ACCA Applied Knowledge · Financial Accounting · Duties and responsibilities of those charged with governance
An audit committee of a listed company is being established. Which of the following arrangements is most consistent with good corporate governance practice?
Good practice is for the audit committee to comprise mainly independent non-executive directors, who oversee financial reporting integrity, internal controls and the external auditor's independence. Executives should not sit on it or chair it, because they would be reviewing their own work, and it does not prepare the accounts.
- AThe committee consists mainly of independent non-executive directors and reviews the external auditor's independence and the integrity of the financial statementsCorrect
- BThe committee consists of the executive directors, so that they can approve their own financial reporting decisions
- CThe committee is chaired by the finance director to ensure the accounts are prepared consistently
- DThe committee is responsible for preparing the financial statements instead of the finance department
Explanation
An audit committee should be made up of independent non-executive directors so it can objectively oversee financial reporting, internal control and the relationship with the external auditor, including auditor independence. Executives or the finance director on the committee would be reviewing their own work, which undermines objectivity. Preparation remains with management.
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