ByProtiviti KnowledgeLeader

Tools Focused on the Audit Committee and the Board

Audit committees and boards play crucial roles in corporate governance, tasked with oversight responsibilities that include financial reporting, internal controls, and compliance with laws and regulations. However, these roles come with inherent risks. One significant risk is the potential for conflicts of interest, where members may have personal or business interests that could compromise their judgment. Additionally, there is the risk of inadequate oversight due to a lack of expertise or understanding of complex financial and regulatory environments. This can lead to poor decision-making and oversight failures that might not only result in financial losses but also damage a company's reputation.

To mitigate these risks, companies must ensure that their audit committees and boards are composed of individuals with the appropriate expertise and integrity. This involves rigorous selection processes, ongoing training, and clear delineation of roles and responsibilities. Members should possess a mix of skills that align with the company's business model and the complexities of the industry in which it operates. Moreover, implementing regular performance evaluations can help assess the effectiveness of the committee and board, ensuring that they meet both current and evolving governance standards.

Another critical strategy is fostering a culture of transparency and ethical behavior. This includes establishing robust internal controls and encouraging open communication among board members, management and external auditors. Regular, thorough audits and compliance checks can preempt potential issues by identifying and addressing them early. By promoting a culture where ethical practices are rewarded and questionable behaviors are quickly addressed, companies can significantly reduce the risks associated with their audit committees and boards, thereby enhancing their overall governance framework.

1. Corporate Governance Policy: Board Committees

The purpose of this policy is to set standards for board committee structures and protocols. It applies to the board of directors and any external resources hired by the board. In this sample, the board of directors should create such standing committees and ad-hoc committees as it deems necessary and appropriate to fulfill its mandate. The board of directors should appoint an audit committee to provide oversight on financial and internal control processes. The audit committee should deal directly with the company’s external auditors in the performance of its duties. All board committees should have board-approved terms of reference.

2. Audit Committee Annual Planning Schedule

The audit committee is a committee of the board of directors. Its primary function is to assist the board in fulfilling its oversight responsibilities by reviewing the financial information which will be provided to the shareholders and others, the systems of internal controls which management and the board of directors have established, and the audit process. This sample schedule provides an annual planner for audit committee activities and demonstrates how to schedule and track audit committee activities throughout the year. Using an annual planner helps ensure that required topics and issues are discussed and not overlooked.

3. Setting the 2025 Audit Committee Agenda

In times of robust technological change and innovation, boards are a critical element in the overall governance structure, helping guide where investments are made and how risks are managed. The explosion of investment and adoption of cloud infrastructure, GenAI and quantum computing will continue to increase and may extend the knowledge gap between management and the board — unless appropriate steps are taken. Risks are evolving more quickly in a business environment marked by rapid technological advancements and geopolitical uncertainties. In this issue of The Bulletin, we offer assessment questions for audit committees to consider when evaluating their performance. 

4. Evaluation of Audit Committee Oversight Questionnaire

Because board and audit committee oversight is an element of the control environment, according to COSO, the independent auditor is required to evaluate audit committee oversight effectiveness as an integral part of their assessment of the control environment and monitoring controls. This requirement of the auditor does not supplant the overall responsibility of the board of directors to evaluate audit committee effectiveness. The auditor’s responsibility, as articulated by the PCAOB in Auditing Standard No. 5, is also narrower than the requirements set forth in Sarbanes-Oxley and the NYSE and NASDAQ listing standards. This questionnaire provides a comprehensive approach to evaluating the effectiveness of an audit committee in overseeing financial reporting processes and internal controls.

5. Audit Committee Responsibilities Questionnaire

Our Audit Committee Responsibilities Questionnaire provides a robust framework for evaluating the efficiency and effectiveness of an audit committee's practices. By following this structured approach, auditors can identify both strengths and areas that may require improvement in the committee's composition, operating procedures, financial reporting oversight, risk management capabilities, internal controls, and compliance with legal standards. The questionnaire is designed to facilitate critical reflection on various aspects that are crucial for maintaining a high standard of corporate governance. Furthermore, it probes into whether the committee has direct access to internal auditors and how it engages with external auditors—ensuring that such relationships support accurate and transparent financial reporting.

6. Setting the Audit Committee Agenda Questionnaire

Good business leaders are aware that the world is changing–dramatically. This questionnaire is for executive management, boards of directors and their audit committees to help ensure their organizations are ready to address change. It also addresses management’s perspective on the audit committee’s agenda and lists challenges and business-facing mandates for audit committees to assess. Example questions include: Has the audit committee made sufficient progress dealing with the agenda items referred to in this issue as “unfinished business? Is the audit committee satisfied with management’s plan to drive sustainability, cost-effectiveness and value-add of SOX compliance?

7. Audit Committee Charter

This document contains nine samples that provide guidelines and standards for creating an audit committee charter. The audit committee of the board of directors of a company should assist the board when fulfilling its responsibilities to the company and its shareholders, potential shareholders, the investment community and other stakeholders regarding its oversight of the quality and integrity of the company’s accounting and reporting practices and controls, financial statements and reports, compliance with legal and regulatory requirements, and the independent auditor’s qualifications and independence.

8. Assessment Questions for Audit Committees to Consider

It is a common practice for boards and their standing committees and individual directors to self-assess their performance periodically and formulate actionable plans to improve performance based on opportunities and areas of concern identified by the process. For this process, the audit committee and its members might consider the illustrative questions we have made available in a companion document to The Bulletin: Setting the 2020 Audit Committee Agenda. These questions are intended to be illustrative and do not purport to cover every topic the committee should consider. They should be customized to the committee’s assessment objectives and specific needs and situation.

9. The Future Auditor’s Advancement of the Audit Committee Relationship

The IIA’s comprehensive definition of internal auditing states that internal audit should "[help] an organization accomplish its objectives by bringing a systematic, disciplined approach to valuate and improve the effectiveness of risk management, control, and governance processes." In this issue of The Bulletin, Protiviti offers 20 tips on how the future auditor advances the relationship with the audit committee of the board of directors (or its equivalent) on these distinctive but interrelated fronts: risk, value and communication.

10. Board of Directors Orientation Audit Report

This document provides a board level overview of internal audit and internal controls. It states that the internal audit department is responsible for: conducting an annual risk assessment; developing an annual internal audit plan; executing operational, compliance and IT audit projects; assisting with corporate governance initiatives; and communicating audit results to senior management and the audit committee. This report also breaks down the elements of the internal control framework, including: mitigating controls, pervasive/preventative controls, entity-level controls, process-level controls, general IT controls and application controls.

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