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(annual certification)
• Stock Exchange Listing Requirements

(one-time certification)

• Education and Training




a
Sarbanes-Oxley Act of 2002.
b
NYSE, Nasdaq, AMEX Listing Standards.
c
SEC Final Rules, Audit Committee Disclosures.
d
NYSE Listing Standards only; see also SEC Release No. 34-47672.
e
Nasdaq Listing Standards only.
f
At least one member must have accounting or related financial management expertise.
The External and Internal Auditing Process 87



Exhibit 2.5 Corporate Audit Committees: An Approach to Continuous
Improvement

CORPORATE AUDIT COMMITTEES:
AN APPROACH TO CONTINUOUS IMPROVEMENT
Audit committees today are faced with the sizable task of overseeing both the auditing and
financial reporting processes. The final rules of the SEC, national stock exchanges, and the
AICPA™s Auditing Standards Board cover corporate governance of audit committees, in-
cluding independence, qualifications, charters, external auditor involvement, and reports
Nonetheless, it remains up to audit committees to ensure that they continuously im-
prove their oversight role. Continuous improvement requires a constructive relationship
between audit committees and management, internal auditors, external auditors, and legal
counsel. Audit committees should function as team members and be empowered by their
boards to ask tough-minded questions about the audit and financial reporting processes as
well as to probe into the entity™s affairs. Continuous improvement helps minimize the
costs of achieving quality in both financial management services and audit services. Thus,
boards of directors are assured that such resources are allocated efficiently and effectively
to prevent the costs of poor quality in the board™s corporate accountability process.
Continuous improvement approach To achieve continuous improvement, audit com-
mittees should consider the following three-step approach:
– Complete a profile worksheet with details of the committee™s role, responsibilities, and
organization;
– Develop a customized review and action plan to achieve the committee™s goals in the
board-approved charter; and
– Develop a quality assurance review based on the elements that guide the committee in
adopting quality assurance policies and procedures.

Audit Committee™s Profile Worksheet
Audit committees are now required to disclose their written charter in the entity™s annual
proxy statement. This document provides a clear presentation of the committee™s oversight
role, responsibilities, and organization. It defines the jurisdictional charge to the commit-
tee, minimizing potential litigation risk as well as avoiding the dilution of the committee™s
activities. See Exhibit 1 for a suggested format for a profile worksheet.
Audit committees need knowledge about”
– the entity™s business and industry,
– significant risks,
– internal control concepts,
– industry accounting practices, and
– complex business transactions.
Likewise, audit committees need to review the following:
– Industry and business data in terms of vulnerability of the industry to changing eco-
nomic conditions and operating characteristics of the business. Such a review would
usually include the annual stockholders™ report, SEC filings, (10Qs, 10Ks, annual proxy
statement), the entity™s website, analytical review procedures, absolute data compar-
isons, and financial ratio data.
– Management™s risk assessment process
– The components of COSO™s Internal Control-Integrated Framework (control environment,
risk assessment, information and communication, control activities, and monitoring)


(continued)
88 Audit Committees: Basic Roles and Responsibilities



Exhibit 2.5 (Continued)

EXHIBIT 1
AUDIT COMMITTEE™S PROFILE WORKSHEET




Board of Directors
Services available




External Auditors




SEC, SROs, ASB
Compliance with
Internal Auditors



Legal Counsel
Management
from:
Audit Committee Practice Area Comments:
Organizational Structure
and Composition
Formation*
Membership
” ”
Number of members (size)

Appointments

Term of Service
” ”
Qualification
” ”
Composition
Meetings

Frequency

Type
Knowledge Areas

Type of business and industry

Internal audit process

External audit process
” ”
Internal control concepts
” ” ”
Management™s risk assessment
” ” ”
Industry accounting practices
” ” ” ”
Complex business transactions
” ” ”
Financial reporting process
” ” ” ” ” ”
Internal communication process**
” ”
External communication process
*
Board resolution or corporate by-laws and a formal written charter
**
Related to the above areas

– Industry accounting practices, with particular emphasis on the appropriateness of ac-
counting principles
– Complex business transactions (e.g., restructuring charges and pre-acquisition audits).
Additionally, audit committees should perform a review in connection with other mat-
ters, such as”
– code of conduct;
– conflict of interest statements (related party transactions);
– corporate perquisites;
– computer security, business continuity plan, and planned systems modifications; and
– biographical information on senior management and financial management.
The External and Internal Auditing Process 89



Audit Committee™s Action Plan
Based on the audit committee™s profile worksheet, the chair can develop a customized re-
view and action plan (Exhibit 2). This plan serves as an oversight compass for the finan-
cial management, audit, legal, and communication process.
Financial management. Responsibility for the integrity and objectivity of the infor-
mation in financial reports rests with the entity™s management. Audit committees should
review background information on the competence and integrity of important members of
the financial management group.



EXHIBIT 2
AUDIT COMMITTEE™S REVIEW AND ACTION PLAN




Board of Directors
Services available




External Auditors




SEC, SROs, ASB
Compliance with
Internal Auditors



Legal Counsel
Management
from:




Audit Committee Practice Area Comments:
Agendas
Pre-audit Meeting (Audit Scope)
” ” ”
Audit plan

Analytical review
Accounting and auditing
” ” ”
developments
” ” ”
Financial reporting matters
” ” ”
Risk assessment
” ” ”
Risk control processes
Interim meeting (optional)
” ” ”
Problem areas

Audit progress
Post-audit Meeting
” ”
Audit findings
Analytical review
” ”
Annual financial statements
” ”
SEC Form 10-K Report
Other Concerns
” ” ” ”
Unresolved matters
” ”
Disagreements with management
” ”
Significant audit adjustments
Completeness of disclosure and
” ” ” ”
risks and uncertainties
Appropriateness of accounting
” ” ”
policies
Management™s representations
” ”
(client representation letter)
” ”
Lawyer™s letter


(continued)
90 Audit Committees: Basic Roles and Responsibilities



Exhibit 2.5 (Continued)




Board of Directors

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