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An audit committee is a committee of an organisation's board of directors which is responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results both internal and external.

In a U.S. publicly traded company, an audit committee is an operating committee of the board of directors charged with oversight of financial reporting and disclosure. Committee members are drawn from members of the company's board of directors, with a Chairperson selected from among the committee members. A qualifying (cf. paragraph "Composition" below) audit committee is required for a U.S. publicly traded company to be listed on a stock exchange. Audit committees are typically empowered to acquire the consulting resources and expertise deemed necessary to perform their responsibilities. The role of audit committees continues to evolve as a result of the passage of the Sarbanes-Oxley Act of 2002. Many audit committees also have oversight of regulatory compliance and risk management activities.

Not for profit entities may also have an audit committee.

Internationally, an audit committee assists a board of directors to fulfil its corporate governance and overseeing responsibilities in relation to an entity's financial reporting, internal control system, risk management system and internal and external audit functions. Its role is to provide advice and recommendations to the board within the scope of its terms of reference / charter. Terms of reference and requirements for an audit committee vary by country, but may be influenced by economic and political unions capable of passing legislation. The European Union directives are applied across Europe through legislation at the country level. Although specific legal requirements may vary by country in Europe, the source of legislation on corporate governance issues is often found at the European Union level and within the non-mandatory corporate governance codes that cross national boundaries.


In India, according to Section 177(1) of the Companies Act 2013, the Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.[2]

As per Rule 6 (Committees of the Board) of the Companies (Meetings of Board and its Powers) Rules, 2014, the Board of directors of every listed companies and the following classes of companies shall constitute an Audit Committee and a Nomination and Remuneration Committee of the Board:

All public companies having:


Usually, membership of the committee is subject to the maximum number of 6 persons.


Boards of Directors and their committees rely on management to run the daily operations of the business. The Board's role is better described as oversight or monitoring, rather than execution. Responsibilities of the audit committee typically include:[5][6]

  • Overseeing the financial reporting and disclosure process.
  • Monitoring choice of accounting policies and principles.
  • Overseeing hiring, performance and independence of the external auditors.
  • Oversight of regulatory compliance, ethics, and whistleblower hotlines.
  • Monitoring the internal control process.
  • Overseeing the performance of the internal audit function.
  • Discussing risk management policies and practices with management.

The duties of an audit committee are typically described in a committee charter, often available on the entity's website.[7]×

Role in oversight of financial reporting and accounting

Audit committees typically review financial statements quarterly and annually in public companies. In addition, members will often discuss complex accounting estimates and judgments made by management and the implementation of new accounting principles or regulations. Audit committees interact regularly with senior financial management such as the CFO and Controller and are in a position to comment on the capabilities of these managers. Should significant problems with accounting practices or personnel be identified or alleged, a special investigation may be directed by the audit committee, using outside consulting resources as deemed necessary.

External auditors are also required to report to the committee on a variety of matters, such as their views on management's selection of accounting principles, accounting adjustments arising from their audits, any disagreement or difficulties encountered in working with management, and any identified fraud or illegal acts.[8]

Role in oversight of the external auditor

Audit committees typically approve selection of the external auditor. The external auditor (also called a public accounting firm) reviews the entity's financial statements quarterly, audits the entity's financial statements annually, and issues an opinion providing assurance on the entity's annual financial statements. Changing an external auditor typically also requires audit committee approval. Audit committees also help ensure the external auditor is independent, meaning no conflicts of interest exist that might interfere with the auditor's ability to issue its opinion on the financial statements.

Role in oversight of regulatory compliance

Audit committees discuss litigation or regulatory compliance risks with management, generally via briefings or reports of the General Counsel, the top lawyer in the organisation. Larger corporations may also have a Chief Compliance Officer or Ethics Officer that report incidents or risks related to the entity's code of conduct.

Role in monitoring the effectiveness of the internal control process and of the internal audit

Internal control includes the policies and practices used to control the operations, accounting, and regulatory compliance of the entity. Management and both the internal auditing function and external auditors provide reporting to the audit committee regarding the effectiveness and efficiency of internal control.

Role in oversight of risk management

Organizations have a variety of functions that perform activities to understand and address risks that threaten the achievement of the organization's objectives. The policies and practices used by the entity to identify, prioritize, and respond to the risks (or opportunities) are typically discussed with the audit committee. Having such a discussion is required for listing on the New York Stock Exchange. Many organizations are developing their practices towards a goal of a risk-based management approach called Enterprise risk management. Audit committee involvement in non-financial risk topics varies significantly by entity. Dr. Ram Charan has argued for risk management early warning systems at the corporate board level.[10]

Impact of the Sarbanes–Oxley Act of 2002

The Sarbanes–Oxley Act of 2002 increased audit committees’ responsibilities and authority. It raised membership requirements and committee composition to include more independent directors. Companies were required to disclose whether or not a financial expert is on the committee. Further, the Securities and Exchange Commission and the stock exchanges proposed new regulations and rules to strengthen audit committees.


Below are a few key milestones in the evolution of audit committees:[11]

Interaction with the board, and with non-executive board members

"The work of the audit committee can only be valuable if sufficient time is allotted on the board agenda for the audit committee to present the results of its work. The audit committee should also feel that the board is taking appropriate action on its report."

Frequency of interaction with management

Many audit committee chairpersons conduct interim calls with key members of management between quarterly meetings. Key contacts may include the CEO, CFO, Chief Auditor, and external audit partner. Many boards also schedule dinners prior to formal meetings that allow informal interaction with management. Some companies also require their boards to spend a certain amount of time learning their operations beyond board meeting attendance.

Executive sessions

These are formally scheduled private meetings between the audit committee and key members of management or the external auditor. These meetings typically are unstructured and provide the opportunity for the committee to obtain the feedback of these managers in private. A key question audit committee members ask in such sessions is: "Is there anything you would like to bring to our attention?"


Audit committees should complete a self-evaluation annually to identify improvement opportunities. This involves comparing the committee's performance versus its charter, any formal guidelines and rules, and against best practices. Such a review is confidential and may or may not include evaluations of particular members.[12]

Survey results

Various consulting and public accounting firms perform research on audit committees, to provide benchmarking data.[11][13][14] Some results are identified below:

In a 2011 study,[15] the Council of Europe concluded that: “The Benchmarking results from a sample of 15 international organisations in Europe show that 11 have an audit committee (of which the name may vary from Audit Committee, Advisory Committee on Audits, Audit Advisory Board, Audit Progress Committee, Finance and Audit Committee, Independent Advisory Oversight Committee, Independent Audit Advisory Committee of Experts) and in seven, the Audit committee plays a role in the selection of the External Auditor".

A 2009 study[16] on 23 international organisations showed that 10 had an Audit Committee and 3 considered having one in future, with 8 reporting to the Governing Body level and 2 reporting to DG/Executive Director level. The sizes of all Audit Committees were between 3 and 9 members, with 5 committees having a mix of external expert members and internal members.

See also


  1. ^ a b "INTOSAI definition" (PDF). INTOSAI. Archived from the original (PDF) on 2011-07-25. Retrieved 1 April 2011.
  2. ^ Prasad, Suresh. "Audit Committee to be constituted by BOD of specified Company". AUBSP. Retrieved 2 February 2017.
  3. ^ a b c "European Directive 2006/43/EC of 17 May 2006". European Commission. Retrieved 12 April 2011.
  4. ^ "Sample Audit Committee Charter". IIA. Archived from the original on 2011-07-28. Retrieved 6 April 2011.
  5. ^ AICPA "The Audit Committee Toolkit" New York; 2004.
  6. ^ "CPA Journal AC Responsibilities". Retrieved 2011-10-22.
  7. ^ "Sample Charter". Retrieved 2011-10-22.
  8. ^ "Audit Committee Effectiveness: What Works Best-2nd Edition." Institute of Internal Auditors and Price Waterhouse. Altamonte Springs, FLA; 2000.
  9. ^ a b c "ECIIA Guidance on the 8th EU Company Law Directive" (PDF). Archived from the original (PDF) on 2012-03-21. Retrieved 12 April 2011.
  10. ^ Charan, Ram (2005). Boards That Deliver. Jossey Bass. ISBN 978-0-7879-7139-7.
  11. ^ a b "KPMG AC Journey 2005-2006" (PDF). Retrieved 2011-10-22.[permanent dead link]
  12. ^ "Audit Committee Effectiveness: What Works Best-2nd Edition" Institute of Internal Auditors and Price Waterhouse. Altamonte Springs, FLA; 2000.
  13. ^ "KPMG AC Survey 2007" (PDF). Archived from the original (PDF) on 2008-12-07. Retrieved 2011-10-22.
  14. ^ "KPMG AC Study 2008" (PDF). Archived from the original (PDF) on 2008-12-07. Retrieved 2011-10-22.
  15. ^ "Document of 3/12/10 presented to the CoE Committee of Ministers". Council of Europe. Retrieved 11 April 2011.
  16. ^ "Benchmarking exercise on Financial Governance". Retrieved 11 April 2011.[permanent dead link]