Audit Committee: Effectiveness & Oversight

• Audit Committee Effectiveness encompasses an audit committee's capability to execute oversight duties.
• It ensures integrity in financial reporting, internal controls, risk management, and legal compliance.
• An effective audit committee improves corporate governance, boosts stakeholder trust, and aids organizational success.

Key Responsibilities of an Effective Audit Committee

• Financial Reporting Oversight ensures the integrity and transparency of financial statements.
• The committee reviews accounting policies, estimates and judgments, and engages with external auditors.
• Internal Control and Risk Management is when a committee evaluates internal controls, monitors ERM, and mitigates operational, financial, and compliance risks.
• External Audit Oversight involves selecting, appointing, and assessing external auditors, along with reviewing scope, fees, findings, and ensuring objectivity.
• Internal Audit Supervision entails approving the internal audit plan, evaluating performance, ensuring objectivity, and reviewing and responding to audit findings.
• Compliance and Ethics Monitoring means adherence of legal and regulatory requirements is ensured.
• The ethics and whistleblower policies are overseen.
• Compliance reports are reviewed and acted upon.
• Fraud Prevention and Detection involves assessing fraud risks, encouraging ethical culture, and investigating fraud incidents.
• Communication with Stakeholders happens when transparent communication with the board, management, and regulators is maintained.
• Reports on audit findings and recommendations are provided.

Characteristics of Effective Audit Committee

• Independence: Members are free from conflicts of interest and independent of management.
• Relevant Expertise: At least one member with a background in finance, accounting, or auditing.
• Strong Leadership: The chairperson is proactive, decisive, and knowledgeable.
• Adequate Time and Resources: The committee has enough time and resources to be proactive, decisive, and knowledgeable.
• Knowledge and Experience: Members possess a deep understanding of financial reporting, corporate governance, and risk assessment.
• Effective Communication: there is an open and transparent communication with management, internal, and external auditors.
• Decision Making: The ability to analyze complex financial data and make well-informed decisions is observed.
• Focus on Risk Management Team Building: there is oversight of the organization's risk management framework.
• Professional Skepticism: Maintain a questioning mindset to identify potential fraud, misstatements, or governance issues.

Risk Management

• Risk Management is forecasting and evaluating financial risks and identifying ways to avoid or minimize their impact.
• Financial Risk refers to potentially losing money or experiencing financial instability.
• Operational Risk comes from internal failures or external events disrupting business activities.
• Compliance Risk involves legal or regulatory violations leading to penalties, fines, or reputational damage.
• Strategic Risk arises when business strategies fail to meet objectives, affecting growth and competitiveness.
• Reputational Risk refers to losing trust or credibility due to negative publicity, unethical behavior, or customer dissatisfaction.
• The Risk Management Framework (RMF) is a structured process for identifying, assessing, and managing risks.
• The components to consider are risk identification, measurement and assessment, mitigation, reporting and monitoring, and governance.
• SWOT Analysis identifies the Strengths, Weaknesses, Opportunities, and Threats.
• Risk Registers list identified risks, likelihood, impact, and mitigation strategies.
• Risk Audits evaluate the effectiveness of risk management strategies.
• Risk Assessment Matrices assess the severity and probability of risks.
• Risk Management Software includes tools like RiskWatch and Active Risk Manager for tracking, evaluating, and mitigating risks.

Internal Control

• Internal Control is a process designed to provide reasonable assurance that information is reliable, accurate, and timely.
• It ensures compliance with laws, regulations, contracts, policies, and procedures.
• Internal Control Objectives confirm compliance with laws, regulations, policies, and procedures.
• They ensure financial statements are accurate, complete, and timely.
• Furthermore, they ensure operations run smoothly and without disruption.
• They also ensure assets are safeguarded and used properly.
• They prevent and detect fraud and other unlawful acts.
• Preventive Control aims to prevent errors and includes maker checker concepts and authorizations.
• Detective Control ensures that identified risks are managed through formal directions.
• Corrective Control is designed to correct errors and irregularities and prevent their recurrence.
• Segregation of Duties: Duties are divided among employees to reduce the risk of error.
• Authorization and Approval: Transactions are authorized and approved to ensure consistency with goals.
• Reconciliation and Review involves cross-checking transactions to ensure accurate information.
• Physical Security includes physical security measures and periodic counts of assets.

Role of Internal Control, Internal Audit, and Audit Committee in Corporate Governance

• Internal control plays a crucial role in corporate governance by establishing procedures that ensure risks are mitigated and financial reporting is accurate.
• It maintains compliance with laws and regulations, promotes operational efficiency, and provides stakeholders with confidence.
• Internal Audit provides independent and objective assurance.
• It evaluates risk management, internal controls, and governance.
• It identifies weaknesses and recommends improvements as well as contributes to corporate governance practices.
• The Audit Committee oversees financial reporting, and evaluates internal controls.
• It reviews risk management practices and ensures financial statement integrity.