A key element in the corporate governance process of any organisation is its audit committee (Source: aicpa.org)
Audit Committees can be seen as a means to enhance the independence of the auditor, and also seen as an important role in reviewing and monitoring the 'external auditors' independence, objectivity and the effectiveness of the audit process. (Source: The Audit Process pg. 669)
2.1 The compositions of audit committees are very important. The majority of non-executive directors should be independent and free from any financial relationship, which could interfere with independent judgement. To qualify as "independent," the Act states that an audit committee member cannot accept any fees from the company other than for serving as a director, and cannot be an affiliated person of the company or any of its subsidiaries (Source: nysscpa.org). According to the Combined Code (which lists sets of requirements and sets the frame work for auditors (Source: The Audit Process)) its says that committees should comprise of at least three non-executive director and that it highlights certain duties for external auditors, internal auditor and the internal controls that have been put in place. (Source: The Audit Process pg. 669)
2.2 Audit Committees have many authorities and duties, they have clear rights to seek information and make decisions and carry out prescribed duties. In the UK the roles of audit committees is still evolving, but the smith guidance (the guidance on Audit Committees) is a step towards greater consistency in there duties and roles (Source: frc.org.uk) For an audit committee to fulfil its new and continuing obligations, asking the tough questions, understanding the answers, and properly disseminating information are crucial. The basic responsibilities include adopting a charter, monitoring the reporting process, overseeing the outside auditor, and paying attention to management and employees. (Source: nysscpa.org)
2.3 Audit Committees Roles in Financial Reporting Process. According to the Blue Ribbon Report, Audit Committees do not prepare financial Statements or become in the details of the decisions required to prepare them, but they are responsible for monitoring and overseeing the financial reporting process. To meet its duties they must ensure that internal control are established properly and they must be familiar with the companies risk assessment. (Source: A Guide For Directors, Management, And Consultants, Frank M. Burke)
2.4 Since the 1940's audit committees have provided an important role ultimately necessary function ensuring that publicly traded business financial statements are accurate.
In the 1970's, the NYSE (New York Stock Exchange) required board of directors of all the listed companies to appoint an audit