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From The AICPA Audit Committee Toolkit.
Copyright © 2005 by the American Institute of Certified Public Accountants,
Inc., New York, New York.
| Purpose of This Tool. Audit committees should conduct a self-evaluation on an annual basis. This can be accomplished in a number of different evaluation formats and scenarios (through the use of outside evaluators, a 360-degree evaluation format, and other methods). The sample questions included in this tool are suggestions and intended to provide a starting point to evaluating the performance and effectiveness of the audit committee. Follow-up questions are encouraged, and the committee should plan for further action as appropriate.
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An audit committee should conduct a comprehensive self-evaluation on an annual
basis. The self-evaluation can take different forms, involve a number of participants,
and use diverse techniques. Most important, however, the self-evaluation should
adopt a straightforward approach that will aid the audit committee in assessing
its strengths and weaknesses and lay a foundation for future improvement. Some
guidelines in designing the format for self-evaluation would include the following
areas of consideration.
- Introspection. Be introspective. Evaluate the audit committee's
performance by asking specific questions about the impact it has had on the
organization, and most importantly, its financial reporting process, the
annual audit, the relationship with the independent auditor, and members
of management. Include the chair of the board in this evaluation session
and ask for his or her input as well.
- Comprehensive. Conduct 360-degree evaluations of all audit committee
members and the committee chair. A 360-degree evaluation is one that obtains
anonymous feedback from a large group of individuals representing various perspectives.
In this setting, each committee member would conduct a self-evaluation and
be evaluated by the other committee members, the board chair, chief audit executive,
chief financial officer, and executive director, and if appropriate, other
senior finance/accounting personnel. The board chair and the audit committee
chair should consider the result of the evaluations. They should decide whether
any members of the committee should be rotated off the committee and/or whether
the chair of the committee should be rotated. The members' attendance record
and level of participation should be considered during this process.
- Competency. Use tools that are available, including the AICPA Competency
Self-Assessment Tool (CAT) to evaluate performance. The CAT is available at
www.cpa2biz.com/CPEConferences/CAT.htm.
| Instructions for This Tool. The sample questions provided in this tool are only a starting point to evaluating the performance and effectiveness of the audit committee. Before completion, the committee should determine how it can best ensure that responses reflect a forthright exchange of ideas and opinions among audit committee members. The committee should determine how the process should be completed. The following sample questions can be completed anonymously, before attending an evaluation discussion meeting or during a session of the committee. Discuss the following questions and include notes and comments if you feel further action is appropriate.
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Audit Committee
Self-Evaluation Tool
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Comments
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1. Does the
audit committee have the appropriate number of members? We would suggest a minimum of three members. The
audit committee should not be so large that:
- Its ability to operate efficiently and effectively is reduced.
- Membersability to raise issues is hampered.
- It is difficult to get a quorum when a time-sensitive issue arises.
The audit committee should have a sufficient number of members to ensure needed skill sets and knowledge are represented on the committee. An independent nominating/governance committee or independent directors have responsibility for appointing audit committee members and selecting the chair.
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2. Do all members continue to be independent, as defined by policies applicable to the organization? In addition to meeting the technical definitions of independence, committee members demonstrate their objectivity during meetings, through behaviors such as driving agendas, rigorous probing of issues, consulting with other parties, and hiring experts, as necessary.
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3. Are differences of opinion on issues
resolved to the satisfaction of the committee?
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4. Do the members challenge the chair as
appropriate?
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5. Is the audit committee charter used as a
document to guide the committee in its efforts, and to help guide the
committees agenda? Is the audit committee charter matrix used to document
compliance with the precepts of the charter?
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6. Are the members financially literate and
has the audit committee determined that it has adequate financial expertise
in accordance with its charter? Examples of this could be through the
following:
(a)
The committee
has a full understanding of the composition of the organizations statement
of financial position, including the degree of management judgment inherent
in the various accounts.
(b)
The committee
understands which financial ratios and indicators are key to the organization
and industry, how the organizations performance compares with its budgetary
targets and its peers, and how management plans to address any unfavorable
variances.
(c)
The committee
discusses the initial selection of or changes in significant accounting
policies used in developing the financial statements, the reason for and
impact of any changes in policy, and reasons alternative treatments were not
adopted.
(d)
The committee
discusses significant, complex, or unusual transactions with management and
the external auditors.
(e)
The committee
understands which areas represent high risk for material misstatement of the
financial statements, and discusses assumptions and approaches used with
management and the external auditors.
(f)
The committee
forms its own view of the risk of material misstatement due to fraud,
discusses with management and the external auditors their views on the risk
of material misstatement due to fraud, and is comfortable that any
differences in views can be reconciled.
(g)
The committee
fully understands significant changes in financial statements from prior
years and from budget, and is provided with sufficient, reliable evidence to
support variances.
(h)
The committee
commits sufficient time to review, discuss, and consider the financial
statements.
(i)
The committee
meets with financial management to discuss results reported before finalization.
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7. Does
the committee engage outside experts as appropriate?
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8. Are the
organizations financial reporting processes stronger as a result of
managements interactions with the audit committee?
For example:
(a) The audit committee understands and agrees with
the board on which categories of internal control it oversees. Categories
include (from the COSO standards):
- Integrity of financial reporting
- Compliance with laws and regulations
- Operational efficiency and effectiveness
The committee and the board concur with any changes
to the committees internal control oversight mandate.
(b) The audit committee understands the current
high-risk areas including information technology and computer systems in
the categories of controls it oversees, as well as how management addresses
those areas.
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9. Is the
committee cognizant of the line between oversight and management, and does it
endeavor to respect that line?
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10. Does the committee conduct executive sessions in a manner that offers a safe haven to the individual, while at the same time asking tough and necessary questions, evaluating the answers, and pursuing issues that might arise to a satisfactory resolution?
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11. Do audit
committee members participate in some form of continuing education to stay
abreast of changes in the financial accounting and reporting, regulatory and
ethics areas?
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12. Does the
committee do its part to ensure the objectivity of the internal audit team?
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13. Does
the committee provide constructive feedback to the chief audit executive at
least annually?
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Follow-Up Questions
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Other Self-Evaluation Notes
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From The
AICPA Audit Committee Toolkit. Copyright ©
2005 by the American Institute of Certified Public Accountants, Inc., New
York, New York.
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