Question

The U.S. national stock exchanges require listed companies to have an
independent audit committee.
a. Describe an audit committee.
b. What does it mean for the audit committee members to be “independent”?
c. What are the typical functions performed by an audit committee?
d. Explain how an audit committee can help an auditor be more independent.
e. Describe the nature of the audit firm’s communications with the audit committee
regarding independence issues.
f. Some critics of audit committees believe that they bias companies in favor of larger
and perhaps more expensive CPA firms. These critics contend that a primary concern
of audit committee members is to reduce their exposure to legal liability. The
committees will therefore recommend larger, more prestigious CPA firms, even if the
cost is somewhat higher, to minimize the potential criticism of selecting an unqualified
firm. Evaluate these comments.

Answer 1

Requirement a.

An audit committee is consist of of three to seven members of a company’s board of directors. These members are outside of company management, and they have the accountability of making sure that the auditor(s) stay independent from company management as well. The audit committee is also responsible for supervising the work of any auditor for a public company, the financial statements and disclosures, as well as vetting all services performed by the auditor(s).

Requirement b

. Audit committee members should remain autonomous from management and the auditors. This means that they should not act as a manger or auditor for the company because in doing so, they can make prejudiced opinions that will not allow them to execute their job properly. The audit committee is set in place to supervise the audit functions, as well as to make sure that impartiality remains between management and the auditor. Independence is important because it will allow the audit committee to keep the evidences in order and not allow any unjustified information to get in the way their position as a committee member, as well as permitting communications to be fair and moral, without partialities.

Requirement c

An audit committee is accountable for the appointment, compensation, and supervising the work performed by the auditor(s). They are also in authority for vetting all services (audit and non-audit) that will be done by the auditor, as well as permitting auditors to communicate important matters acknowledged during the audit process.

Requirement d

The audit committee should make sure that an auditor is not crafting a mutual or contradictory interest between themselves and the client. They can also augment independence of the auditor by making sure that the auditor is auditing the company, and not their own work, as well as making sure that the auditor is not taking the role of management or an employee. In addition, the audit committee can make sure that the auditor takes an unprejudiced stand on the audit being performed, so that the auditor does not become an advocate for their client.

Requirement e

Auditing Standard No. 16 was introduced to confirm that the audit committee is supervising the work and objectivity from the client by the auditor(s). This particular auditing standard creates a way for productive communications to be had between the audit committee and the auditor relating to financial statement and audit matters. The auditor is now required to report any matters concerning the audit to the audit committee, instead of reporting issues right to management. Not only does this auditing standard help ease conflicts of interest between the auditor and the client, but it also allows the audit committee to act as an arbitrator between the auditor and the client as well. This allows for an auditor to remain independent while piloting an audit and delivering an audit report because the audit committee will be at the center of the auditor/client relationship. Because of this independence, the auditor will be able to conduct a more precise audit report, while also maintaining the integrity, timing, and nature of the audit.

Requirement f

It is convincing to think that a company and their audit committee will want a more competent and perfect audit team to conduct their audits. However, it is idealistic to believe that the audit committee is in favor of more costly CPA firms. It is the role of management to select an external auditor to audit their financial statements, while the role of the audit committee is to remain independent from management and the auditor to ensure that a unfair opinion is not made from either perception. The audit committee is accountable for intermediary communications between the company and the auditor, but they are not there to form a partial opinion or to create prejudice in one direction or another. The legal liabilities of a company are the anxiety of management, while the audit committee is making sure that the auditor is performing their job in a professional manner regarding the inferences to the financial statement’s accuracy and the confessions that should be reported. The audit committee may be in control of auditor compensation, but they are also there to make sure that the auditor is piloting a fair presentation of the financial statements at a minimal cost. Therefore, critics will always have their own opinions, but the audit committee is there to ensure that the opinions and ideas of the client and the auditor do not form one opinion, but that they remain independent from one another so that an accurate report can be issued, regardless of what information is in the report.