Audit and Assurance · Internal audit and governance and the differences between external audit and internal audit

Audit Committee and Non-Executive Directors Explained for ACCA AA

Updated 11 October 2026 · Fact-checked

An **audit committee** is a board sub-committee, made up mainly of independent non-executive directors, that oversees financial reporting, internal control, risk management, internal audit and the external auditor. **Non-executive directors** (NEDs) bring independent challenge to the board. In the exam, link each duty to better oversight and auditor independence.

Understand Audit Committee and Non-Executive Directors

Start with the problem. In a listed or large company, shareholders own the business but executive directors run it. Executives may want to show good results or hide weak controls. This is the agency problem. Governance structures exist to reduce it.

Non-executive directors are board members who do not work in the company day to day. They do not run operations. Their value is independence. They challenge strategy, test management's proposals, and check that the board acts for shareholders. Typical roles are: scrutinising performance, reviewing financial information and controls, setting executive pay through the remuneration committee, and selecting directors through the nomination committee.

The audit committee is where NEDs focus on reporting and audit. Codes of best practice usually expect a committee of independent NEDs, with at least one member having recent and relevant financial experience. The detail varies by jurisdiction, so state it as best practice rather than a fixed law. The committee normally meets the external auditor, and the internal auditor, without executives present.

Its main responsibilities fall into groups:

Financial reporting: review the integrity of the financial statements and key judgements and estimates before the board approves them.
Internal control and risk: review the effectiveness of internal controls and risk management systems.
Internal audit: review its scope, resources and independence, consider its reports, and advise on appointing or removing the head of internal audit.
External audit: recommend appointment, reappointment and removal of the auditor, approve fees and terms, assess independence and objectivity, agree the audit scope, and discuss findings. It also sets the policy on non-audit services.
Other: oversee the whistleblowing arrangements and the fraud-detection procedures.

Why this matters to the auditor: the committee gives the auditor a body independent of management to report to. It protects auditor independence, since the auditor is not relying on the finance director alone for fees and appointment. It also helps the auditor escalate disagreements. Where a company has no audit committee, for example a smaller company, the board or the NEDs, or the internal audit function, may need to fill the gap. Do not forget that responsibility for the financial statements stays with the directors as a whole.

Key rules to remember

Audit committee composition (best practice): Independent NEDs only (or mainly) + at least one with recent, relevant financial experience; Codes differ by country. Present this as best practice, not as a universal legal rule.
Five areas of audit committee responsibility: Financial reporting + Internal control and risk + Internal audit + External audit + Whistleblowing and fraud; Use this as a checklist for any 'describe the role' question.
Four NED roles: Strategy + Scrutiny + Risk + People; A common way to organise NED contribution: challenge strategy, scrutinise management, oversee risk and controls, and handle appointments and pay.
External audit link: Recommend appointment/removal + Approve fees + Assess independence + Agree scope + Set non-audit services policy; Shows how the committee supports auditor independence and objectivity.

How to solve Audit Committee and Non-Executive Directors questions

Use this method for any question on audit committees or NEDs, whether it is an objective test or a written answer.

1Read the requirement verb. 'Describe' or 'explain' needs reasons. 'List' needs short points. 'Evaluate' needs both sides.
2Identify the party in the question: the audit committee, NEDs in general, or the auditor's relationship with them.
3Scan the scenario for clues: no audit committee, executive-dominated board, no internal audit, high non-audit fees, a dominant director.
4Group your points under the headings: financial reporting, internal control and risk, internal audit, external audit.
5For each point, state the duty and then the benefit, such as better reliability of financial information or protection of auditor independence.
6Tie the answer to the scenario. Name the company's actual weakness and say how a committee or NED would address it.
7Check mark allocation. Aim for roughly one distinct point per mark and avoid repeating the same idea in different words.

Quickest way: Four-box method

When to use it: Use it when time is short, particularly in a written question worth 6 to 10 marks.

Draw four boxes: reporting, controls and risk, internal audit, external audit.
Put one duty in each box, then add a second point where marks require more.
Add one scenario-specific point at the end.
Write the answer as short, separate points, each with a reason.

Common mistakes in Audit Committee and Non-Executive Directors

Saying the audit committee prepares the financial statements or carries out the audit.
The name sounds like it does audit work.
Fix: State that it oversees and reviews. Directors prepare the statements and the external auditor audits.
Treating NEDs as part of management who run the business daily.
Students confuse board membership with executive roles.
Fix: Describe NEDs as independent members who challenge and scrutinise, not manage operations.
Listing duties with no link to the scenario.
Students recall a memorised list and stop thinking.
Fix: Add at least one sentence applying each duty to the company's facts, such as a lack of internal audit.
Omitting the committee's role in auditor independence.
Students focus on internal control and forget the external auditor.
Fix: Include recommending appointment, approving fees, and a policy on non-audit services.
Stating that the committee must include executive directors or the finance director as full members.
Mixing up attendance with membership.
Fix: Executives may attend by invitation, but members should be independent NEDs.
Presenting a code's detailed requirements as law everywhere.
Codes are learned as fixed rules.
Fix: Say 'best practice suggests' and avoid quoting specific numbers you cannot confirm.

Worked examples

Example 1

Describe the main responsibilities of an audit committee in relation to the external auditor. (5 marks)

Show the solution

Requirement: external auditor only, so use the external audit box.
Point 1: recommend to the board the appointment, reappointment or removal of the external auditor, which reduces management influence over the choice.
Point 2: approve the audit fee and terms of engagement so that the fee is adequate but does not threaten objectivity.
Point 3: assess the auditor's independence and objectivity, including reviewing relationships with the company.
Point 4: set the policy on non-audit services provided by the auditor to control self-interest and self-review threats.
Point 5: discuss the audit plan, scope and findings with the auditor, including meeting without executives present.

Answer: The audit committee recommends the auditor's appointment or removal, approves fees and terms, assesses independence, sets the non-audit services policy, and reviews the audit scope and findings, including private meetings with the auditor.

Example 2

Shoreline Ltd is a listed company with an executive-dominated board and no audit committee. Explain the benefits of establishing an audit committee of independent non-executive directors. (6 marks)

Show the solution

Identify the weakness: executives dominate, so there is little independent challenge.
Benefit 1: independent review of financial statements and key judgements improves the credibility of reported results.
Benefit 2: regular review of internal controls and risk management helps find weaknesses sooner.
Benefit 3: oversight of internal audit, if there is one, helps it stay independent and ensures that its findings are acted on.
Benefit 4: a committee separate from management gives the external auditor someone to report to, supporting independence and the handling of disagreements.
Benefit 5: the committee oversees whistleblowing and fraud arrangements, giving staff a safe route to raise concerns.
Benefit 6: shareholders and other stakeholders gain confidence that the board is governing properly.

Answer: An independent audit committee would add challenge to a dominant executive board, improve confidence in financial reporting, strengthen oversight of controls, risk and internal audit, support external auditor independence, and provide a safe route for whistleblowing.

Exam tips

In written questions, state the duty and then its purpose. A bare list of duties earns fewer marks.
In objective tests, remember that the committee oversees and reviews. Options saying it prepares the accounts or performs the audit are wrong.
Read the scenario for governance weaknesses, because Section B and C questions often reward application over recall.
If asked about independence, include fees, non-audit services and appointment, not only the auditor's own safeguards.
Use 'best practice' wording for committee composition, as requirements differ between jurisdictions.

Audit Committee and Non-Executive Directors in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit Committee and Non-Executive Directors: frequently asked questions

What is the main role of the audit committee?

It oversees financial reporting, internal control, risk management, internal audit and the external auditor on behalf of the board and shareholders. It does not replace the directors' responsibility for the financial statements.

Who should sit on an audit committee?

Best practice is independent non-executive directors, with at least one who has recent and relevant financial experience. Executives and auditors may be invited to attend, but they are not members.

How do non-executive directors improve corporate governance?

They bring independent judgement and challenge to the board. They scrutinise management, help oversee risk and controls, and serve on the audit, remuneration and nomination committees.

How should I write audit committee functions in the exam?

Group your points into financial reporting, internal control and risk, internal audit and external audit. State each duty, explain why it matters, and link it to the scenario.