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ACCA Strategic Professional · Strategic Business Leader · Internal control and management reporting

Zentra plc, a listed manufacturer, has a board that includes the finance director and two executive directors on its audit committee. Investors complain that the committee's review of management's internal control assertions lacks objectivity. Which governance change would best address the concern?

The audit committee should be reconstituted with independent non-executive directors, including at least one with recent relevant financial experience. This removes executives from reviewing their own control assertions and gives objective oversight, which is the purpose of an audit committee under governance codes.

  1. AReconstitute the audit committee with independent non-executive directors, at least one with recent relevant financial experienceCorrect
  2. BMake the finance director chair of the audit committee to improve technical competence
  3. CTransfer responsibility for reviewing internal controls to the external auditor
  4. DReplace the committee with a monthly executive management meeting on controls

Explanation

Good governance codes require audit committees to be made up of independent non-executive directors, with relevant financial expertise, so that management's controls are reviewed objectively. Making executives members or chair compromises independence. The external auditor cannot take over management's or the board's responsibility for monitoring controls.

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