The New CFO Financial Leadership Manual, Second Edition

Chapter 7. Audit Function

The audit function is crucial for ensuring the integrity of a company’s financial systems, which includes not only its financial results but also the control systems and code of ethics that are the cornerstones of an accurate financial reporting system. The CFO plays a major role in the audit function, given the position’s ability to allocate resources to or from audits as well as to influence the annual internal audit plan. However, the key player in this area is the audit committee, which is comprised of independent directors who report directly to the Board of Directors. This committee is described in the next section.

Composition of the Audit Committee

The audit committee should be a standing committee of the Board of Directors, and should be comprised primarily of nonofficer directors. These directors should not be involved in the management of the company, nor have previously been its officers. These restrictions are intended to create the most independent overview environment possible for the committee.

The committee is generally comprised of between three and five members, not all of whom must have an accounting, auditing, or finance background. It can be more useful to have some directors with a solid operational knowledge of the industry in which the company operates; these people can spot potential control weaknesses, based on their knowledge of how transactions flow in an industry-specific environment. Nonetheless, at least one committee member ...