An audit committee is a specialized governing body within a company. Both internal and external auditors report their findings to the audit committee. It is the responsibility of the committee to provide direction, scope, and support to the auditors as they carry out their work. An audit is a detailed review of the transactions and business processes of a company.
The audit committee has four main functions: select the audit firm, provide guidance to auditors, review audit report and inform the company board of directors of the results of the audit. The committee is separate from the regular governing boards in order to ensure a fair and unbiased audit review. All publicly traded companies are required to issue audited financial statements each year.
Selecting an audit firm is the sole responsibility of the audit committee. It must define the scope of work, the types of audits that will be performed, and the frequency of the audits. The standard process is to issue a request for proposal for audit services. Interested firms respond with their level of expertise, service and pricing. The committee creates a short list, conducts interviews, and makes the selection.
A financial audit is the review of transaction details that are randomly selected. The purpose of the audit is to provide assurances that the values reported on the financial statements are accurate. All selected items are reviewed in detail to determine the level of confidence that readers should have in the numbers and to ensure standard business process is being followed.
There are also several other types of audits that can be performed. A systems or operational audit is done to confirm that standard business practices are being followed. Transactions are selected at random and the responsible department is required to provide supporting documentation that they were carried out in the correct process.
An audit report provides a high-level summary of the auditor’s findings and then a detailed report of the transactions that were audited, the degree of compliance, and any concerns that the auditor had noticed. The audit committee is presented with this report and has the opportunity to question the auditors on their findings, and any concerns they had. At the conclusion of each audit, the committee creates a report for the governing body of the company. This report provides their comments and suggestions for priorities. The combination of the two reports is used to define the list of weaknesses that need to be addressed before the next audit.