Audit committees are typically assigned a broad range of responsibilities under their charters.

This can include, but is not limited to, oversight of:

• internal control and risk management
• financial reporting
• performance management
• the internal audit and external audit functions
• monitoring compliance with legal and regulatory compliance.

However, as we approach the end of the financial year, committees’ roles tend to focus more on the preparation of their entity’s annual financial statements.

Effective audit committees play an important role in ensuring entities prepare quality financial reports in a timely manner. Whilst management is responsible for preparing financial reports, audit committees help ensure the integrity and transparency of the statements. They do so by providing oversight of the financial reporting process.

Often, audit committees are responsible for final clearance of the financial statements before they are signed by the accountable officer, chairperson or another person with overall responsibility for governance and accountability.

What level of knowledge and understanding is expected of audit committee members?

Ideally, audit committee members should have enough understanding of accounting requirements and concepts to effectively review the financial statements. And they should be able to constructively challenge management and the auditors on key aspects.

While the level of knowledge and understanding of accounting requirements may vary between individual committee members, collectively it should be sufficient to discharge the committee’s responsibilities. Where necessary, entities may wish to facilitate training for committee members where there is a need to improve their knowledge of current financial accounting requirements.

Even where members of the committee do not individually possess a detailed knowledge of accounting requirements, they should be able to actively participate in the review of the financial statements by using their understanding of the entity and its operations. This could include knowledge gained through:

• prior reviews of financial statements
• considering internal control, risk management and compliance activities as part of the audit committee
• discussing matters with internal and external auditors
• being involved in other similar organisations and/or industries
• considering matters as part of their roles on other committees or as part of the governance board.

When should the audit committee get involved?

To provide effective oversight, audit committees should be involved throughout the financial reporting process. If committees are only involved in reviewing the financial statements at the end of the process, their ability to provide effective oversight and ensure a quality outcome is significantly reduced.

The committee’s oversight role should start with reviewing the financial reporting project plan prepared by management and agreed with the auditors. This project plan should identify major processes, key milestones and the deliverables that the committee can factor into their own agenda-setting and forward work plan in an appropriate way. At this stage of the process, the committee should also consider when the final audit committee will review and clear the financial statements.

Additional guidance on preparing audit committee work plans, including considering key elements of the financial reporting process, is available in:

• Results of audit of local government entities 2014–15 (Report 17: 2015–16) which includes a better practice guide for developing an audit committee 12 month work plan
• Queensland Treasury’s Audit Committee Toolkit.

In addition to assessing the timing of key project deliverables, the committee should also assess whether management has the required level of staff with necessary skills, qualifications and experience to achieve the project deliverables within the timeframes identified in the plan.

Audit committee oversight should occur progressively during the year and should be incorporated into other key phases of the financial statement project plan, including review and approval of:

• pro forma financial statements
• key accounting position papers
• changes to key financial reporting systems and processes
• other significant project deliverables such as valuations of property, plant and equipment.

In reviewing financial statements what should the audit committee consider?

In fulfilling their responsibilities for oversight of the financial reporting process, and in clearing financial statements, audit committees should consider some, or all, of the following areas:

Financial reporting process:

• In preparing the financial report, have you considered who the likely users of the financial report are, and their areas of greatest interest?
• What aspects of the financial statements are most at risk of material misstatement and how are they being managed?
• Are the accounting systems (including key financial internal controls) adequate, appropriate and operating effectively?
• Were there any issues raised by the auditors during the year, including deficiencies in internal control, that may impact on the preparation of the financial statements? Do any of these issues remain unresolved at year end?
• Have all significant or unusual movements between balances that were reported in the current year, and those reported in the prior year, been adequately explained and supported by management?
• Are the financial statements presented in a way that is easy to read and understandable by potential users of the financial report?
• Have the auditors requested any adjustments to the financial statements? If the requested adjustments remain unadjusted, has agreement been reached with the auditors that these do not have a material impact on the financial statements?

Selection and application of key accounting policies:

• Are the accounting policies adopted by management appropriate and compliant with the applicable accounting framework?  
• Are the accounting policies consistent with those adopted in the prior year and, if so, is management still comfortable that the policies remain appropriate in the current circumstances?
• If accounting policies were changed in the current year, was management able to appropriately explain/justify to the committee the change in accounting policy, including consideration of alternate policies available?
• Has management adequately explained to the committee the impact of any changes in accounting policies or accounting requirements on the financial statements?
• Are the significant accounting policies adopted by management, including changes to the policies adopted in the prior year, adequately described and reflected in the financial statements prepared by management?
• Are any changes to the amounts reported in the prior year audited financial statements included in the current year statements for comparative purposes? If so, what is the basis for the change (for example, correction of prior period error, restatement due to a change in an accounting policy or other reclassification). Has the change been appropriately disclosed?

Significant transactions and events including accounting estimates:

• Is management satisfied that it’s taken all reasonable steps to ensure the financial statements completely and accurately reflect all material transactions and balances of the entity, including events occurring post balance date?
• What steps has management taken to ensure that all related parties and related party transactions were identified and assessed? And that appropriate related party disclosures have been included in the financial statements?
• Have the significant transactions and events impacting on the entity, of which the committee is aware, been completely, accurately and appropriately disclosed in the financial statements?
• Have all material balances involving significant estimation or management judgements been identified and supported by management. This includes assessing the validity and appropriateness of all key inputs and the sensitivity of the balances to changes in the inputs.

Valuation of assets:

• Has management adopted appropriate methodologies for valuing the entity’s material assets?
• Has there been any significant changes in the methodologies adopted for valuing assets in the current year? If so, what impact have the changes had on the asset values?
• Have the key inputs or assumptions used to value the assets been clearly identified? Have these significantly changed? How sensitive are the values to changes in the key inputs and assumptions?
• To what extent has management relied on the advice of experts in determining the value of the assets? Where experts have been engaged by management, how has management assured themselves of the appropriateness of the values provided by the experts?
• Has management performed an appropriate assessment of whether the asset values may be impaired?
• Has management performed an appropriate review of asset useful lives and depreciation methodologies during the year?

Oversight of the financial reporting process is most effective where the committee considers the above matters progressively during the year, rather than as part of a final review of the financial statements.

Additional guidance on the types of questions audit committees may ask or consider in reviewing financial statements is available in Queensland Treasury’s Audit Committee Toolkit.

Ultimately, in reviewing the financial statements, audit committee members should ask themselves whether the statements provide:

• a complete and fair representation of the entity’s significant events, transactions and balances based on their own knowledge obtained as a member of the audit committee
• useful information that will help a reader understand the entity and its operations for the financial year.