While ultimately it is management’s responsibility
to prepare accurate financial statements and disclosures, noted the FRC, the
audit committee should consider significant accounting policies, any changes to
them, and any significant estimates and judgments. Management should inform the
audit committee of the methods used to account for significant or unusual
transactions where the accounting treatment is open to different approaches.
Taking into account the external auditor’s view, the audit committee should
consider whether the company has adopted appropriate accounting policies and,
where necessary, made appropriate estimates and judgments.
The audit committee should also review the
clarity and completeness of disclosures in the financial statements, said the
FRC, and consider whether the disclosures made are set properly in context.
Where, following its review, the audit committee is not satisfied with any
aspect of the proposed financial reporting by the company, it must report its
views to the board.
Similarly, the audit committee should review
related information presented with the financial statements, including the
business review and corporate governance statements relating to the audit and
to risk management. When board approval is required for other statements
containing financial information, such as summary financial
statements, significant financial returns to regulators and release of price sensitive information,
whenever practicable the audit committee should review such statements first.
When requested by the board, instructed the
guidance, the audit committee should review the content of the annual report and
accounts and advise the board on whether, taken as a whole, it is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the company’s performance, business model and strategy.
This report will inform the board’s statement on these matters required under
the UK Corporate Governance Code.
In order for the board to make that statement, any review undertaken by the
audit committee would need to assess whether the narrative in the front of the
report was consistent with the accounting information in the back, so as to
ensure that there were no surprises hidden in the accounts.
The guidance emphasized that the audit
committee is the body responsible for overseeing the company’s relations with
the external auditor. In that regard, the audit committee has the primary
responsibility for making a recommendation on the appointment, reappointment
and removal of the external auditors. If the board does not accept the audit
committee’s recommendation, it should include in the annual report, and in any
papers recommending appointment or reappointment, a statement from the audit
committee explaining its recommendation and should set out reasons why the
board has taken a different position.
Further, the audit committee should annually
assess, and report to the board on, the qualification, expertise and resources,
and independence of the external auditors and the effectiveness of the audit
process, with a recommendation on whether the external auditor be reappointed.
The assessment should cover all aspects of the audit service provided by the
audit firm, and include obtaining a report on the audit firm’s own internal
quality control procedures and consideration of audit firms’ annual
transparency reports, where available. It might also be appropriate for the
audit committee to consider whether there might be any benefit in using firms
from more than one audit network.
If the external auditor resigns, said the
FRC, the audit committee should investigate the issues giving rise to such resignation
and consider whether any action is required. The audit committee should
evaluate the risks to the quality and effectiveness of the financial reporting process,
and consider the need to include the risk of the withdrawal of their auditor
from the market in that evaluation.
The audit committee should develop and
recommend to the board the company’s policy in relation to the provision of
non-audit services by the auditor, and keep the policy under review. The audit committee’s objective should be to ensure
that the provision of such services does not impair the external auditor’s independence or
objectivity.
In this context, the audit committee should
consider a number of factors, including whether the skills and experience of
the audit firm make it the most suitable supplier of the non-audit service and whether
there are safeguards in place to eliminate or reduce to an acceptable level any
threat to the independence of the audit resulting from the provision of such services
by the external auditor. The audit committee should also consider the nature of
the non-audit services; the fees for non-audit services relative to the audit
fee; and the criteria which govern the compensation of the individuals
performing the audit.