An audit committee is, in a corporation, a committee comprising a majority of independent non-executive members of the Board of Directors to which has been assigned the oversight of the financial reporting and auditing process. This often includes the internal, as well as the external, audit function.
From a corporate governance viewpoint, audit committee members should be competent and independent of the management of the auditee entity [fn]. (SeeThe CPA Journal entitled Independence and Objectivity: Retired Partners on Audit Committees.) Auditors evaluate the independence of committee members by considering, for example, any executive functions the members may have and directorships of, or relationships with, entities with which the auditee deals (Refer to ICAEW's Guidance for audit committees: Reviewing auditor independence.) The auditor also evaluates the competence of the members of the audit committee, including their knowledge and understanding of (i) the business of the entity, (ii) the accounting information system, (iii) the control environment in which the system operates and (iv) financial reporting requirements. If the auditor has some doubts as to the independence or competence of members of the audit committee, the auditor places less reliance on the results of the committee's overseeing of the periodic financial reports and, if applicable, the work of the internal audit function.
Auditors communicate regularly with the audit committee of an entity and, at least annually, advise the audit committee of any financial or other interests/relationships the audit firm or associated firms, including individual staff members and partners, has or have, with the entity that may be viewed by others as affecting the independence of the auditor. The auditor also informs the audit committee of the various audit and other services the audit firm provides the entity [fn] and details of the fees that it charges.
Note that in addition to reviewing the minutes of meetings of the audit committee, the auditor also may attend its meetings.
See the AICPA's Audit Committee Effectiveness Center.
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