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Audit framework and regulationCorporate GovernanceAudit Committee

ACCA · Question 02 · Audit framework and regulation

CASE 1: NEXUSCLOUD LTD
NexusCloud Ltd is a rapidly growing SaaS (Software as a Service) technology startup. You are an audit manager at TechAudit LLP. NexusCloud is preparing for an IPO and has requested TechAudit to provide both the statutory audit and IT system design services for their new revenue recognition platform. The audit committee currently consists of the CEO, the CFO, and one independent non-executive director. The engagement partner has just rotated onto the audit after the previous partner served for 7 years.

Evaluate the current composition of NexusCloud's audit committee in the context of corporate governance best practices for a listed company.

Answer options:

A.

The composition is appropriate as the CEO and CFO provide necessary operational insight to the independent director.

B.

The composition is deficient; the audit committee should comprise at least three independent non-executive directors.

C.

The composition is appropriate provided the independent non-executive director acts as the Chairman of the committee.

D.

The composition is deficient; the audit committee must include a representative from the external audit firm.

How to approach this question

Recall the corporate governance requirements for audit committees, specifically regarding independence and the exclusion of executive directors.

Full Answer

B.The composition is deficient; the audit committee should comprise at least three independent non-executive directors.✓ Correct
Corporate governance principles require that the audit committee consists exclusively of independent non-executive directors. The inclusion of executive directors (CEO, CFO) compromises the committee's independence and its ability to objectively oversee the financial reporting process and the external audit.

Common mistakes

Confusing 'attendance' with 'membership'. Executives can attend by invitation, but cannot be members.
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