role of audit committees in corporate governance

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Role of Audit Committees in

Corporate Governance

2013

Submitted To

Sir Muzaffar Asad, Lecturer

University of Central Punjab

Submitted By

Hafiz Mohammad Umer L1F11MCOM0149

Mohammad Umer L1F11BCMH2022

Arslan Nawaz L1F11MCOM2165

Mohsin Khan L1F11MCOM0156

Okasha Safdar L1F11BCMH2023

Qaiser Ayub L1F11MCOM2158

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Table of Contents

Introduction ......................................................................................................... 2

Research Objective ............................................................................................. 4

Audit Committees in International Perspective ............................................... 4

Audit committees in United States of America (USA) ..................................... 4

Audit committees in United Kingdom (UK) ................................................... 12

Audit committees in Germany ......................................................................... 21

Audit Committees in Pakistan ......................................................................... 26

Conclusion .......................................................................................................... 34

Bibliography ...................................................................................................... 36

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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. As the face of business changes so do information

needs. This leads to questions over the reliability and relevance of traditional financial reporting and

whether it has kept pace with the changes in stakeholder needs.

In response to this changing environment, Boards of Directors are now placing increasing reliance

on audit committees to oversee reporting and internal control. In a corporate governance approach to

financial reporting, audit committees are involved in the oversight of the entire financial reporting process.

Throughout the year they learn and inquire about significant matters affecting financial reporting, such as

the development of generally accepted accounting practice, accounting estimates, information systems,

internal controls and risks and uncertainties. To gain a full understanding of these issues the audit

committee will need to consult with financial and operating management as well as the internal and

external auditors.

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. Committee members are

drawn from members of the company's board of directors as well as in some cases independent outside

directors with at least one qualifying as a financial expert, with a Chairperson selected from among the

committee members.

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.

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Typically major responsibilities of audit committee are overseeing the financial reporting and

disclosure process, monitoring choice of accounting policies and principles, overseeing hiring,

performance and independence of the external auditors, oversight of regulatory compliance, ethics, and

whistleblower hotlines, monitoring the internal control process, overseeing the performance of the internal

audit function, discussing risk management policies and practices with management.

The audit committee is an integral element of public accountability and governance. It plays a key

role with respect to the integrity of the entity‟s financial information, its system of internal controls, and

the legal and ethical conduct of management and employees.

An effective audit committee will also give rise to assist in establishing and strengthening the

independence and objectivity of the directors and the internal and external auditors. Improved in

communication and increased contact, understanding and confidence between directors, management and

the internal and external auditors. Increase internal and external auditors‟ accountability as their

performance will be under greater scrutiny. It will help to create a climate of discipline and control which

will reduce the opportunity for fraud.

A more cost efficient and effective external audit will result. This will benefit both the company and

the auditor.

An effective audit committee can increase the integrity and efficiency of the audit process, as well

as the system of internal controls and financial reporting. The audit committee is an integral element of

public accountability and governance. It plays a key role with respect to the integrity of the entity‟s

financial information, its system of internal controls, and the legal and ethical conduct of management and

employees.

To fulfill its responsibility in effective way audit committee should have three qualities

independence, communication, and accountability.

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Research Objective

Success for any organizations regardless of their type or size is built on a firm foundation of fiscal

accountability and governance. Audit committee can allow organization to have stronger internal controls,

budgetary and legal compliance, accurate and timely financial reporting and disclosure, sound business

practices, and a culture of uncompromised moral and ethical behavior.

Audit Committee has thus become one of the main pillars of the corporate governance system in

public companies. In steering companies through today‟s complex business environment, boards are going

to need strong leadership from their audit committees. This research is carried out with aim to know role

of audit committee in UK, USA, Germany and Pakistan corporate governance system. This research paper

includes criteria of composition of audit committee, its role and responsibilities.

Audit Committees in International Perspective

Audit committees in United States of America (USA)

The Audit committee refers to the governance body that is charged with oversight of the

organization‟s audit and control functions. Although these fiduciary duties are often delegated to an audit

committee of the board of directors, the Practice Advisory is also intended to apply to other oversight

groups with equivalent authority and responsibility, such as trustees, legislative bodies, owners of an

owner-managed entity, internal control committees, or full boards of directors (International Standards for

the Professional Practice of Internal Auditing, December 3, 2002).

In a U.S. publicly traded company, an audit committee is an operating committee of the Board of

Directors charged with oversight of financial reporting and disclosure. Committee members are drawn

from members of the company's board of directors, with a Chairperson selected from among the

committee members. A qualifying audit committee is required for a U.S. publicly traded company to be

listed on a stock exchange. Audit committees are typically empowered to acquire the consulting resources

and expertise deemed necessary to perform their responsibilities.

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Usually, membership of the Committee is subject to the maximum number of 6 persons. In the USA,

a qualifying audit committee is required for listed publicly traded companies. To qualify, the committee

must be composed of outside director independent outside directors with at least one qualifying as a

financial expert.

Institute of Internal Auditors best practice: “The audit committee will consist of at least three and no

more than six members of the board of directors. Each committee member will be both independent and

financially literate. At least one member shall be designated as the "financial expert," as defined by

applicable legislation and regulation”.

Boards of Directors and their committees rely on management to run the daily operations of the

business. The Board's role is better described as oversight or monitoring, rather than execution.

Responsibilities of the audit committee typically include:

• Overseeing the financial reporting and disclosure process.

• Monitoring choice of accounting policies and principles.

• Overseeing hiring, performance and independence of the external auditors.

• Oversight of regulatory compliance, ethics, and whistleblower hotlines.

• Monitoring the internal control process.

• Overseeing the performance of the internal audit function.

• Discussing risk management policies and practices with management.

The duties of an audit committee are typically described in a committee charter, often available on

the entity's website.

Audit committees typically review financial reports quarterly and annually in publicly traded

companies. In addition, members will often discuss complex accounting estimates and judgments made by

management and the implementation of new accounting principles or regulations. Audit committees

interact regularly with senior financial management such as the CFO and Controller and are in a position

to comment on the capabilities of these managers. Should significant problems with accounting practices

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or personnel be identified or alleged, a special investigation may be directed by the audit committee, using

outside consulting resources as deemed necessary.

External auditors are also required to report to the committee on a variety of matters, such as their

views on management's selection of accounting principles, accounting adjustments arising from their

audits, any disagreement or difficulties encountered in working with management, and any identified fraud

or illegal acts.

Audit committees typically approve selection of the external auditor. The external auditor (also

called a public accounting firm) reviews the entity's financial statements quarterly and issues an opinion on

the accuracy of the entity's annual financial statements. Changing an external auditor typically also

requires audit committee approval. Audit committees also help ensure the external auditor is independent,

meaning no conflicts of interest exist that might interfere with the auditor's ability to issue its opinion on

the financial statements.

Audit committees discuss litigation or regulatory compliance risks with management, generally via

briefings or reports from the General Counsel, the top lawyer in the entity. Larger corporations may also

have a Chief Compliance Officer or Ethics Officer that report incidents or risks related to the entity's code

of conduct.

Internal control includes the policies and practices used to control the operations, accounting, and

regulatory compliance of the entity. Management and both the internal auditing function and external

auditors provide reporting to the audit committee regarding the effectiveness and efficiency of internal

control.

In 1992, the Committee of Sponsoring Organizations (COSO)1 of the National Commission on

Fraudulent Financial Reporting (also known as the Treadway Commission) published a document called

1 The Committee of Sponsoring Organizations (COSO) consists of the American Institute of CPAs

(AICPA), the Institute of Management Accountants (IMA), the Institute of Internal Auditors (IIA),

Financial Executives International (FEI), and the American Accounting Association (AAA).

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Internal Control — Integrated Framework,2 which defined internal control as “a process, effected by an

entity‟s board of directors, management and other personnel, designed to provide reasonable assurance

regarding the achievement of objectives” in three categories:

1. Effectiveness and efficiency of operations

2. Reliability of financial reporting

3. Compliance with applicable laws and regulations

Internal control can be judged as effective in each of these categories if the board of directors and

management have reasonable assurance that:

1. They understand the extent to which the entity‟s operations objectives are being achieved.

2. Published financial statements are being prepared reliably.

3. Applicable laws and regulations are being complied with.

The COSO Framework went on to say that internal control consists of five interrelated components as

follows:

1. Control environment. Sometimes referred to as the “tone at the top” of the organization, meaning the

integrity, ethical values, and competence of the entity‟s people; management‟s philosophy and

operating style; the way management assigns authority and responsibility and organizes and develops

its people; and the attention and direction provided by the board of directors. It is the foundation for

all other components of internal control, providing discipline and structure.

2. Risk assessment. The identification and analysis of relevant risks to achieve the objectives that form

the basis to determine how risks should be managed. This component should address the risks, both

internal and external, that must be assessed. Before conducting a risk assessment, objectives must be

set and linked at different levels.

2 The COSO publication Internal Control—Integrated Framework (product code number 990012), may

be purchased through the AICPA store at www.cpa2biz.com. The proceeds from the sale of the

Framework are used to support the continuing work of COSO.

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3. Control activities. Policies and procedures that help ensure that management directives are carried

out. Control activities occur throughout the organization at all levels in all functions. These include

activities such as approvals, authorizations, verifications, reconciliations, reviews of operating

performance, security of assets, and segregation of duties.

4. Information and communication. Components that address the need in the organization to identify,

capture, and communicate information to the right people to enable them to carry out their

responsibilities. Information systems within the organization are key to this element of internal

control. Internal information, as well as external events, activities, and conditions must be

communicated to enable management to make informed business decisions and for external reporting

purposes.

5. Monitoring. The activity undertaken by management and others in the organization with regard to the

internal control system. This is the framework element that is associated with the internal audit

function in the company, as well as other means of monitoring such as general management activities

and supervisory activities. It is important that internal control deficiencies be reported upstream, and

that serious deficiencies be reported to top management and the board of directors.

These five components are linked together, thus forming an integrated system that can react dynamically

to changing conditions. The internal control system is intertwined with the organization‟s operating

activities and is most effective when controls are built into the organization‟s infrastructure, becoming part

of the very essence of the organization.

Note that while the Sarbanes-Oxley Act of 2002, which applies to publicly traded companies, does

specifically mention the COSO Framework, the Act acknowledges that this is not the only framework that

can be used to fulfill management‟s requirements about the internal control system. The Act specifically

states that other frameworks may be created either within or outside the United States that may satisfy the

intent of the statutes. The Act further states certain conditions that must be met for a framework to be

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considered suitable. While this Act is not applicable to government organizations, its internal control

system intent is equally important to government organizations and should be considered.

An effective internal control structure can actually be part of the competitive advantage of the

government organization.

A few terms arise frequently during discussions of internal control, identified and described as

follows.

Reportable condition. Has the same meaning as the term significant deficiency. These two terms are used

to define a significant deficiency in the design or operation of internal control that could adversely affect

an organization‟s ability to record, process, summarize, and report financial data consistent with the

assertions of management in the organization‟s financial statements. An aggregation of significant

deficiencies could constitute a material weakness.

Material weakness. Defined in the auditing literature as a reportable condition in which the design or

operation of one or more of the internal control components does not reduce to a relatively low level the

risk that misstatements caused by errors or fraud in amounts that would be material in relation to the

financial statements being audited may occur and not be detected within a timely period by employees in

the normal course of performing their assigned duties.

Compensating controls. Instituted by management to cover for the lack of a basic control, or if a basic

control is not able to function for some period of time. They are important for some organizations that, by

virtue of their size, are not able to implement basic controls such as segregation of duties.

As important as an internal control structure is to an organization, an effective system is not a guarantee

that the organization will be successful. An effective internal control structure will keep the right people

informed about the organization‟s progress (or lack of progress) in achieving its objectives, but it can

neither turn a poor manager into a good one nor ensure success.

Internal control is not an absolute assurance to management and the board about the organization‟s

achievement of its objectives. It can only provide reasonable assurance, due to limitations inherent in all

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internal control systems. For example, breakdowns in the internal control structure can occur due to simple

error or mistake, as well as to faulty judgments that could be made at any level of management. In

addition, controls can be circumvented by collusion or by management override. Finally, the design of the

internal control system is a function of the resources available, meaning that there must be a cost-benefit

analysis in the design of the system.

It is important to realize that both the design and compliance with the internal control system is

important. The audit committee should be “tuned-in” to the tone-at-the-top of the organization as a first

indicator of the functioning of the internal control system.

In addition, audit committees should realize that the system of internal control should be scaled to

the organization. Some organizations will be so small, for example, that they will not be able to have

appropriate segregation of duties. The message here is that the lack of segregation of duties is not

automatically a material weakness, or even a reportable condition, depending on the compensating

controls that are in place.

For example, suppose an organization‟s accounting department is so small that it is not possible to

segregate duties between the person that does the accounts payable, and the person that reconciles the bank

statements. In this case, it is one and the same person, so the implication is that there are no checks and

balances on the accounts payable person, who could be writing checks to a personal account, then passing

on them during the bank reconciliation process (that is, there is no one to raise the red flag that personal

checks are being written on the organization‟s account).

Compensating controls could make up for this apparent breech in the internal control system. Here

are some examples of compensating controls in this situation:

1. All checks are hand signed by an officer, rather than using a signature plate that is in the control of the

person that prepared the checks.

2. The bank reconciliation may be reviewed by the person‟s manager.

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3. A periodic report of all checks that are cleared at the bank could be prepared by the bank and

forwarded to an officer for review.

Audit committees should be aware of situations like this and be prepared to ask questions and evaluate the

answers when an obvious breach in internal control becomes apparent.

Another area that an audit committee needs to focus on is the ability of management to override

internal controls over financial reporting to perpetrate a fraud. Examples of techniques used by

management in overriding internal controls over the financial reporting function include:

Approving inappropriate and/or irregular transactions without proper support

Making adjusting entries during the financial reporting closing process

Reclassifying items improperly between the statement of financial position and the statement of

changes in financial position

Some of these override techniques were used in some of the recent scandals and have gained substantial

notoriety.

An audit committee has the responsibility to help prevent or deter a management override of

controls. It is important for the audit committee to understand that there is a system to uncover an override,

as well as follow-up to determine its appropriateness. Questions about management override, and the

controls over management override, as well as audit steps to detect if a management override has occurred,

should be addressed to the CEO, CFO, chief audit executive (CAE), and independent auditor during the

respective executive sessions with the audit committee as noted elsewhere in this toolkit.

Main issue faced by Audit committee is

Evolving regulations impacting Audit Committees today

The role of the Audit Committee Chair and his/her relationship with other board and

management stakeholders

The Audit Committee‟s role in risk oversight and risk management

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Key internal relationships including the CFO, HR/Compensation Committee and Risk

Committee

The internal and external audit functions, including relationship dynamics with the external

auditor

Other key external relationships including regulators

Non-standard issues faced by Audit Committees including whistleblowers, fraud, and material

restatements

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.

Best practice requires that every board should consider in detail what arrangements for its audit

committee are best suited for its particular circumstances. Audit committee arrangements need to be

proportionate to the task, and will vary according to the size, complexity and risk profile of the company.

While all directors have a duty to act in the interests of the company the audit committee has a particular

role, acting independently from the executive, to ensure that the interests of shareholders are properly

protected in relation to financial reporting and internal control. Nothing in the guidance should be

interpreted as a departure from the principle of the unitary board.

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. Any disagreement within the board,

including disagreement between the audit committee‟s members and the rest of the board, should be

resolved at board level. The Code provides that a separate section of the annual report should describe the

work of the committee. This deliberately puts the spotlight on the audit committee and gives it an authority

that it might otherwise lack. This is not incompatible with the principle of the unitary board.

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The guidance contains recommendations about the conduct of the audit committee‟s relationship

with the board, with the executive management and with internal and external auditors. However, the most

important features of this relationship cannot be drafted as guidance or put into a code of practice: a frank,

open working relationship and a high level of mutual respect are essential, particularly between the audit

committee chairman and the board chairman, the chief executive and the finance director. The audit

committee must be prepared to take a robust stand, and all parties must be prepared to make information

freely available to the audit committee, to listen to their views and to talk through the issues openly. In

particular, the management is under an obligation to ensure the audit committee is kept properly informed,

and should take the initiative in supplying information rather than waiting to be asked. The board should

make it clear to all directors and staff that they must cooperate with the audit committee and provide it

with any information it requires. In addition, executive board members will have regard to Guidance on

Audit Committees (September 2012) to their duty to provide all directors, including those on the audit

committee, with all the information they need to discharge their responsibilities as directors of the

company. Many of the core functions of audit committees set out in this guidance are expressed in terms

of „oversight‟, „assessment‟ and „review‟ of a particular function. It is not the duty of audit committees to

carry out functions that properly belong to others, such as the company‟s management in the preparation

of the financial statements or the auditors in the planning or conducting of audits. To do so could

undermine the responsibility of management and auditors. Audit committees should, for example, satisfy

themselves that there is a proper system and allocation of responsibilities for the day to-day monitoring of

financial controls but they should not seek to do the monitoring themselves.

However, the high-level oversight function may lead to detailed work. The audit committee must

intervene if there are signs that something may be seriously amiss. For example, if the audit committee is

uneasy about the explanations of management and auditors about a particular financial reporting policy

decision, there may be no alternative but to grapple with the detail and perhaps to seek independent advice.

Under this guidance, audit committees have wide-ranging, time-consuming and sometimes intensive work

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to do. Companies need to make the necessary resources available. This includes suitable payment for the

members of audit committees themselves. They and particularly the audit committee chairman - bear a

significant responsibility and they need to commit a significant extra amount of time to the job. Companies

also need to make provision for induction and training for new audit committee members and continuing

training as may be required. For groups, it will usually be necessary for the audit committee of the parent

company to review issues that relate to particular subsidiaries or activities carried on by the group.

Consequently, the board of a UK-listed parent company with a Premium listing of equity shares in the UK

should ensure that there is adequate cooperation within the group (and with internal and external auditors

of individual companies within the group) to enable the parent company audit committee to discharge its

responsibilities effectively.

The board should establish an audit committee of at least three, or in the case of smaller companies‟

two, independent non-executive directors. In smaller companies the company chairman may be a member

of, but not chair, the committee in addition to the independent non-executive directors, provided he or she

was considered independent on appointment as chairman. The board should defined in the UK Corporate

Governance Code as companies below the FTSE 350 index 4 Guidance on Audit Committees (September

2012) satisfy itself that at least one member of the audit committee has recent and relevant financial

experience.

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.

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

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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

To review and monitor the external auditor‟s independence and objectivity and the of the audit

process, taking into consideration relevant UK professional and regulatory requirements

To develop and implement policy on the engagement of the external auditor to supply non audit

services, taking into account relevant ethical guidance regarding the provision of non-audit

services by the external audit firm; and to report to the board, identifying any matters in respect

of which it considers that action or improvement is needed, and making recommendations as to

the steps to be taken; and to report to the board on how it has discharged its responsibilities.

It is for the audit committee chairman, in consultation with the company secretary, to decide the

frequency and timing of its meetings. There should be as many meetings as the audit committee‟s role and

responsibilities require. It is recommended there should be no fewer than three meetings during the year,

held to coincide with key dates within the financial reporting and audit cycle. However, most audit

committee chairmen will wish to call more frequent meetings. No one other than the audit committee‟s

chairman and members is entitled to be present at a meeting of the audit committee. It is for the audit

committee to decide if non-members should attend for a particular meeting or a particular agenda item. It

is to be expected that the external audit lead partner will be invited regularly to attend meetings as well as

the finance director. Others may be invited to attend. Sufficient time should be allowed to enable the audit

committee to undertake as full a discussion as may be required. A sufficient interval should be allowed

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between audit committee meetings and main board meetings to allow any work arising from the audit

committee meeting to be carried out and reported to the board as appropriate. The audit committee should,

at least annually, meet the external and internal auditors, without management, to discuss matters relating

to its remit and any issues arising from the audit.

Formal meetings of the audit committee are the heart of its work. However, they will rarely be

sufficient. It is expected that the audit committee chairman, and to a lesser extent the other members, will

wish to keep in touch on a continuing basis with the key people involved in the company‟s governance,

including the board chairman, the chief executive, the finance director, the external audit lead partner and

the head of internal audit. The audit committee should be provided with sufficient resources to undertake

its duties. For example, when the audit plans (internal and external) are available for review and when

interim statements, preliminary announcements and the full annual report are near completion. The audit

committee should have access to the services of the company secretariat on all audit Committee matters

including: assisting the chairman in planning the audit committee‟s work, drawing up meeting agendas,

maintenance of minutes, drafting of material about its activities for the annual report, collection and

distribution of information and provision of any necessary practical support. The company secretary

should ensure that the audit committee receives information and papers in a timely manner to enable full

and proper consideration to be given to the issues.

The board should make funds available to the audit committee to enable it to take independent legal,

accounting or other advice when the audit committee reasonably believes it necessary to do so.

In addition to the remuneration paid to all non-executive directors, each company should consider

the further remuneration that should be paid to members of the audit committee to recompense them for

the additional responsibilities of membership. Consideration should be given to the time members are

required to give to audit committee business, the skills they bring to bear and the onerous duties they take

on, as well as the value of their work to the company. The level of remuneration paid to the members of

the audit committee should take into account the level of fees paid to other members of the board. The

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chairman‟s responsibilities and time demands will generally be heavier than the other members of the

audit committee and this should be reflected in his or her remuneration. It is desirable that the committee

member whom the board considers to have recent and relevant financial experience should have a

professional qualification from one of the professional accountancy bodies. The need for a degree of

financial literacy among the other members will vary according to the nature of the company, but

experience of corporate financial matters will normally be required. The availability of appropriate

financial expertise will be particularly important where the company‟s activities involve specialized

financial activities.

The company should provide an induction programme for new audit committee members. This

should cover the role of the audit committee, including its terms of reference and expected time

commitment by members; and an overview of the company‟s business model and strategy, identifying the

main business and financial dynamics and risks. It could also include meeting some of the company staff.

Training should also be provided to members of the audit committee on an ongoing and timely basis

and should include an understanding of the principles of and developments in financial reporting and

related company law. In appropriate cases, it may also include, for example, understanding financial

statements, applicable accounting standards and recommended practice; the regulatory framework for the

company‟s business; the role of internal and external auditing and risk management.

The induction programme and ongoing training may take various forms, including attendance at

formal courses and conferences, internal company talks and seminars, and briefings by external advisers.

The role of the audit committee is for the board to decide and to the extent that the audit committee

undertakes tasks on behalf of the board, the results should be reported to, and considered by, the board. In

doing so it should identify any matters in respect of which it considers that action or improvements is

needed, and make recommendations as to the steps to be taken.

The terms of reference should be tailored to the particular circumstances of the company.

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The audit committee should review annually its terms of reference and its own effectiveness and

recommend any necessary changes to the board. The board should also review the audit committee‟s

effectiveness annually.

The audit committee should report to the board on how it has discharged its responsibilities,

including: The significant issues that it considered in relation to the financial statements and how these

issues were addressed; Its assessment of the effectiveness of the external audit process and its

recommendation on the appointment or reappointment of the external auditor; and any other issues on

which the board has requested the committee‟s opinion.

Where there is disagreement between the audit committee and the board, adequate time should be

made available for discussion of the issue with a view to resolving the disagreement. Where any such

disagreements cannot be resolved, the audit committee should have the right to report the issue to the

shareholders as part of the report on its activities in the annual report.

The audit committee should review, and report to the board on, the significant financial reporting

issues and judgments made in connection with the preparation of the company‟s financial statements

(having regard to matters communicated to it by the auditor), interim reports, preliminary announcements

and related formal statements.

It is management‟s, not the audit committees, responsibility to prepare complete and accurate

financial statements and disclosures in accordance with financial reporting standards and applicable rules

and regulations. However the audit committee should consider significant accounting policies, any

changes to them and any significant estimates and judgments. The management should inform the audit

committee of the methods used to account for significant or unusual transactions where the accounting

treatment is open to different approaches. Taking into account the external auditor‟s view, the audit

committee should consider whether the company has adopted appropriate accounting policies and, where

necessary, made appropriate estimates and judgments. The audit committee should review the clarity and

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completeness of disclosures in the financial statements and consider whether the disclosures made are set

properly in context.

Where, following its review, the audit committee is not satisfied with any aspect of the proposed

financial reporting by the company, it shall report its views to the board.

Where requested by the board, the audit committee should review the content of the annual report

and accounts and advise the board on whether, taken as a whole, it is fair, balanced and

This report will inform the board‟s statement on these matters required under Section C.1.1 of the

UK Corporate Governance Code. In order for the board to make that statement, any review undertaken by

the committee would need to assess whether the narrative in the front of the report was consistent with the

accounting information in the back, so as to ensure that there were no surprises hidden in the accounts.

The audit committee should monitor and review the effectiveness of the company‟s internal audit

function. Where there is no internal audit function, the audit committee should consider annually whether

there is a need for an internal audit function and make a recommendation to the board, and the reasons for

the absence of such a function should be explained in the relevant section of the annual report. In addition,

the auditor is required by auditing standards to report, in their report on the financial statements, if the

board‟s statement in the annual report is inconsistent with the knowledge acquired by the auditor in the

course of performing the audit. „Internal Control: Guidance to Directors‟ provides further guidance on this

subject. Copies are available from the FRC website.

The need for an internal audit function will vary depending on company specific factors including

the scale, diversity and complexity of the company‟s activities and the number of employees, as well as

cost/benefit considerations. Senior management and the board may desire objective assurance and advice

on risk and control. An adequately resourced internal audit function (or its equivalent where, for example,

a third party is contracted to perform some or all of the work concerned) may provide such assurance and

advice. There may be other functions within the company that also provide assurance and advice covering

specialist areas such as health and safety, regulatory and legal compliance and environmental issues.

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When undertaking its assessment of the need for an internal audit function, the audit committee

should also consider whether there are any trends or current factors relevant to the company‟s activities,

markets or other aspects of its external environment that have increased, or are expected to increase, the

risks faced by the company. Such an increase in risk may also arise from internal factors such as

organizational restructuring or from changes in reporting processes or underlying information systems.

Other matters to be taken into account may include adverse trends evident from the monitoring of internal

control systems or an increased incidence of unexpected occurrences.

In the absence of an internal audit function, management needs to apply other monitoring processes

in order to assure itself, the audit committee and the board that the system of internal control is functioning

as intended. In these circumstances, the audit committee will need to assess whether such processes

provide sufficient and objective assurance.

If the external auditor is being considered to undertake aspects of the internal audit function, the

audit committee should consider the effect this may have on the effectiveness of the company‟s overall

arrangements for internal control and investor perceptions in this regard. Investor perceptions are likely to

be influenced by: the rationale set out in the annual report for the work being performed by the external

auditor the nature and extent of the work performed by the external auditor; how the independence and

objectivity of the external auditor and internal audit function have been safeguarded; and whether, in the

absence of internal audit work, the audit committee is wholly reliant on the views of the external auditor

about the effectiveness of its system of controls relating to core activities and significant locations.

The audit committee should review and approve the internal audit function‟s remit, having regard to

the complementary roles of the internal and external audit functions. The audit committee should ensure

that the function has the necessary resources and access to information to enable it to fulfill its 10

Guidance on Audit Committees (September 2012) mandate, and is equipped to perform in accordance with

appropriate professional standards for internal auditors. The audit committee should approve the

appointment or termination of appointment of the head of In its review of the work of the internal audit

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function, the audit committee should: ensure that the internal auditor has direct access to the board

chairman and to the audit committee, and is accountable to the audit committee; review and assess the

annual internal audit work plan; receive a report on the results of the internal auditors‟ work on a periodic

basis; review and monitor management‟s responsiveness to the internal auditor‟s findings and

recommendations; meet with the head of internal audit at least once a year without the presence of

management; and monitor and assess the role and effectiveness of the internal audit function in the overall

context of the company‟s risk management system.

The audit committee is the body responsible for overseeing the company‟s relations with the external

auditor. The audit committee should have primary responsibility for making a recommendation on the

appointment, reappointment and removal of the external auditors. If the board does not accept the audit

committee‟s recommendation, it should include in the annual report, and in any papers recommending

appointment or reappointment, a statement from the audit committee explaining its recommendation and

should set out reasons why the board has taken a different position.

The audit committee‟s recommendation to the board should be based on the assessments referred to

below. If the audit committee recommends considering the selection of possible new appointees as

external auditors, it should oversee the selection process, and ensure that all tendering firms have such

access as is necessary to information and individuals during the duration of the tendering process.

Further guidance can be found in the Chartered Institute of Internal Auditors‟ Code of Ethics and the

International Standards for the Professional Practice of Internal Auditing (Financial Reporting Council,

September 2012).

Audit committees in Germany

In July 2001, the so called “Baums commission” accessible 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

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bodies such as the Executive (or Management) Board, the Supervisory Board, the auditor and chiefly

shareholders as the well-known stakeholder group . The commission also examined audit committees as

one fastidious subgroup of Supervisory Boards. The Code recommends establishing audit committees in

German publicly listed companies with Supervisory Boards of more than six members. These boards

should deal mainly with issues of accounting, risk management, auditor independence, auditor

appointment, audit fee arrangement, and the determination of additional audit measures.

In the U.S. audit committees have been obligatory for companies listed on the New York Stock

Exchange (NYSE) since 1978, and on the American Stock Exchange since 1980. The penalty of the

Sarbanes-Oxley Act of 2002 comprehensive this requirement to all U.S. stock exchanges in 2003.

Additionally, SOA mapped out both tasks and requirements relating to the freedom and qualification of

audit committee members. Therefore, most of the early research related to audit committees listening

carefully on audit committee formation determinants, using a principal agent setting. Later, studies

extended their focus to examining the issue of audit committee effectiveness. Audit committee

composition, tasks, and size (among other factors) served as both dependent and independent variables.

In contrast, due to its institutional and legal setting, audit committee formation in Germany is quasi

mandatory; audit committee responsibilities are semi-regulated, and audit committee composition is

biased. It is quasi obligatory in the intelligence that stakeholders of a company recognize noncompliance

with the Code as an unfavorable signal. Therefore, at least in companies with Supervisory Boards of more

than six members, Supervisory Board members have no “free” choice. Responsibilities of audit committee

members are semi-regulated, since it is not always clear what tasks may be delegated to individual

members of the Supervisory Board, such as audit committee members, and what tasks are subject to a

plenary decision of the Board according to 107 Subsection 3 S. 2 AktG3. The bias in audit committee

composition is due to German Supervisory Board formation and composition, which for public companies

with more than 2,000 employees is highly regulated with respect to size and co-determination. For

3 AktG is a short name of Das deutsche Aktiengesetz which means German Stock Corporation Act.

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instance, in companies with up to 10,000 employees, the Supervisory Board must consist of six labor

legislatures and six shareholders. Given the fact that it is the Supervisory

Board members themselves who are appointing committee members, it can be assumed that

committee formation without accounting for labor representatives would be complicated

Thus, as far as Germany is concerned, our interest is not so much on determining what firms

establish audit committees, but on understanding how audit committees work. Since audit committees are

influenced by regulatory authorities and interest groups, we should also expect the identification of theory-

based correlations between the formation and effectiveness of audit committees on the one hand, and

explanatory firm-specific variables on the other, to be tremendously difficult. In particular, resorting to

rationales underlying agency theory may not be sufficient to describe and explain audit committee put into

practice in Germany today.

In the U.S., an audit committee is defined as “ A standing committee of Board of Directors

established to work directly with the auditors, both independent and internal, as well as with the

representatives of other accounting-related activities as seems appropriate” (Mautz and Neumann (1970,

7). Audit committees are one of the most significant components of U.S. corporate governance, since they

openly separate management and monitoring duties attributed to the Board of Directors as a whole. The

implementation of the recommendations of the “Blue Ribbon Committee on Improving the Effectiveness

of Corporate Audit Committees” in 2000 not only led to a revaluation of this corporate governance body,

but also to its further guideline enhancing comprehensive efficiency and effectiveness.

It is also due to SOA that audit committee members must now fulfill certain requirements concerning

their independence and qualification. Independence is regarded as impaired if members receive payments

from the company other than audit committee remuneration, or if they have a personal relationship with

members of the company or one of its subsidiaries. Second, audit committee members must prove

financial literacy. At least one of them must have served as a financial manager. In addition, they should

be characterized by good decision, cynicism, and determination and they should devote sufficient time to

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fulfilling their. On May 21, 2003, the Commission also presented a communication to the European

Council and the European Parliament called “Reinforcing the Statutory Audit in the European Union”.

This paper comprised a proposal to update the 8th Council Directive and clarify the role and position of

the auditor. However, it was made clear that a firm-specific governance body does not unavoidably have

to be an audit committee along the lines required by the SEC, but may be a group of persons embedded in

the omission body of a company, and can include individuals other than management (EU (2003b, 6)).

Consequently, in the “Proposal for a Directive of the European Parliament and of the Council on statutory

audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and

83/349/EEC” issued on March 16, 2004, Article 39 states that public interest entities (such as publicly

listed entities) “ shall have an audit committee, collected of members of the supervisory body with at

least one independent member with capability in accounting and/or auditing” (EU (2004, 30)). According

to this draft, 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

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 from a German perspective (Prüfungsausschüsse) are Supervisory Board

sub-groups. These groups are established to get better mainly corporate monitoring efficiency by reducing

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the sum of resources allocated to bring about the essential level of monitoring provided by the Supervisory

Board as a whole. Only from a second point of view do audit committees in Germany augment monitoring

effectiveness that is the level of monitoring, which must be an objective of the Supervisory Board. 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. However, the limiting factor in the

German setting is the notion that the delegation of decisions to single Board members is prohibited.

Thus, Supervisory Board committees may only take over preparatory work prior to Board decisions

(Ziemons (2000, 77); Semler (1988, 61); Altmeppen (2004, 405); Baums (2001, No. 315)). For the audit

committees, the relevant decisions are particularly the examination and approval of financial statements by

the Supervisory Board according to § 171 AktG. Hence, the scope of responsibilities for audit committees

in the U.S. is greater than that in Germany (Hucke and Ammann (2003, 95)).The commendation of the

GCGC to establish audit committees in listed companies includes some recommendations concerning

audit committee features and potential tasks. The most important of these is the notion that committee

formation and composition in general should be completely content-driven. As a result other Supervisory

Board objectives should not be considered. This notion is made clear when it is stressed that audit

committee composition does not have to comprise a pro rata labor representation (Kirsten (2004, 174)).

However, this does not mean that employees must not be audit committee members. The most important

criterion for member selection should be the requirement and experience of the individual Supervisory

Board member. Also, all audit committee members should be as independent of the Executive Board as

possible, and should have sufficient time available to fulfill their tasks. In this respect, audit committee

formation may provide the opportunity to apply independence requirements which go further than the

requirements for Supervisory Board members. Finally, the audit committee should not be chaired by either

a former member of the Executive Board or the Supervisory.

As previously mentioned, the scope of tasks of German audit committees according to the GCGC

consequences from the most important objective to raise Supervisory Board monitoring efficiency,

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followed by monitoring effectiveness. Thus, all Supervisory Board tasks concerning financial accounting

and other shareholder-oriented information of a company, including measures that contribute to the

credibility of financial reporting, should be performed in audit committees (unless forbidden by law). This

bundling allows monitoring duties to be fulfilled in a continuous and/or even preventive manner and the

flexible and timely grouping of specific skills and knowledge.

The preparation of the financial statement examination audit by the Supervisory Board

The preparation of auditor selection and auditor appointment8

Audit fee negotiation

Determination of additional audit procedures

Monitoring of risk management systems and internal controls

Check of auditor independence

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. Evaluated on a Likert scale ranging from one (completely irrelevant) to five

(crucial), the motivation “Interest group representation” scored 2,3; “Audit committee member

independence” scored 4,1, and “Audit committee member qualification” scored 5,0. The intuitive

challenge between “independence” and “interest group representation” is reflected by the participants‟

answers. Thus, the notion of independence has considerable influence on the actual proportion of labor

legislature in audit committees (Köhler, 2005).

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.

Majority of the members of the Committee shall be from among the non-executive directors of the listed

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company and the chairman of the Audit Committee shall preferably be a non-executive director. The

names of members of the Audit Committee shall be disclosed in each annual report of the listed company.

The chairman of the Board as well as the chief executive of the Public Sector Company shall not be a

member of the audit committee.

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. A meeting of the Audit Committee shall also

be held, if requested by the external auditors or the head of internal audit.

As described in CCG the CFO, the head of internal audit and a representative of the external auditors

shall attend meetings of the Audit Committee at which issues relating to accounts and audit are discussed.

Provided that at least once a year, the Audit Committee shall meet the external auditors without the CFO

and the head of internal audit being present. Provided further that at least once a year, the Audit

Committee shall meet the head of internal audit and other members of the internal audit function without

the CFO and the external auditors being present.

The Board shall determine the terms of reference of the audit committee. The terms of reference

shall be in writing, specifying the mandate of the audit committee. The audit committee shall have full and

explicit authority to investigate any matter within its terms of reference and shall be provided with

adequate resources and access to all relevant information.

The audit committee shall, inter-alia, be responsible for recommending to the Board the appointment

of external auditors by the Public Sector Company's shareholders and shall consider any questions of

resignation or removal of external auditors, audit fees and provision by external auditors of any service to

the Public Sector Company in addition to audit of its financial statements. In the absence of strong grounds

to proceed otherwise, the Board shall act in accordance with the recommendations of the audit committee

in all these matters. However, the Board shall not be deemed to absolve itself of its overall responsibility

for the functions delegated to the audit committee.

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

A. Determination of appropriate measures to safeguard the Public Sector Company's assets;

B. Review of financial results;

C. Review of quarterly, half-yearly and annual financial statements

D. Ensuring coordination between the internal and external auditors of the Public Sector Company;

E. Review of the scope and extent of internal audit and ensuring that the internal audit function has

adequate resources and is appropriately placed within the Public Sector Company;

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

a) Major judgment areas;

b) Significant adjustments resulting from the audit;

c) The going-concern assumption;

d) Any changes in accounting policies and practices; and

e) Compliance with applicable accounting standards.

f) Compliance with listing regulations and other statutory and regulatory requirements; and

g) Significant related party transactions

(Securities and Exchange Commission of Pakistan)

Other responsibilities mentioned in Rules of 2012 are

G. Review of preliminary announcements of results prior to publication;

H. Facilitating the external audit and discussion with external auditors of major observations arising from

interim and final audits and any matter that the auditors may wish to highlight (in the absence of

management, where necessary);

I. Review of management letter issued by external auditors and management‟s response thereto;

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

K. Review of the scope and extent of internal audit and ensuring that the internal audit function has

adequate resources and is appropriately placed within the listed company;

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L. Consideration of major findings of internal investigations of activities characterized by fraud,

corruption and abuse of power and management's response thereto; ascertaining that the internal

control systems including financial and operational controls, accounting systems for timely and

appropriate recording of purchases and sales, receipts and payments, assets and liabilities and the

reporting structure are adequate and effective;

M. Review of the listed company‟s statement on internal control systems prior to endorsement by the

Board of Directors and internal audit reports;

N. Instituting special projects, value for money studies or other investigations on any matter specified by

the Board of Directors, in consultation with the CEO and to consider remittance of any matter to the

external auditors or to any other external body;

O. Determination of compliance with relevant statutory requirements;

P. Monitoring compliance with the best practices of corporate governance and identification of

significant violations thereof; and

Q. Consideration of any other issue or matter as may be assigned by the Board of Directors

(Securities and Exchange Commission of Pakistan, 2012)

The Audit Committee of a listed company will appoint a secretary of the committee who shall either

be the Company Secretary or Head of Internal Audit. However, By Law chief financial officer (CFO) shall

not be appointed as the secretary to the Audit Committee. The secretary shall circulate minutes of

meetings of the Audit Committee to all members, directors, Head of internal Audit and the CFO prior to

the next meeting of the board and where this is not practicable, the Chairman of the Audit Committee shall

communicate a synopsis of the proceedings to the board and the minutes shall be circulated immediately

after the meeting of the board.

The head of internal audit shall have access to the chair of the Audit Committee. All listed

companies shall ensure that internal audit reports are provided for the review of external auditors. The

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auditors shall discuss any major findings in relation to the reports with the Audit Committee, which shall

report matters of significance to the Board of Directors.

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

areas:

I. Financial reporting.

II. Corporate governance.

III. 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:

i. Financial condition;

ii. Results of operations; and

iii. Plans and long-term commitments.

The responsibility of audit committees in the area of corporate governance is to provide assurance

that the corporation is in reasonable compliance with pertinent laws and regulations, is conducting its

affairs ethically, and is maintaining effective controls against employee conflict of interest and fraud. The

specific steps involved in carrying out this responsibility include:

• Reviewing corporate policies relating to compliance with laws and regulations, ethics,

conflict of interest, and the investigation of misconduct and fraud.

• Reviewing current/pending litigation or regulatory proceedings bearing on corporate

governance in which the corporation is a party.

• Reviewing significant cases of employee conflict of interest, misconduct, or fraud.

Requiring the internal auditor to report in writing annually the scope of the reviews of

corporate governance and any significant findings.

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The responsibility of audit committees for corporate control includes an understanding of the

company's key financial reporting risk area and system of internal control. The committee should monitor

the control process through internal auditing (Siddiqui).

As per Corporate governance rules, There shall be an internal audit function in every listed company.

The head of internal audit shall have access to the chair of the Audit Committee. The Head of internal

Audit shall functionally report to the Audit Committee and administratively to the CEO. A director cannot

be appointed, in any capacity, in the internal audit function, to ensure independence of the internal audit

function.

The internal audit function may be outsourced by a listed company to a professional services firm or

be performed by the internal audit staff of holding company. However, due care shall be exercised to

ensure that suitably qualified and experienced persons, who are conversant with the company's policies

and procedures, are engaged in the internal audit. In the event of outsourcing the internal audit function,

company shall appoint or designate a fulltime employee other than CFO, as Head of Internal Audit, to act

as coordinator between firm providing internal audit services and the board: Provided that while

outsourcing the function, the company must not appoint its existing external auditors as internal auditors.

All listed companies shall ensure that internal audit reports are provided for the review of external

auditors. The auditors shall discuss any major findings in relation to the reports with the Audit Committee,

which shall report matters of significance to the Board of Directors.

There is a weakness in corporate governance rules that the qualification of Internal Auditor is not

mentioned so can anyone be Internal Auditor? The answer is no. Then who are eligible for this post? The

eligible ones are the qualified members of ICMAP, IIA, ICAP and other accounting bodies members.

But the qualification of chief internal auditor is prescribed by Corporate Governance Rules 2013. By

rules, No person shall be appointed as the Chief Internal Auditor of a Public Sector Company unless

He has five years of relevant audit experience and is a

Member of a recognized body of professional accountants; or

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Certified internal auditor; or

Certified fraud examiner; or

Certified internal control auditor; or

Person holding a master degree in finance from a university recognized by the Higher

Education Commission (Securities and Exchange Commission of Pakistan).

Audit committees and internal auditors have common goals. A good working relationship with

internal auditors can assist the audit committee in fulfilling its responsibility to the board of directors,

shareholders, and other outside parties. This position statement summarizes the appropriate relationship

between audit committees and internal auditing. Audit committee responsibilities encompass activities

which are beyond the scope of this statement, and in no way intends it to be a comprehensive description

of audit committee responsibilities.

The primary responsibilities of the audit committee should involve assisting the board of directors in

carrying out its responsibilities as they relate to the organization's accounting policies, internal control, and

financial reporting practices. The audit committee should establish and maintain lines of communication

between the board and the company's independent auditors, internal auditors, and financial management.

Every public company have an audit committee organized as a standing committee of the board of

directors. The establishment of audit committees in other organizations is encouraged, including not-for-

profit and governmental bodies.

The audit committee should expect internal auditing to examine and evaluate the adequacy and

effectiveness of the organization's systems of internal control and the quality of performance in carrying

out assigned responsibilities. Internal auditing may be used as a source of information to the audit

committee on major frauds or irregularities as well as company compliance with laws and regulations.

To ensure that internal auditors carry out their responsibilities, the audit committee should approve

and periodically review the internal audit charter, a management-approved document which states internal

audit's purpose, authority, and responsibility. The audit committee should review annually the internal

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audit department's objectives and goals, audit schedules, staffing plans, and financial budgets. The director

of internal auditing should inform the audit committee of the results of audits, highlighting significant

audit findings and recommendations. The audit committee should also determine whether internal audit

activities are being carried out in accordance with the corporate governance rules.

To help assure independence, the director of internal auditing should have direct communication

with the audit committee. The director should attend audit committee meetings and meet privately with the

audit committee at least annually. Independence is further enhanced when the audit committee concurs in

the appointment or removal of the director of internal auditing.

The Board of Directors of a listed company shall recommend appointment of external auditors for a

year, as suggested by the Audit Committee. The recommendations of the Audit Committee for

appointment of an auditor or otherwise shall be included in the Directors‟ Report. In case of a

recommendation for appointment of an auditor other than the retiring auditor the reasons for the same

shall be included in the Directors‟ Report.

By SECP Rule of corporate governance 2012, No listed company shall appoint as external auditors a

firm of auditors which has not been given a satisfactory rating under the Quality Control Review program

of the Institute of Chartered Accountants of Pakistan (ICAP). No listed company shall appoint as external

auditors a firm of auditors which or a partner of which is non-compliant with the International Federation

of Accountants' (IFAC) Guidelines on Code of Ethics, as adopted by the Institute of Chartered

Accountants of Pakistan.

No listed company shall appoint as external auditors a firm of auditors which has not been given a

satisfactory rating under the Quality Control Review program of the Institute of Chartered Accountants of

Pakistan.

No listed company shall appoint a person as an external auditor or a person involved in the audit of a

listed company who is a close relative, i.e., spouse, parents, dependents and non-dependent children, of the

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CEO, the CFO, an internal auditor or a director of the listed company (Securities and Exchange

Commission of Pakistan, 2012) .

Conclusion

An audit committee‟s responsibility will vary depending upon the entity‟s complexity, size, and

requirements. Sometime audit committee role is defined by country law relating to operating companies.

Audit committee give number of benefits to companies like it provides an internal reporting mechanism

compared to reporting to the directors who may wish to hide or amend unfavorable internal audit,

shareholder and public confidence in published financial information is enhanced because it has been

reviewed by an independent committee, provides better communication between the directors, the external

auditors and management etc. To make audit committee more effective there should exists a

comprehensive position prescription for the Audit Committee Chair members.

There exists clear agreement that when an accounting treatment (e.g., critical accounting policies,

those most important to disclosure of financial condition and operational results) that is open to

interpretation or requires a judgment. At a minimum, all directors need to understand the business model

and how the company makes money.

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. Critical

accounting policies require complex, subjective judgment and critical accounting estimates require

assumptions about uncertainty whereby different assumptions may have a material impact. All Audit

Committee Members always act independent of Management. It is important that audit committee

members not only possess formal independence according to prescribed criteria, but also have

independence of thought, judgment and action, so that independence is not only perceived or seen, but is

real and applied. Audit committee members should voice their own opinions and not allow their trust in, or

relationships with, management to compromise their continual display of impartiality and objectivity. All

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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). There should exist sufficient time

between the audit committee meeting and board meetings to allow the Audit Committee Chair‟s working

relationships with key parties (e.g., with the Board Chair, CEO, CFO, Auditors, independent advisers, other

reporting parties) are constructive (i.e., supportive, consultative and collaborative, yet independent,

transparent and candid. There exists a clear understanding of the scope of risk oversight by the Audit

Committee.

The Head of Internal Audit sees the Audit Committee as its key client (e.g., Internal Audit may be

administratively accountable to the CEO or CFO, but is functionally accountable and owes its loyalty to the

Audit Committee, who recommend to the Board, CEO and CFO the appointment, evaluation,

compensation (at least annually, including incentive structure) and retention of the Head of Internal Audit,

including the reassignment or replacement of senior staff, and review and approve the mandate, work plan,

budget and resources for this function).

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).

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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.

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