Audit committee definition
/What is an Audit Committee?
An audit committee is that subset of a firm’s board of directors that is responsible for the oversight of the internal auditors and external auditors. The audit committee is an essential part of an organization’s system of internal controls, because members of the board can have candid discussions with the auditors without anyone from management being present. Because of its independent status, the audit committee can force management to create and adhere to an effective system of financial controls.
An audit committee is required by stock exchanges, so publicly held entities that want their securities to be traded on an exchange must have an audit committee that meets the requirements of the relevant exchange.
Composition of an Audit Committee
Depending on the situation, the audit committee is comprised of from three to five outside directors, with at least one person qualifying as a financial expert. A financial expert must have an understanding of financial statements and the relevant accounting framework (such as GAAP or IFRS), and must have the ability to assess the application of these principles to how a business accounts for estimates, accruals, and reserves. The expert must also have experience in the preparation, audit, analysis, or evaluation of financial statements. Further, the expert must have an understanding of internal controls, the procedures for financial reporting, and audit committee functions.