periods, so long as members continue to be independent

Audit committees in United Kingdom (UK)

(cont)

The main role and responsibilities of the audit committee should be set out in written terms of reference and should include:

To monitor the integrity of the financial statements of the company and any formal announcements relating to the company’s financial performance

Reviewing significant reporting judgments contained in them

To review the company’s internal financial controls and, unless expressly addressed

by a separate board risk committee composed of independent directors or by the

board itself, the company’s internal control and risk management systems

To monitor and review the effectiveness of the company’s internal audit function

To make recommendations to the board, for it to put to the shareholders for their

approval in general meeting, in relation to the appointment of the external auditor

and to approve the remuneration and terms of engagement of the external auditor

Audit committees in Germany

In July 2001, the so called Baums commissionaccessible its final report and suggested the

establishment of the “Kodex commission”, which set of contacts a German Corporate Governance in February

2002.

The Baums commission recommendations covered issues of corporate finance, accounting, monitoring, and disclosure, and addressed various aspects of governance mechanisms and bodies such as the Executive (or Management) Board, the Supervisory Board, the auditor and chiefly shareholders as the well- known stakeholder group

Audit committees in Germany (cont)

The audit committees have the following responsibilities:

Monitoring financial reporting

Monitoring internal control, internal audit, and risk management system effectiveness

Overseeing the statutory audit

Reviewing and monitoring auditor independence and the provision of additional services to the audited entity

Auditor appointment

Audit committees in Germany (cont)

The auditor is obligatory to account to the audit committee and shall support the audit committee in satisfying its

tasks.

Due to the difference between corporate management by the Board of Directors on the one hand and corporate monitoring by the Supervisory Board on the other, there is

no tradition of audit committees in Germany

Thus, the use of the term “Audit Committee” within the German institutional context may be misleading.

Audit committees do so by dealing with all accounting and auditing issues that fall under the responsibility of Supervisory Boards, given the German institutional environment.

Audit committees in Germany (cont)

Audit committee composition in Germany reflects co- determination in Supervisory Boards.

On average, 35% of audit committee members represent labor interests, followed by major shareholders and other shareholders (both groups account for 26%, respectively) and others (13%).

In nine of 22 cases, labor legislature account for half of all audit committee members; four audit committees in the survey do not have labor representatives.

Audit Committees in Pakistan

According to Corporate Governance Rule 2013, The Board of Directors of every listed company shall establish an Audit Committee, which shall comprise not less than three members, including the chairman.

The names of members of the Audit Committee shall be

disclosed in each annual report of the listed company.

The Audit Committee of a listed company shall meet at least once every quarter of the financial year.

These meetings shall be held prior to the approval of

interim results of the listed company by its Board of

Directors and before and after completion of external audit.

Audit Committees in Pakistan (cont)

The terms of reference of the audit committee may also include the following, namely:

Determination of appropriate measures to safeguard the Public

Sector Company's assets;

Review of financial results;

Review of quarterly, half-yearly and annual financial statements

Public Sector Company, prior to their approval by the Board, focusing on

Major judgment areas;

Significant adjustments resulting from the audit;

The going-concern assumption;

Any changes in accounting policies and practices; and Compliance with applicable accounting standards.

Audit Committees in Pakistan (cont)

Other responsibilities mentioned in Rules of 2012 are

Review of preliminary announcements of results prior to

publication;

Review of management letter issued by external auditors and management’s response thereto;

Ensuring coordination between the internal and external auditors of the listed company;

Determination of compliance with relevant statutory

requirements;

Monitoring compliance with the best practices of corporate governance and identification of significant violations thereof;

and

Consideration of any other issue or matter as may be assigned by the Board of Directors (Securities and Exchange Commission of Pakistan, 2012)

Audit Committees in Pakistan (cont)

As far as Audit Committees are concerned they generally exercise responsibility in three important areas:

1. Financial reporting.

2. Corporate governance.

3. Corporate control

The responsibility of audit committees in the area of financial reporting is to provide assurance that financial disclosures made by management reasonably portray the company's:

1.

Financial condition;

2.

Results of operations; and

3.

Plans and long-term commitments.

Conclusion

An audit committee’s responsibility will vary depending upon the entity’s complexity, size, and requirements.

To make audit committee more effective there should exists a comprehensive position prescription for the Audit Committee Chair members.

But audit members must understand how such transactions require the judgments and choices management make, including the selection and application of critical accounting policies, judgments and estimates, and the potential for manipulation of financial statements, by management, as a result.

Conclusion (cont)

Audit Committee Charter responsibilities (includes ad hoc items and amendments) are comprehensively mapped into an annual

work agenda (i.e., Committee responsibilities are integrated within

a

detailed calendar of scheduled meetings, agendas, matters,

Management, Audit and other Assurance reporting requirements and Committee action, coordination and reporting).

A

comprehensive assessment of the effectiveness of each Audit

Committee’s effectiveness is regularly is conducted (e.g., considering the Charter’s duties and responsibilities,

providing feedback and reporting, taking timely, corrective action

as required, and reporting on the review process in sufficient

detail in all appropriate public documents so as to demonstrate its effectiveness).

Bibliography

Financial Reporting Council. (September 2012). Guidance on Audit Committees. United Kingdom.

International Standards for the Professional Practice of Internal Auditing. (December 3, 2002). Practice Advisory

2060-2.

Köhler, A. G. (2005). Audit Committees in Germany

Theoretical Reasoning and Empirical Evidence (Vol. 57). LMU

Munich School of Management.

Securities and Exchange Commission of Pakistan. (2012). Corportae Governance Rules.

Securities and Exchange Commission of Pakistan. (n.d.). Public Sector Companies Corportae Governance Rule. 2013.

Siddiqui, M. F. (n.d.). A role of Internal Auditor & Audit

Committee. Pakistan: Institute of Cost & Management Accountants of Pakistan.