An audit committee is one of the major operating committees of a company’s board of directors that is in charge of overseeing financial reporting and disclosure.
All U.S. publicly-traded companies must maintain a qualified audit committee in order to be listed on a stock exchange. Committee members must be made up of independent outside directors, including a minimum of one person who qualifies as a financial expert. For more details you can read in the SEC material ‘STANDARDS RELATING TO LISTED COMPANY AUDIT COMMITTEES’.
There are cases that an auditor need to communicate with the audit committee (AS 1301).
The objectives of the auditor are to:
- Communicate to the audit committee the responsibilities of the auditor in relation to the audit and establish an understanding of the terms of the audit engagement with the audit committee;
- Obtain information from the audit committee relevant to the audit;
- Communicate to the audit committee an overview of the overall audit strategy and timing of the audit; and
- Provide the audit committee with timely observations arising from the audit that are significant to the financial reporting process.
The case that the auditor should communicate to the audit committee include, but not limited, to the following matters:
- Significant accounting policies and practices.
- Critical accounting policies and practices. All critical accounting policies and practices to be used.
- Critical accounting estimates.
- Significant unusual transactions
- Auditor’s Evaluation of the Quality of the Company’s Financial Reporting (Qualitative aspects of significant accounting policies and practices, New accounting pronouncements and Alternative accounting treatments.)
- Management Consultation with Other Accountants
- The auditor’s evaluation of the company’s ability to continue as a going concern
- Discuss with the audit committee a draft of the auditor’s report.
- Any disagreements with management about matters, whether or not satisfactorily resolved, that individually or in the aggregate could be significant to the company’s financial statements or the auditor’s report.
There are many companies traded in small stock exchange (as the OTC, mostly on the Pink sheet level) that doesn’t have an audit committee. In that case the auditor communicate with the entire board of director.