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The audit committee is a body formed by a company's board of directors to oversee audit operations and circumstances and which is responsible for the overall management of the auditing process and the auditors. The audit committee assists the board of directors in overseeing the integrity of the company’s financial statements and also may be involved with legal and regulatory compliance, including the internal audit function. The board of directors appoints the audit committee. The audit committee also recommends whether shareholders should approve the choice of an independent auditor. The corporate audit committee is the liaison between the company's management, the board of directors, internal and external auditors, and any other accounting experts advising the company on audit issues. An audit committee is composed of subgroups from the corporation's board of directors. Members of the audit committee must be independent, which means they have no ties to the company's management team.
In view of the complexity of the modern corporation and the increased demands for corporate accountability, the audit committee’s role has become an increasingly important consideration in the conduct of corporate affairs. As defined by the American Institute of Certified Public Accountants, “an audit committee should be organized as a standing committee of the board composed mainly of non officer directors”.
A key element in the corporate governance process of any organization is its audit committee. The battle for financial statement integrity and reliability depends on balancing the pressures of multiple stakeholders, including management, regulators, investors and the public interest. Guidance and tools are presented to make audit committee best practices actionable. In a publicly-held company, an audit committee is an operating committee of the board of directors, typically charged with oversight of financial reporting and disclosure. Committee members are drawn from members of the company's board of directors, with a chairperson selected from among the members. An audit committee of a publicly-traded company in the United States is composed of independent and outside directors referred to as non-executive directors, at least one of which must be a financial expert. Audit committees are typically empowered to acquire the consulting resources and expertise deemed necessary to perform their responsibilities. Many audit committees also have oversight of regulatory compliance and risk management activities. Not for profit entities may also have an audit committee.
The five most relevant audit committee characteristics are:
• audit committee independence
• financial expertise
• audit committee size
• frequency of audit committee meetings
• cost of capital.