Audit committees play an important role in corporate governance by providing oversight of financial reporting, internal controls, risk management, and the external audit process. Their work can help boards maintain a clearer understanding of significant financial and reporting matters.
For Singapore companies, the audit committee may work closely with management and Singapore Audit Services to review financial reporting processes and discuss matters arising during an audit. Its responsibilities and composition depend on the company’s structure, applicable requirements, and governance framework.
What Is an Audit Committee?
An audit committee is generally a committee of the board established to oversee areas relating to financial reporting, auditing, internal controls, and risk management.
The committee does not replace the responsibilities of management, the board, or the external auditor. Instead, it provides an additional level of oversight and facilitates communication between these parties.
Financial Reporting Oversight
One of the key areas for an audit committee is reviewing financial information before it is considered by the board.
The committee may examine significant accounting matters, financial reporting judgments, unusual transactions, and other issues that could affect the presentation of the company’s financial statements.
This review can help the committee understand how management has addressed important reporting matters.
Working With External Auditors
Audit committees often have an important relationship with the company’s external auditors.
They may discuss matters such as:
- The scope and timing of the audit
- Significant audit risks
- Planned audit procedures
- Important accounting judgments
- Audit findings
- Internal control observations
- The auditor’s independence
Regular communication can help ensure that significant matters are brought to the committee’s attention.
Reviewing Internal Controls
Internal controls help businesses manage financial reporting and operational risks. Audit committees may oversee how management designs, implements, and monitors these controls.
Areas of interest can include financial approvals, reconciliations, access to accounting systems, segregation of duties, and procedures for identifying errors.
The committee’s role is generally one of oversight rather than performing the controls itself.
Considering Risk Management
Business risks can affect financial reporting as well as broader company operations. Audit committees may therefore consider whether significant financial and reporting risks are being appropriately identified and monitored.
Depending on the organization, these discussions may cover financial risks, technology-related risks, compliance matters, fraud risks, or other areas relevant to the company’s activities.
Supporting Auditor Independence
An audit committee can contribute to the independence of the external audit process by maintaining appropriate communication with the auditor and considering relevant independence matters.
This may include discussions about relationships, services provided outside the audit, and other circumstances that could create threats to auditor independence.
The applicable professional and regulatory requirements determine how these matters should be assessed.
Reviewing Significant Accounting Judgments
Some financial statement items require substantial management judgment. Examples can include asset impairment, provisions, valuations, revenue-related judgments, and other estimates.
Audit committees may question the assumptions and supporting information used by management and discuss the auditor’s assessment of those matters.
This provides an opportunity for significant accounting issues to receive focused board-level attention.
The Audit Committee and Internal Audit
Where a company has an internal audit function, the audit committee may oversee or monitor its activities.
Internal audit and external audit have different purposes and responsibilities. Internal audit generally focuses on evaluating and improving internal processes, controls, risk management, and governance, while the external auditor provides an independent opinion within the scope of the financial statement audit.
Coordination and communication between relevant functions can improve overall oversight.
Monitoring Audit Findings
Audit findings can identify matters that require management attention. An audit committee may review significant findings and monitor how management responds to them.
For example, if an audit identifies a recurring reconciliation issue, the committee may ask management about the underlying cause, proposed corrective measures, and progress toward resolving the matter.
Preventing Misunderstandings About Responsibilities
An effective audit committee understands the distinction between oversight and management responsibility.
Management remains responsible for preparing financial statements, maintaining accounting records, establishing internal controls, and operating the business.
The external auditor remains responsible for performing the audit and forming an independent opinion. The audit committee provides oversight and facilitates appropriate communication.
Importance of Committee Expertise
Audit committee members need sufficient knowledge to understand financial reporting and governance matters relevant to their responsibilities.
Financial literacy, accounting knowledge, industry understanding, and familiarity with risk and control issues can help members ask informed questions and evaluate information presented to them.
The specific requirements for committee composition and expertise can vary according to the company’s circumstances and applicable governance rules.
Preparing for Audit Committee Meetings
Good preparation can make committee discussions more productive. Relevant materials may include financial statements, management reports, audit plans, significant accounting papers, internal control updates, and reports from internal or external auditors.
Committee members can review these materials before meetings and identify areas requiring clarification or further discussion.
Why Audit Committees Matter
An audit committee provides a structured forum for discussing financial reporting, auditing, controls, and risk matters at board level.
Its effectiveness depends on factors such as appropriate expertise, independence, access to relevant information, constructive communication, and clear understanding of responsibilities.
The committee is most useful when significant matters are considered carefully rather than treated as routine administrative exercises.
Conclusion
Audit committees have an important governance function within companies by overseeing financial reporting, internal controls, risk-related matters, and relationships with external auditors. They provide the board with a dedicated mechanism for examining issues that can affect the reliability and integrity of financial information.
For Singapore companies, a well-structured audit committee can support clearer communication among directors, management, internal audit functions, and external auditors. Its responsibilities should be understood within the company’s governance structure and the applicable regulatory and professional requirements.
