AAA – L3 – SA – Q1.2 – Audit Committee Advantages

Advantages of having an audit committee.

Question

Which of the following are potential advantages of having an audit committee?

1 Conflict between the auditor and the executive directors is reduced

2 Responsibility for internal control is given to independent non-executive directors and so becomes more effective

3 Costs of internal control and the external audit are reduced

4 It provides additional reassurance to shareholders about the reliability of the financial statements

A 1 and 4 only

B 2 and 3 only

C 1 and 3 only

D 2 and 4 only

Answer

Explanation:
The establishment of an audit committee will not necessarily lead to any cost reductions, so option 3 is incorrect. The audit committee is responsible for reviewing the effectiveness of internal control, but responsibility for internal control remains with the board as a whole and executive management (for implementation), making option 2 incorrect. However, conflict between the auditor and executive management might be reduced because their respective concerns can be referred to the committee, and by monitoring the independence of the external auditor, the audit committee should improve shareholders’ confidence in the reliability of the financial statements. Thus, options 1 and 4 are correct, making A the correct answer.

Tags: Audit committee, Auditor Independence, Corporate Governance, ICAG

Topic: The regulatory environment

Uploader: Salamat Hamid