The audit committee
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The Audit Committee. Purpose, Process, Professionalism. A New World of Corporate Governance. Boards of directors and committees must be: Proactive Informed Investigative Accountable. Clarifying Governance.

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The Audit Committee

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The audit committee

The Audit Committee

Purpose, Process, Professionalism

A new world of corporate governance

A New World of Corporate Governance

Boards of directors and committees must be:

  • Proactive

  • Informed

  • Investigative

  • Accountable

Clarifying governance

Clarifying Governance

Governance is the system by which organizations are directed and controlled. It includes the rules and procedures for making decisions on corporate affairs to ensure success while maintaining the right balance with the stakeholders’ interest.

The iia corporate governance model




External Audit

Internal Audit


The IIA Corporate Governance Model

The bad news

The Bad News

  • Stakes are greater

  • No “figure head” board members allowed

  • Public trust has diminished

  • Greater challenges

  • More director liability

Clarifying liability

Clarifying Liability

Directors need to be realistic about their personal liability under state and federal law, neither exaggerating nor ignoring their exposure.

Fiduciary duties

Fiduciary Duties

The duties of care and loyalty, and the expectation that directors will act in good faith.

These are the primary source of director liability under state law.

Source: Director Liability: Myths, Realities And Prevention – National Association of Corporate Directors

Fiduciary duties cont

Fiduciary Duties (cont.)

Board members who wish to become empowered guardians and builders of corporate value must:

  • Learn and follow best practices,

  • avoid conflicts of interest,

  • pay strict attention to board matters,

  • drawing on appropriate expertise, including their own.

    Source: Director Liability: Myths, Realities And Prevention – National Association of Corporate Directors

Director evaluations and qualifications

Director Evaluations and Qualifications

  • 38% of companies performed director evaluations in 2005 and 45% are planning to do so in 2006

  • 97% of companies have established director qualifications up from 87% in 2005

    Harvard Business School

What is the ac s role in governance

What is the AC’s Role in Governance?

  • Oversight of financial reporting

  • Risk management

  • Internal control

  • Compliance

  • Ethics

  • Management

  • Internal auditors

  • External auditors

Committee meetings

Committee Meetings

  • 52% of companies report a significant increase in the number or length of meetings of the Audit Committee in the past two years.

    Harvard Business School

Tone at the top

Tone at the Top

Management, the board, and the audit committee all play critical roles in an organization’s tone at the top.

Best practices in code of conduct oversight

Best Practices in Code-of-Conduct Oversight:


  • A code of conduct has been developed, reviewed and updated as needed.

  • All employees receive the code of conduct, understand it, and receive training.

  • Management exhibits ethical behavior and reported violations receive action.

Best practices in compliance and ethics oversight

Best Practices in Compliance and Ethics Oversight:


  • Compliance with laws and regulations

  • Financial reporting of significant issues

  • Management monitoring of program effectiveness

  • Staying informed and recognizing trends to ensure appropriate action

  • Internal audit includes assessment of compliance and ethics risks in their audit plan

  • AC meetings with program manager to discuss key risks, status, issues, investigations, disciplinary action and effectiveness.

Noses in fingers out

Noses In. Fingers Out.

  • The lines of authority for audit committees and management should be clear and understood.

  • AC members must communicate openly with management. They must also challenge management as appropriate.

Communications checklist

Communications Checklist

  • Management is easily accessible.

  • Management reaches out to the audit committee regularly.

  • Management answers audit committee questions fully and completely.

  • Management provides factual information to support responses.

Communications checklist continued

Communications Checklist (continued)

  • Management admits not knowing an answer.

  • Management supports the audit committee by contacting additional resources and specialists.

  • Management advises the audit committee of significant issues in a timely manner.

  • Management seeks audit committee input in advance of key decisions.

Key issues of concern

Key Issues of Concern

  • Financial Accuracy

  • Risk Management

  • Control Assessment

  • External Auditor Oversight

  • Effective Use of Internal Auditing

Statistics on first full year of filings as of march 30 2006 404 opinions

Statistics on First Full Year of Filings As of March 30, 2006 - 404 Opinions

  • 3710 filers

  • 591 (15.9%) received adverse opinions from their public accountants

  • 90 (2.4%) of all filers restated their first year’s Section 404 opinion; 59 (10%) of filers with adverse opinions restated their first year’s Section 404 opinion

    Source: Section 404 Internal Control Material

    Weakness Dashboard Audit Analytics

Gaap accounting areas of failure for adverse opinions

GAAP/Accounting Areas of Failure for Adverse Opinions

  • Tax-related issues – 32%

  • Revenue recognition – (31.3%)

  • Inventory – (27.4%)

    Source: Section 404 Internal Control Material

    Weakness Dashboard Audit Analytics

Internal controls over financial reporting issues adverse opinions

Internal Controls Over Financial Reporting Issues – Adverse Opinions

  • Material year-end adjustments (53.1%)

  • Personnel issues (48.1%)

  • Restatements of financials (49.6%)

    Source: Section 404 Internal Control Material

    Weakness Dashboard Audit Analytics

Clarifying the value of internal auditing

Clarifying the Value of Internal Auditing

Audit committees must understand internal auditing’s role if they are to work effectively and share a healthy interdependence.

Understanding internal audit

Understanding Internal Audit

  • Objectivity

  • Reporting structure

  • Risk management

  • Staffing

  • Prioritization

  • Adding Value

Asking the right questions

Asking the Right Questions

Audit committee members must maintain an in-depth understanding of internal audit best practices and how internal audit is functioning.



How does the audit committee live up to its significant governance responsibilities and meet the high expectations of shareholders and other outside parties?

Charting the course

Charting the Course

An audit committee charter is a blueprint for its operation and should address:

  • Processes

  • Procedures

  • Responsibilities

For more information on audit committees and governance

For More Information on Audit Committees and Governance

  • IIA website

  • Research/Publications

    • Audit Committee Effectiveness: What Works Best

    • Tone at The Top (corporate governance newsletter)

    • The Professional Practices Framework

    • The IIA Bookstore

  • Guidance

    • Audit Committee: Purpose, Process, Professionalism

    • Audit Committee: Discussions on Performance (self-assessment)

    • 20 Questions Directors Should Ask About Internal Audit

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