assessment of audit committee - kpmgcommunications.kpmg.co.za/acf/acf alert 12.pdf · assessment of...

Audit Committee ForumTM

Alert 12

Issue Date: May 2011

Assessment of audit committee

In association with

Assessment of audit committeeIssue date: May 2011

This assessment guide may be applied to various types of audit committee assessments. It need not be this detailed, and should be tailored for each specific entity’s needs according to the maturity of the audit committee.

The purpose of the assessment is to evaluate the effectiveness of the audit committee.

When completing the assessment, members of the audit committee and/or external parties will complete the assessment independently. For a detailed guide summarising key principles and practices (paragraphs in bold type indicate statutory requirements) relating to the principal components of the assessment refer to Annexure A. The audit committee chairman/company secretary will then collate the results and lead a discussion, focusing on those areas that clearly need improvement or where there is a significant variation in responses.

A self- assessment by the audit committee should be performed annually to establish whether the terms of reference have been met, with an independent facilitated assessment at least every three years.

The results of the audit committee assessment and any action plans arising from it should be reported to the board after discussion with the chairman of the board. The chairman of the board should also make his/her own assessment of the effectiveness of the audit committee’s performance on an annual basis.

Audit Committee ForumTM Alert 1

Principal components to be considered in the assessment of the effectiveness of the audit committee

1. Charter Evaluation

2. Composition

3. Training and Resources

4. Meetings

5. Combined Assurance

6. Risk Management Oversight

Audit Committee ForumTM Alert2

7. Internal Audit

8. External Audit

9. Accounting, Financial Statements and Integrated Reporting

10. Finance Function

11. Regulatory Reporting

12. Reporting

13. General

Consider the overall effectiveness of the audit committee


Audit Committee ForumTM Alert

Annexure A: Audit Committee Assessment Guide

The assessment guide summarises key principles and practices and is provided for your use in assessing your audit committee’s performance. You may find it useful to rate the extent to which your committee complies with each statement, on a scale where 1=Strongly Disagree and 5=Strongly Agree. If the practice is not being followed or if the rating is below what you consider acceptable, space is provided to note steps the committee should take to raise its performance.

# Key principles and practices of an effective audit committee Yes/No Scoring (1-5)Comment reference for “No” answers

Follow-up steps necessary

1. Charter Evaluation

The audit committee has:

1.1 Adequate terms of reference approved by the board, which include:• Constitution• Function• Membership• Duties• Meetings and procedures• Reporting• Authority

1.2 Reviewed the terms of reference annually and recommended any necessary changes to the board

1.3 Carried out all its responsibilities outlined in its terms of reference

1.4 Regularly evaluated the performance of the committee as a whole, as well as the performance of individual members’ and has taken decisive corrective action where necessary

2. Composition

The audit committee:

2.1 Consists of at least three independent non-executive directors

2.2 Is an appropriate size, bringing requisite knowledge, abilities and skills to the table in a group small enough to act cohesively

2.3 Does not have the chairman of the board serving as a member

2.4 Has a sufficiently independent voice in no way beholden to the Chairman or Chief Executive of the company, and is consistently ready to challenge the management team constructively

2.5 Collectively has an understanding of:• Integrated reporting, which includes financial reporting• Internal financial controls• External audit process• Internal audit process• Corporate law• Risk management• Sustainability issues• IT governance as it relates to financial reporting• Governance processes within the company• IFRS, SA GAAP, GRI guidelines and any other applicable

financial or sustainability reporting standards, regulations or guidelines

2.6 Collectively has an understanding of:• Integrated reporting, which includes financial reporting• Internal financial controls• External audit process• Internal audit process• Corporate law• Risk management• Sustainability issues• IT governance as it relates to financial reporting• Governance processes within the company• IFRS, SA GAAP, GRI guidelines and any other applicable financial

or sustainability reporting standards, regulations or guidelines and circumstances, as well as its industry

4

# Key principles and practices of an effective audit committee Yes/No Scoring (1-5) Comment reference for “No” answers


2. Composition (continued)

2.7 Members display attributes such as integrity, judgement, credibility, trustworthiness, intuition, industry knowledge, willingness to handle conflict actively, communication, decision-making and interpersonal skills

2.8 Ensure that any terms beyond nine years (e.g. three three-year terms) have been subject to a rigorous independence review by the board

3. Training and Resources


3.1 Collectively kept up to date with key developments affecting its required skills set

3.2 Ensured that the company secretary has set up an induction programme for new members of the committee

3.3 Ensured that there is a process in place for all members to be trained and updated on current financial developments and reporting requirements and other issues relevant to the company

3.4 Access to the services of the company secretary and staff

3.5 Funds available to undertake independent legal, accounting or other advice where necessary

4. Meetings


4.1 Held a sufficient number of meetings, scheduled at appropriate times to address its responsibilities

4.2 Allocated reasonable time for meetings to accomplish its agenda

4.3 Had regular attendance at meetings

4.4 Ensured that the right individuals attended as invitees, particularly those with meaningful input on agenda items

4.5 Met at least once a year with the external and internal auditors without management being present

4.6 Established meeting agendas and circulated background information through its chairman

4.7 Considered the need to meet either before and/or after each regular audit committee meeting in an in-committee session, without invitees being present

4.8 Ensured that minutes and other meeting documentation were accurate and distributed timeously

5. Combined Assurance


5.1 Monitored the appropriateness of the company’s combined assurance model and ensured that significant risks facing the company are adequately addressed

5.2 Monitored the relationship between the external assurance providers and the company

5.3 Considered the use of technology and related techniques to improve audit coverage and audit efficiency

6. Risk Management Oversight


6.1 Considered the audit committee’s role in developing and implementing a policy and plan for a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes within the company

6.2 Representation, preferably the audit committee chairman, on the risk committee

6.3 Obtained an understanding of, and had an adequate level of comfort regarding the company’s processes for identifying, managing and reporting on risk by, for example, liaison with the risk committee

6.4 Overseen financial risk management and controls

6.5 Evaluated the nature and extent of the formal documented review of internal financial controls performed by internal audit




6. Risk Management Oversight (continued)

6.6 Reviewed the items reported through arrangements made by the company to enable employees and outside whistleblowers to report in confidence their concerns about possible improprieties in matters of financial and sustainability reporting, or non-compliance with laws and regulations that may have a direct or indirect effect on integrated reporting

6.7 Ensured that management monitors compliance with the code of conduct and approves any amendments to the code of conduct as it applies to financial reporting

6.8 Addressed matters that may result in material misstatements in the integrated report due to fraud

6.9 Been satisfied with IT as it relates to financial reporting and the going concern assumption

6.10 In its review of the entity’s code of conduct, considered the ethical stance of the entity as demonstrated by the board and management

6.11 Obtained feedback from the Chief Risk Officer on any matters which potentially impact on or are related to the responsibilities of the committee

7. Internal Audit


7.1 Been responsible for the appointment, performance assessment and dismissal of the Chief Audit Executive

7.2 Approved the internal audit plan

7.3 Considered and recommended the internal audit charter for approval by the board

7.4 Overseen the appropriateness of the staffing, budgets and objectives of the internal audit function

7.5 Encouraged cooperation between external and internal audit, such that the committee optimises the combined assurance from these assurance providers

7.6 Ensured that the internal audit function is subjected to an independent quality review

7.7 Evaluated the performance of the internal audit function to ensure that the function is fulfilling its responsibility to assist and advise the audit committee and the board

7.8 Ensured that the internal audit function is independent and has the necessary resources, budget, standing and authority within the company to enable it to discharge its functions

7.9 Obtained feedback from internal audit at all audit committee meetings

7.10 Met with internal audit at least once per annum, separately from management

7.11 Reviewed arrangements made by the company to enable employees and outside whistleblowers to report, in confidence, their concerns about possible improprieties in matters of financial and sustainability reporting, or non-compliance with laws and regulations that may have a direct or indirect effect on integrated reporting

7.12 Been satisfied with the competence and independence of an outsourced internal audit provider

7.13 Adequately managed its relationship with the internal audit function, particularly the Chief Audit Executive

8. External Audit

The audit committee has

8.1 Nominated for appointment an independent registered auditor who in the opinion of the audit committee is independent of the company

8.2 Ensured that the auditor has the necessary qualifications, expertise and resources, and is registered with the JSE (for listed companies)

8.3 Reviewed, monitored and reported on the external auditor’s independence and objectivity and considered audit partner rotation

8.4 Assessed the quality and effectiveness of the audit process

8.5 Determined the fees to be paid to the external auditor and the auditor’s terms of engagement

8.6 Ensured that the appointment of the auditor complies with the Companies Act and other legislation relating to the appointment of auditors




8. External Audit (continued)

8.7 Determined the nature and extent of any non-audit services which the auditor may provide to the company, or that the auditor must not provide to the company, or a related company

8.8 Pre-approved all contracts with the external auditor for non-audit services to the company

8.9 Received notice of all reportable irregularities and reviewed disclosure

8.10 Addressed any disagreement on auditing or accounting matters between management and the external auditors

8.11 Met separately with external audit (without management being present) where necessary, at least once a year

8.12 Reviewed representation letters issued by management and addressed any difficulties encountered

8.13 Reviewed the scope of the audit function and annual audit plan

8.14 Reviewed the external auditor’s annual opinion and management letters and management’s response thereto

8.15 Adequately managed its relationship with external audit

9. Accounting, Financial Statements And Integrated Reporting


9.1 Received and dealt appropriately with any concerns or complaints, whether from within or outside the company, or on its own initiative, relating to:• The accounting practices and internal audit of the company• The content or auditing of the company’s financial statements• The internal financial controls of the company• Any related matter

9.2 Made submissions to the board on any matter concerning the company’s accounting policies, financial control, records and reporting

9.3 Obtained explanations from management on the accounting of significant or unusual transactions and has considered the views of external audit

9.4 Considered all the factors that may have resulted in management presenting an incomplete or misleading picture of the company’s position, performance or sustainability

9.5 Evaluated significant judgements and reporting decisions affecting the integrated report made by management, including changes in accounting policies, decisions requiring a major element of judgement and the clarity and completeness of the proposed financial and sustainability disclosures

9.6 Understood how the board and external auditor evaluated materiality for integrated reporting purposes

9.7 Considered any regulatory, monitoring or enforcement actions against the company

9.8 Considered any evidence that came to its attention that brought into question any previously published financial or sustainability information, including complaints about this information. Where necessary, has taken steps to recommend that the company publicly correct the previously published information if it was materially incorrect

9.9 Reviewed forward-looking statements of financial or sustainability information to ensure that the information provides a proper appreciation of the key drivers that will enable the company to achieve these forward-looking goals

9.10 Reviewed all annual financial statements, interim reports, preliminary or provisional result announcements, summarised integrated information, any other intended release of price-sensitive financial information and prospectuses, trading statements, circulars and similar documents

9.11 Reviewed a documented assessment prepared by management of the going concern status of the company

9.12 Assisted the board in approving the disclosure of sustainability issues in the integrated report by ensuring that the information is reliable and that no conflicts or differences arise when compared with the financial results

9.13 Recommended to the board to engage an external assurance provider to provide assurance over material elements of the sustainability part of the integrated report and evaluate the independence and credentials of the external assurance provider

9.14 Considered and recommended to the board whether an external auditor should perform assurance procedures on interim results


# Key principles and practices of an effective audit committee Yes/No Scoring (1-5)Comment reference for “No” answers


9. Accounting, Financial Statements And Integrated Reporting (continued)

9.15 Reviewed the results of assurance procedures over interim results

9.16 Engaged the external auditors to provide an assurance report on summarised financial information, confirming that the summarised financial information is appropriately derived from the financial statements

9.17 Considered the financial reporting requirements applicable to regulatory industries

10. Finance Function

The audit committee has

10.1 Considered and satisfied itself with the appropriateness of the expertise and adequacy of resources of the finance function and experience of the senior members of management responsible for the financial function

10.2 For listed entities, evaluated the suitability of the expertise and experience of the finance director and recommended to the board if any changes are necessary

10.3 Maintained a good relationship with the FD/CFO

11. Regulatory Reporting


11.1 Reviewed and satisfied itself with all taxation related matters

11.2 Reviewed and approved the annual return submitted to the JSE by the company secretary

11.3 Considered legal and regulatory requirements to the extent that they may have an impact on the integrated report

11.4 Met with regulators when required

11.5 Liaised with the compliance function where necessary

12. Reporting


12.1 Liaised with other board committees where necessary

12.2 Maintained a constructive relationship with management, with open lines of communication and ongoing dialogue

12.3 Has prepared a report to the shareholders that includes all the required information

12.4 Chairman attended the AGM and answered questions on matters within the committee’s scope

13. General


13.1 Liaised with other board committees where necessary

13.2 Maintained a constructive relationship with management, with open lines of communication and ongoing dialogue

13.3 Considered whether there are emerging issues that will demand its attention going forward, and is proactive in positioning itself to deal with them

13.4 Consulted with specialists where necessary


Notes:


Audit Committee ForumTM Alert

Contact Details:

Thingle PatherDirectorTel: +27 (0)11 647 5037Email: [email protected]

Reney JonesManagerTel: +27 (0)11 647 8365Email: [email protected]

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