The annual audit is a complex process that must be done correctly in order to comply with important regulations and laws. This process requires a secure process for communications, collaboration and secure document storage. A surefire way for boards and audit committees to ensure that their audit committee activities are secure and confidential is by using Diligent board portal software and Diligent Messenger for secure communications.
Diligent’s portal stores audits and disclosures indefinitely for future review and comparison. The board administrator can grant granular permissions to allow auditors, financial experts and audit committee members to access the various areas of the portal they need to fulfill their respective duties and responsibilities. Here’s a look at an audit committee reporting checklist:
Audit Committee Reporting Checklist
By breaking the steps of the audit reporting process down into sections, it makes easier work of this time-consuming, complex task.
Substance
Shareholders and regulatory bodies want assurance that the audit committee has performed due diligence in their disclosures, so it’s important to review the audit report for standard boilerplate language and eliminate it.
Assurance reporting should be understandable, informative and engaging. It should provide readers with specific information about what the audit committee did.
Of greatest importance is to affirm that the report highlights audit issues and how the company manages them.
Audit Committee Charter
Audit committee reporting should disclose and explain any changes to the audit committee charter and make reference to the annual review of the audit committee chair. The committee also needs to affirm that they’ve met all of their responsibilities under the charter. Review the audit committee charter to be sure that it permits the committee to obtain external independent advice. The report should include details on whether the committee opted to secure third-party independent advice.
Audit Committee Membership
On an annual basis, the board must review the audit committee’s composition and affirm that the committee has the appropriate expertise and resources that it requires to fulfill its responsibilities, including responsibilities pertaining to risks and controls. The board must also be prepared to disclose and explain any changes to the audit committee.
In addition, the board must provide specific assurance that details that the audit committee has financial experience that’s recent and relevant. The board must also confirm that the audit committee has the necessary commercial, financial and audit expertise to deal effectively with the issues it faces.
Information Flow to the Audit Committee
It’s in the board’s best interest to get confirmation from the audit committee that the information they’ve received from management and the external auditors is timely, reliable and sufficient to ensure that they have all the information they need to fulfill their duties and responsibilities.
Risks and Internal Controls
The board of directors should confirm that they – or a relevant committee – disclosed what steps they took to satisfy themselves that the company’s risk and control framework and processes are operating properly. It’s recommended for boards to disclose and provide a summary of the process they use to review the operations of the system of internal controls.
It’s also crucial for the board to confirm that the company took the necessary actions to remedy any significant weaknesses or failings they’ve identified in reviewing their system of controls.
Valuation of Assets and Liabilities
The audit committee should be able to provide assurance that they have scrutinized and challenged the significant assumptions they used for determining values. The audit committee should be able to confirm that it is satisfied that the market and models to which the valuations are marked have robust liquidity and transaction profiles. The committee should also be able to confirm that they can disclose critical judgments and key estimates in a meaningful way. The disclosures should include an unbiased explanation of the factors that account for any significant deviation from those reported in previous years. Finally, the audit committee should be able to affirm that the auditors brought an appropriate degree of skepticism in performing the audit.
Write-down and Impairment Provisions
With regard to material write-down and impairment provisions, the audit committee should provide a summary of the factors they took into account and any considerations they made to fulfill their responsibility in endorsing these provisions. The audit committee should be able to affirm that they believe that the auditors fulfilled their verification responsibilities with due diligence and professional skepticism.
Securitization, Off-Balance-Sheet and Contingent Liabilities
Audit committees should be able to provide a description of the work they accomplished to:
- Be satisfied that they identified all securitization arrangements, off-balance-sheet liabilities and contingent liabilities and disclosed them in detail in the financial statements;
- Critically assess and challenge, if necessary, the valuations pertaining to the liabilities; and
- Describe the methodologies they used to determine the values.
Internal and External Auditors
The report should include a disclosure of when and how the audit committee addressed the periodic formal evaluations of the internal and external auditors and how they drew key conclusions. The audit committee must also provide a convincing explanation of how they chose their auditor. The summary should indicate the controls that are related to the provision of non-audit services and comment on the level and nature of non-audit services they received.
Disclosures should state how long the firm has retained the audit firm as auditor to the company and disclose the policy for selecting a different audit firm with assurance that the audit committee has complied with their policy. If the auditor has or will be changed, the audit committee must disclose the change with an explanation for changing auditors.
Audit Planning and Main Audit Issues
The audit committee is responsible to disclose its responsibilities for assessing the internal and external auditors. Audit committee reporting must also disclose whether it met with the auditors of key subsidiaries and/or joint ventures. Within the limits of confidentiality, the audit committee needs to report on the nature and resolution of the main audit issues.
The board should confirm that they considered the internal control and risk issues that the internal and external auditors brought to their attention and attest to the nature of those issues. In addition, the audit committee should have gotten confirmation that management has addressed issues of internal control and risk or their plans to address them.
Executive Compensation and Risk
Audit committees should provide:
- A description of its interaction with the compensation or remuneration committee;
- Assurance that the compensation policies and practices for top executive, key business unit leaders and senior finance, control and risk management personnel are the appropriate ones to maintain a robust control environment that’s consistent with good stewardship. If this has been done, the audit committee should refer to it in its report.
The duties and responsibilities in checking, double-checking and reviewing all figures and documents for audits and disclosures is worthwhile, albeit daunting. Governance software solutions, like Diligent Compliance, make the tasks of audit committee reporting easier and more accurate while offering the utmost in high-level security.
