Audit Committee Self-Assessment Guide.pdf

7/28/2019 Audit Committee Self-Assessment Guide.pdf

1/14

4th Edition

Audit Committee EffectivenessWhat Works Best

Prepared by

Principal Authors

Catherine L. Bromilow, CPA

Donald P. Keller, CPA

Project Manager

Garret K. Tripp, CPA, CFE

Sponsored by

IIA-Chicago Chapter

IIA-Philadelphia Chapter

Copyright 2011, The IIA Research Foundation

Reprinted with permission


2/14

Disclosure

Copyright 2011 by The Institute o Internal Auditors Research Foundation (IIARF), 247Maitland Avenue, Altamonte Springs, Florida 32701-4201. All rights reserved. No part o thispublication may be reproduced, stored in a retrieval system, or transmitted in any orm by any

means electronic, mechanical, photocopying, recording, or otherwise without prior writtenpermission o the publisher.

The IIARF publishes this document or inormational and educational purposes. This document is

intended to provide inormation, but is not a substitute or legal or accounting advice. The IIARFdoes not provide such advice and makes no warranty as to any legal or accounting results throughits publication o this document. When legal or accounting issues arise, proessional assistance

should be sought and retained.

The Institute o Internal Auditors (IIAs) International Proessional Practices Framework (IPPF)comprises the ull range o existing and developing practice guidance or the proession. The IPPF

provides guidance to internal auditors globally and paves the way to world-class internal auditing.

The mission o The IIARF is to expand knowledge and understanding o internal auditing by

providing relevant research and educational products to advance the proession globally.

The IIA and The IIARF work in partnership with researchers rom around the globe who conductvaluable studies on critical issues aecting todays business world. Much o the content presented

in their nal reports is a result o IIARF-unded research and prepared as a service to The Foun-dation and the internal audit proession. Expressed opinions, interpretations, or points o view

represent a consensus o the researchers and do not necessarily refect or represent the ocialposition or policies o The IIA or The IIARF.

ISBN 978-0-89413-708-26/11

First Printing




3/14

Appendix A | Audit Committee Self-assessment Guide | 11

The ollowing guide summarizes leading auditcommittee practices discussed in this report. Youmay use it to help assess your audit committeesperormance and identiy changes to consider in

your processes. Audit committees may also nd itbenecial to obtain eedback rom management,the internal audit director, general counsel, and theexternal auditors on committee perormance.

Appendix A

Audit Committee Self-assessment Guide

Characteristics of Effective Audit Committees Comments and Follow-up Actions(including any personal plans)

Financial Reporting and Disclosures

Your committee:Adequately understands the companysbusiness and the industryin which it operates

Is satised the company adequatelyaddressesthe risk that the nancial statements maybe materiallymisstated, intentionally orunintentionally

Understands how management and theexternal auditors evaluate materiality, both

quantitativelyand qualitatively, or nancialreporting purposes

Assesses reasonableness and appropriatenessocritical accounting policies the companyollows, discussing with management andexternal auditors

Reviews the reasons or and implicationsochanges in accounting principles made

at managements discretion, understandingstakeholders potential reaction beore approving

Scrutinizes areas involving managementestimates that have a material impact onthe nancial statements and understands thereasonableness o the underlying assumptionsand whether the amount recorded is closer to theconservative or aggressive end o the spectrum




4/14

113 | Audit Committee Effectiveness What Works Best


Discusses with managementsubstantivereasons orsignifcant changes in the nancial

statements between reporting periods androm budget ensuring explanations areconsistent with understandingo the companys

perormance

Reviews with management transactions thatare unusual, complex, or have increased

volume near period ends and their accountingtreatment, evaluating appropriateness andconsistencywith members knowledge othe company

Understands managements process to identiyany signicant related party transactions thatoccur during a reporting period and is satised

with the related disclosures

Reads annual fnancial statements, assessingtheir completeness and consistencywithoperational and other inormation known tomembers and discussing also with managementand the external auditors

Reviews interim fnancial statements andrelated disclosures, understanding consistency

with annual reporting, beore flingwithregulators

Understands and is comortable withpressreleases and otherfnancial inormation (e.g.,earnings guidance, orward-looking inormation,inormation or rating agencies) routinelydisclosed by the company, including separatereporting ospecial items or non-GAAPdisclosures

Reads, beore publication, narrative reportingand related inormation, ensuring consistency

withfnancial statements, completeness,and appropriate transparencyor issues suchas liquidity and fnancing needs




5/14



Discusses audit results with external auditors,considering managements handling o corrected

or uncorrected misstatements

Meets periodically with counsel to discusslitigation, claims, contingencies, or other

signifcant issues and their impact on thenancial statements

Understands how management captures allrelevant inormation in the nancial statements,

including how the management disclosurecommittee unctions

Reviews any correspondence between thecompany and regulators regarding nancialstatement lings and disclosures

Considers the impact o any identiedsubsequent events on nancial disclosures

Risk Management and the System

o Internal Control

Your committee:Is comortable with the eectiveness o thecompanys risk management process

Clearlyunderstands and agrees with the board

onwhich o the key risks likely those coveringnancial reporting and compliance with lawsand regulations it oversees on behal o theboard. Agrees with the board on thespecifc scopeo the committees oversight responsibilities ormonitoring risks.




6/14



Reviews the approach to and extent ointernal control testing by management,

internal audit, and external auditors andhow the testing supports any related reportingthe company does

Discusses with management, internal audit,and external auditors their observations, issues,andfndings on internal control eectiveness.Understands anysignifcant or material control

weaknesses as well as managements plans toremediate anycontrol defciencies.

Reads managements external reports on theeectiveness o internal control and/or riskmanagement and any related reports romexternal auditors

Understands whether compensation incentivescould create risk or nancial reporting

Understands any actors that increase fnancialreporting raud risk and how managementaddresses the risk

Understands the risks obriberyand corruptionand how management is minimizing those risks

Culture and ComplianceYour committee:Evaluates the tone at the topand thecompanys culture, understanding their relevanceto nancial reporting and compliance




7/14



Understands the eectiveness o the companysprograms or ensuring compliance with laws

and regulations, considers anysignifcantcompliance issues identied, and is satised

with managements actions

Ensures management has an appropriate codeo conduct. Makes sure that managementprovides the code, along with related training,to employees and periodically requires employeesto certiytheir compliance.

Is satised that the companys ethics and

conduct policies properly address culturallyor regionally sensitive issues

Sees that appropriatesupport channelsare available to help employees addresscompliance and ethics issues

Meets periodicallywith internal audit,

general counsel, the compliance ofcer,and management, among others, to discusssensitive issues

Ensures procedures are in place to receive, retain,and address complaints regarding accounting,internal controls, or auditing matters. Considersthe potential impact and resolution o anysignicant issues raised through thewhistleblowerprogram.

Oversight o Management and Internal Audit

Your committee:Maintains aproductive relationship withmanagement through open lines o communica-tion and candid, continual dialogue, includingbetween committee meetings




8/14



Strikes the right balance between advisingmanagement and monitoringmanagement and

is ready to increase its engagement i changesin circumstances warrant

Ensures management obtains the auditcommittees input beore making key decisions

Assesses senior nance managementsperor-mance and competence, obtaining eedback rom

internal audit and external auditors

Monitorssuccession plans or the CFO andsenior nance team members

Involves management appropriately inmeetings and ensures emphasis on discussion,

not presentation

Meets privatelywith management on aregular basis

Builds a trusting relationship with internalaudit that includes candid and continual

communication between meetings, acilitatingability to raise sensitive issues

Ensures the role internal audit plays meetsthe committees needs or assurance andprovidesvalue to management




9/14



Approves internal audits charter and reviewsannual plans and anysignifcant changes

ensuring appropriate coverage o risks andcoordination o work with external auditors

Ensures internal audit has adequate resourcesand budget, including quality and continuityosta, with ability to supplement skillsas needed

Discussessignifcant internal auditfndings,reported to the committee at an appropriately

summarized level, as well as thestatus omanagements remediation actions

Ensures internal audit reports directlyto thecommittee, as well as to an appropriately

senior position within the company, promotinginternal audits stature and objectivity

Plays a central role in appointingor replacingthe internal audit director, evaluatinghis or

herperormance and determining compensation

Evaluates internal auditsperormance andoperational independence by weighing results oany quality control reviews as well as eedbackrom management and external auditors

Meets privatelywith the internal audit directoron a regular basis

Relationship with External Auditors

Your committee:Builds a trustingandproessional relationship

with external auditors, ensuring open lines ocommunication




10/14



Drives theselection, oversight, and evaluationo external auditors, obtaining managements

and internal audits input and consideringreplacement when appropriate

Ensures external auditors independence bypreapprovingaudit and nonauditservices,understanding impact o ees, and evaluatingtype ononaudit services

Reviews the external audit scope, understandingrisk coverage and signicant plan changes

Receives inormation required to becommunicated under auditingand regulatory

standards and seeks insight on how thecompanys practices compare to those o peers

Reviews managements representationletters to the auditors and inquires about any

nonstandard representations

Understands anydisagreements betweenthe auditors and management and determines

whether outside advice is needed or resolution

Understands managements rationale orusing other audit frms or audit work or

other services

Meets privatelywith external auditors ona regular basis




11/14



What to Do When Things Go Wrong

Your committee:Understands any signicant identifed errors inpreviously issued nancial statements and agrees

with management conclusions regarding the needor restatement

Ensures management conducts a thoroughinvestigation to identiy and resolve all errors

Understands its role and key considerations inoverseeing investigations (or possible raudor illegal acts) and is prepared to take charge

when needed

Has authorityand makes the appropriatedecision on whether to engage outside advisors

Activelymonitors investigation progress and

ensures management captures lessons learnedand applies them in uture investigations

Is satised a crisis management plan existsand enables the company to respond quicklyand appropriately to an emerging crisis

Committee Composition

Your committee:Has its new members selected by the nominatingcommittee based onskills and attributes thecommittee needs

Considers, with the nominating committee,a need or balancing continuitywithresh

perspective when addressing member turnover




12/14



Has asuccession plan or its members and chair

Has a chair who possessesstrong leadershipqualities, ability to promote eective discussionand working relationships, and time andfnancialexpertise to direct the committee appropriately

Has members whopossess critical characteristicssuch as integrity, courage, skepticism, independent

judgment, and industry knowledge and have theavailable time

Has members who are independent andpossess requisite levels ofnancial literacyand nancial expertise

Is the right size, bringing requisite knowledge,abilities, and skills to the table, yetsmall enough

to act cohesively

Meetings

Your committee:Uses ascheduling calendar to ensure it addressesall its responsibilities over the course o a year,

while balancing its workload

Holds asufcient number o meetings,

scheduled at appropriate points, to addressits responsibilities on a timely basis

Ensures meetings are oadequate length toallow the committee to accomplish its agenda,

with time toully discuss issues




13/14



Plans meetings properly with the chair drivingthe agenda and members providing input

Is satised it receives appropriate advancematerial or agenda topics, providing theright inormation and insight, and that materialis received in a timelymanner and reviewedbymembers beore meetings

Requires meeting attendance by the rightindividuals, those with meaningul input on

agenda items, and limits the number oobserverswhose presence may hinder discussion

Meets in separateprivate sessions regularlywith the CFO, internal audit director, andexternal auditors and periodically withgeneralcounsel, compliance ofcer, chie risk ofcer,and other management allowingull and

rank discussion o potentially sensitive matters

Has members meet regularlyinprivatesession, allowing confdential discussiono managements and auditors perormanceand refection on other issues

Communicates eectively with managementabout issues that arise between meetings,thereby avoiding surprises

Allows time at meetings or dialogue, with thediscussion ocusing on relevant topics

Ensures minutes provide accurate descriptionso meetings, at the right level odetail, andreviews and approves them in a timely manner




14/14


Reports regularly to the board to discussactivities, keyissues, major recommendations,

and action plans

Supporting Committee Eectiveness

Your committee:Has awritten charter, which has been approvedby the board odirectors, that it assesses annuallyor anyupdates

Ensures annually that it has carried out allthe responsibilities outlined in its charter

Assessesperormance o the committee asawhole annually, taking decisive correctiveaction and considering improvements

Evaluates individual members perormanceregularly, considering training and other

needed support

Has proper administrative support on anongoing basis and the authorityto engageadditional resources when needed

Ensures new members receive robust orientationto enable them to understand their role and get

up to speed quickly

Ensures that all members have access tocontinuing education on business and accountingdevelopments and other matters relevant to newresponsibilities or changes in the business

Audit Committee Self-Assessment Guide.pdf

Documents

Transcript of Audit Committee Self-Assessment Guide.pdf