Board Committees and the Audit Committee
This domain tests why boards delegate, how committees should be composed, and what the audit committee specifically owns. Expect questions on composition, terms of reference, reporting lines and the boundary between oversight and management.
Why committees
The full board cannot scrutinise financial reporting, remuneration or succession in depth, and executives have conflicts in these areas. Committees give focused time, independent judgement and a clear audit trail.
The audit committee
- Composition: independent non-executive directors, an independent chair, and at least one member with recent and relevant financial experience. Written terms of reference, power to take external advice, and direct access to management, internal audit and the external auditor.
- Ownership: integrity of financial statements, significant judgements and going concern, the external auditor's appointment, fees, independence and non-audit services, the internal audit charter, plan, resourcing and performance, internal control and risk oversight, whistleblowing arrangements, related party transactions and compliance.
- Practice: private sessions with both auditors, and an annual report to shareholders on how the committee discharged its duties.
Other committees
Remuneration (independent members, no executives present when their own pay is discussed) and nomination (board composition, skills matrix, succession) are standard. Some boards add risk, related party or ESG committees.
Worked example
The head of internal audit discovers irregularities in the finance division and currently reports administratively to the CFO. The fix is structural: a functional reporting line to the audit committee chair, committee approval of the audit plan and budget, and unfettered private access. The committee, not the CFO, should direct the investigation and receive the report.
Traps that cost marks
Saying the audit committee prepares or signs the financial statements. Describing it as managing risk. Allowing the CEO or CFO to be a voting member. Confusing oversight of the external auditor with performing the audit. Forgetting executive sessions and the internal audit charter.