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Audit Committee and Corporate Governance for ACCA SBL

Updated 11 October 2026 · Fact-checked

An audit committee is a board committee, made up mainly of independent non-executive directors, that oversees financial reporting, internal control, risk monitoring, internal audit and the external auditor. In SBL, you answer by stating the duty, applying it to the scenario's weakness, and recommending a practical action.

Understand Audit Committee and Corporate Governance

A board is responsible for the company's financial statements and controls. But executives prepare the numbers, so there is a conflict of interest. The audit committee reduces this conflict. It gives the board an independent view on reporting, controls and audit.

Codes such as the UK Corporate Governance Code expect a committee made up of independent non-executive directors. Typical expectations are a minimum number of members, at least one with recent and relevant financial experience, and competence in the sector. The chair of the board should not chair the committee. Check the exact wording of your code in the exam scenario, and do not quote details you are unsure of.

The committee's main responsibilities are:
- Monitoring the integrity of the financial statements and significant reporting judgements.
- Reviewing internal financial controls and, unless a separate risk committee exists, wider internal control and risk management systems.
- Overseeing the internal audit function: its independence, resources, plan and findings. Where there is none, it considers whether one is needed.
- Recommending the appointment, reappointment or removal of the external auditor, and approving their fees and terms.
- Protecting auditor independence, including a policy on non-audit services.
- Reviewing arrangements for staff to raise concerns in confidence (whistleblowing) and fraud arrangements.

The committee is effective when its members are independent, skilled and have enough time. It also needs direct access to auditors and the right to obtain information and advice. It should meet the external and internal auditors without executives present, report openly to shareholders and be supported by a board that acts on its advice. A committee that only receives reports, or that is dominated by the finance director, adds little.

The committee advises and oversees. It does not run controls or do the audit. Management still owns the controls, and the full board remains accountable.

Key rules to remember

Composition rule of thumb: Independent NEDs + relevant financial experience + sector competence + not chaired by the board chair; Reflects the UK Code approach. In an exam, use the code or guidance named in the scenario.
Core duties checklist: Reporting + Controls and risk + Internal audit + External audit + Independence + Whistleblowing; Use as a prompt to cover each duty and link it to the facts.
Auditor independence safeguards: Non-audit services policy + fee review + rotation + private meetings + disclosure; The committee oversees these. It does not replace the auditor's own ethical duties.
Effectiveness test: Independence + competence + resources + access + influence on the board; A weakness in any one limits the committee's value.

How to solve Audit Committee and Corporate Governance questions

Use this method for any question on the audit committee, whether it asks for a role, a weakness or a recommendation.

1Read the requirement and note the verb: explain, evaluate, advise or recommend.
2Identify the context from the scenario: listed or unlisted, code in force, whether a committee exists, and its membership.
3Pick the relevant duty from the checklist: reporting, controls, internal audit, external audit, independence or whistleblowing.
4Link the duty to the scenario facts. Name the specific weakness, such as an executive on the committee or a long-serving auditor.
5Say what the committee should do about it. Be specific: a policy, a meeting, a review or a recommendation to the board.
6Explain the benefit or risk in terms of reliable reporting, fraud prevention or investor confidence.
7Keep the tone professional. Give a balanced view and conclude with a clear recommendation.

Quickest way: Duty, fact, action

When to use it: Use it when time is short and the question asks for the role of the committee or advice on improving it.

List three or four relevant duties in the margin.
For each, write one sentence quoting a scenario fact.
Add one practical action per point.
Close with a one-line overall recommendation.

Common mistakes in Audit Committee and Corporate Governance

Describing the committee's role in general terms with no link to the scenario.
Students memorise a list of duties and reproduce it.
Fix: Tie each duty to a fact in the case, and state the consequence of the weakness.
Saying the audit committee carries out the audit or runs internal controls.
The word 'audit' misleads students.
Fix: State that it oversees. Management owns controls, auditors perform the audit, and the board is accountable.
Ignoring independence and saying executives can sit on the committee.
Students overlook who is on the committee.
Fix: Check membership. Executives, or a board chair leading it, undermine objectivity. Recommend independent non-executives.
Treating auditor independence as the auditor's problem only.
Students separate ethics from governance.
Fix: Explain that the committee sets non-audit services policy, reviews fees and tenure, and recommends appointment.
Giving a list of points with no recommendation.
Students stop after description.
Fix: End each point with an action, since professional skills marks reward judgement and commercial awareness.

Worked examples

Example 1

Zenara Ltd is a listed company. Its audit committee has three members: the finance director, a non-executive director who is a friend of the chief executive, and the board chair, who chairs the committee. Advise the board on weaknesses in composition and what to change.

Show the solution

Identify the weakness in each member. The finance director is responsible for the numbers, so cannot review them independently.
The friendship with the chief executive threatens independence.
Chairing by the board chair weakens separation of roles and is contrary to the UK Code approach.
Recommend a committee of independent non-executives only, with at least one member with recent and relevant financial experience.
Appoint an independent chair, and allow executives to attend by invitation only.
Explain the benefit: more reliable reporting, greater investor confidence and stronger challenge to management.

Answer: The committee lacks independence. Replace the finance director and the board chair, review the independence of the third member, appoint an independent chair with financial experience, and invite executives to attend only when needed.

Example 2

Karsten plc's external auditor has served for 14 years and earned consulting fees nearly equal to its audit fee. Explain how the audit committee should protect auditor independence.

Show the solution

Name the threats: familiarity from long tenure, and self-interest and self-review from large non-audit fees.
The committee should adopt a policy restricting non-audit services, with its approval needed for permitted ones.
Review the ratio of non-audit to audit fees and disclose it to shareholders.
Assess tenure and consider audit partner rotation and a tender for the audit.
Meet the auditor privately, without management, and ask about pressures on independence.
Make a reasoned recommendation to the board on reappointment.

Answer: The committee should restrict and approve non-audit services, monitor fees, review tenure and consider tendering, meet the auditor privately, and recommend reappointment or replacement on that evidence.

Exam tips

Always apply the committee's duties to the scenario. Generic lists score poorly on both technical and professional skills marks.
Check who sits on the committee and who chairs it before writing. Many cases hide the weakness in the membership.
Use the language of oversight: review, monitor, recommend and challenge. Avoid saying the committee performs the audit.
Where the company has no committee, explain the benefits and the practical steps to set one up, and note smaller company options such as the full board performing the role.
Finish with a clear recommendation. Professional skills marks reward judgement and communication, so write as if advising the board.

Practice questions from Audit and compliance

Audit Committee and Corporate Governance 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 Corporate Governance: frequently asked questions

What does an audit committee do?

It oversees financial reporting, internal control and risk monitoring, internal audit and the external auditor. It also reviews whistleblowing arrangements. It reports to the board and shareholders and does not replace management's responsibilities.

How does the audit committee ensure auditor independence?

It recommends the auditor's appointment, sets a policy on non-audit services, reviews fees and tenure, and meets the auditor without management. It also considers rotation and tendering. These steps support, but do not replace, the auditor's own ethical duties.

Who should sit on an audit committee under the UK Corporate Governance Code?

The Code expects independent non-executive directors, with at least one member having recent and relevant financial experience and the committee as a whole competent in the sector. The board chair should not chair it. Always use the wording given in the exam scenario.

Is the audit committee responsible for internal controls?

Management designs and operates controls and the board is accountable for them. The committee reviews their effectiveness and reports to the board. If a separate risk committee exists, wider risk oversight may sit there.