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Audit and AssuranceSection ASyllabus Area ACorporate GovernanceAudit Committee

ACCA · Question 04 · Audit and Assurance

CASE 1: AQUAPURE UTILITIES CO

AquaPure Utilities Co is a listed water treatment company. Your firm, Stream & Co, has been the auditor for 6 years. The audit engagement partner, Sarah Jenkins, has been in place for the entire 6 years. AquaPure has requested Stream & Co to provide internal audit services regarding their new environmental compliance system. The Finance Director of AquaPure recently offered the audit team a weekend stay at a luxury spa resort owned by the company. AquaPure's audit committee consists of three executive directors and two independent non-executive directors.

QUESTION:
Evaluate the composition of AquaPure's audit committee against corporate governance best practices. Which of the following statements is correct?

Answer options:

A.

The composition is appropriate as there is a mix of executive and non-executive directors.

B.

The composition is deficient because an audit committee should consist entirely of independent non-executive directors.

C.

The composition is deficient because there must be at least five independent non-executive directors.

D.

The composition is appropriate because the executive directors have the necessary financial expertise.

How to approach this question

Recall the corporate governance requirements for audit committees. They exist to provide independent oversight, which means executives should not be members.

Full Answer

B.The composition is deficient because an audit committee should consist entirely of independent non-executive directors.✓ Correct
To ensure independence and effective oversight of the financial reporting process and external audit, corporate governance principles dictate that the audit committee should be made up entirely of independent non-executive directors. Executive directors should not be members, though they may attend meetings by invitation.

Common mistakes

Confusing the composition of the main Board of Directors (which should have a balance of executives and NEDs) with the Audit Committee (which must be 100% independent NEDs).
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