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CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

An audit committee is most likely to enhance the quality of a company's financial reporting if it is composed of:

An audit committee works best when it consists of independent non-executive directors, including at least one with financial expertise. Independence lets it challenge management and oversee auditors objectively. Including executives who prepare the statements would create a self-review conflict and weaken the oversight function.

  1. Athe chief financial officer and two senior finance managers who prepare the statements.
  2. Bindependent non-executive directors, at least one of whom has financial expertise.Correct
  3. Cthe chief executive officer and the largest shareholder's nominee.

Explanation

An effective audit committee is made up of independent directors with financial literacy, so it can challenge management and oversee the external auditor objectively. Including the CFO or CEO places management in the role of overseeing its own work, which weakens independence.

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