An audit committee of a company refers to a group of non-executive directors that the board of directors has set up and is responsible for supervising it. This committee has a very close relationship with the structure of a company’s board of directors. Typically, the board of director will set up many distinct sub-committees with different specialisation and objectives. This includes the audit committee.
Sometimes, a company choose to establish this committee as required by the jurisdiction. It may also be one of the requirements of the laws and regulations of the country that it is operating in. Some entities may want to do so to adopt an excellent practice in good corporate governance.
Typically, the members of the audit committee come from a variety of different industries, backgrounds and experiences. Yet, it is a must for it to possess at least one member who has enough experience in the field of finance (Also see Lesson for Financial Accounting).
The Responsibilities of an Audit Committee
- Act as the coordinator when a conflict of interest occurs between the external audit firm in Johor Bahru and the firm’s finance department.
- Advise the board of directors if any issues about the audits, risks (Also see Types of Audit Risks and Their Sources) and the internal controls arise.
- Supervise the independence and quality of the external audits (Also see The Audit Objective of External and Internal Audit)
- Control the quality of the firm’s internal audit department
- Question the firm’s CFO (Also see Bookkeeper, Finance Controller or CFO- Which Do You Need The Most?) on the results of audits that the internal audit department has conducted
The Requirements to Become a Member of the Audit Committee
This committee combines independent and non-executive directors who perform their job independently without being restricted by the company’s operating activities. Being independent is the most crucial requirement for an individual to become a member of the audit committee. This indicates that the person is independent of the business’s operation and any interest which is relevant to the company. The firm must ensure the independence of its audit committee.
Besides, the audit committee’s members need to work as full-time employees in the company for the past three years. Such a requirement is to make sure that the members have adequate capabilities and expertise in providing the expert teams with appropriate advice and lead them in the correct direction.
Also, the major suppliers or customers of the entity must not become a member of the audit committee as this helps in reducing the conflict of interest to the lowest possible level.