{"id":32724,"date":"2025-12-10T06:07:20","date_gmt":"2025-12-10T06:07:20","guid":{"rendered":"https:\/\/msadvisory.com\/?p=32724"},"modified":"2026-04-20T11:34:43","modified_gmt":"2026-04-20T11:34:43","slug":"audit-committee","status":"publish","type":"post","link":"https:\/\/msadvisory.com\/audit-committee\/","title":{"rendered":"What Is the Role of an Audit Committee?"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"32724\" class=\"elementor elementor-32724\" data-elementor-post-type=\"post\">\n\t\t\t\t<div class=\"elementor-element elementor-element-03a2dbe e-flex e-con-boxed e-con e-parent\" data-id=\"03a2dbe\" data-element_type=\"container\" data-e-type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-ed6b357 key-takeaways elementor-widget elementor-widget-text-editor\" data-id=\"ed6b357\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<h3>Key Takeaways<\/h3><ul><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">An audit committee is made up of independent board members.<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">The committee\u2019s role is to oversee financial reporting and auditing.<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Regulatory bodies can dictate who can sit on a committee.<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Audit committees must sign off on quarterly and annual reports<\/span><\/li><\/ul>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-9ba8f87 elementor-widget elementor-widget-text-editor\" data-id=\"9ba8f87\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<p>Setting up an audit committee ensures that a company has checks and balances in place for monitoring financial reporting and the general financial well-being of the company.\u00a0<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a929334 elementor-widget elementor-widget-text-editor\" data-id=\"a929334\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<h2><span style=\"font-weight: 400\">W<\/span>hat is an Audit Committee?<\/h2><p><span style=\"font-weight: 400\">One of the <a href=\"https:\/\/msadvisory.com\/directors-duties\/\">responsibilities<\/a> of a company\u2019s board of directors is to form an audit committee. This operating committee is tasked with overseeing the company\u2019s financial reporting and auditing processes. The committee works closely with both internal and independent auditors to ensure that the company\u2019s financial disclosure is correct and of a high enough quality (See <a href=\"https:\/\/corporatefinanceinstitute.com\/resources\/accounting\/audit-committee\/?\" target=\"_blank\" rel=\"noopener\">Corporate Finance Institute<\/a>). It also assesses the adequacy of the company\u2019s internal controls and the efficacy of the risk management plan.<\/span><\/p><p><span style=\"font-weight: 400\">In many countries, an audit committee is mandatory for every publicly traded company. A stock exchange or an oversight body may mandate the composition, roles, and responsibilities of these committees. In the US, the <\/span><a href=\"https:\/\/www.sec.gov\/rules-regulations\/2003\/04\/standards-relating-listed-company-audit-committees#audit\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">Securities and Exchange Commission (SEC)<\/span><\/a><span style=\"font-weight: 400\"> has issued a rule on the <strong>Standards Relating to Listed Company Audit Committees<\/strong> (See <a href=\"http:\/\/U.S. Securities and Exchange Commission\" data-wplink-url-error=\"true\">U.S. Securities and Exchange Commission<\/a>). Committees must have at least three members and should be composed of independent directors (not staff or officers of the company). At <a href=\"https:\/\/msadvisory.com\/service\/accounting-tax-filing\/accounting-in-china\/\">least one should be a financial expert<\/a>, preferably a certified public accountant (CPA). The SEC states that committee members cannot be paid for their roles on the committee but only compensated for being directors. Committee members must also be unaffiliated with the company, meaning they have no control over or ownership of the company.\u00a0<\/span><\/p><p>While unlisted and smaller companies don&#8217;t necessarily need a CPA or equivalent, a properly constituted audit committee is still good practice.\u00a0<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-99ef31a elementor-position-left elementor-vertical-align-middle elementor-position-top speak-expert-new elementor-widget elementor-widget-image-box\" data-id=\"99ef31a\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"image-box.default\">\n\t\t\t\t\t<div class=\"elementor-image-box-wrapper\"><figure class=\"elementor-image-box-img\"><a href=\"https:\/\/msadvisory.com\/contact\/\" tabindex=\"-1\"><img fetchpriority=\"high\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/msadvisory.com\/wp-content\/uploads\/2024\/03\/shanghai-china.jpeg\" class=\"attachment-full size-full wp-image-21671\" alt=\"Shanghai China\" srcset=\"https:\/\/msadvisory.com\/wp-content\/uploads\/2024\/03\/shanghai-china.jpeg 1024w, https:\/\/msadvisory.com\/wp-content\/uploads\/2024\/03\/shanghai-china-300x169.jpeg 300w, https:\/\/msadvisory.com\/wp-content\/uploads\/2024\/03\/shanghai-china-768x432.jpeg 768w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure><div class=\"elementor-image-box-content\"><div class=\"elementor-image-box-title\"><a href=\"https:\/\/msadvisory.com\/contact\/\">Need help establishing a compliant Audit Committee for your China subsidiary or regional entity?<\/a><\/div><p class=\"elementor-image-box-description\">MSA guides you through board composition, compliance requirements, and governance setup - ensuring you meet international and local standards\n<span>Message &nbsp;\u2192<\/span><\/p><\/div><\/div>\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-732d433 elementor-widget elementor-widget-text-editor\" data-id=\"732d433\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<h2><strong>Re<\/strong>sponsibilities of the Audit Committee<\/h2><p><span style=\"font-weight: 400\">Audit committees play a crucial role in monitoring the operations of corporations. The responsibilities of an audit committee include:<\/span><\/p><ul><li style=\"font-weight: 400\"><b>Oversight of financial reporting:<\/b><span style=\"font-weight: 400\"> The audit committee must oversee the company\u2019s accounting and financial reporting processes, including internal auditing, disclosure controls, and external audits of consolidated financial statements. This includes helping to define critical accounting policies, reviewing quarterly and annual financial statements, creating proxy reports, and assessing the adequacy and effectiveness of internal controls.<\/span><\/li><\/ul><ul><li style=\"font-weight: 400\"><b>Risk management:<\/b><span style=\"font-weight: 400\"> The committee is responsible for identifying risks related to financial reporting, strategies, taxes, accounting, disclosure, and credit and liquidity. It also considers exposures related to data privacy, competition, regulatory compliance, operations, and business continuity. It assesses these risks and makes recommendations for their mitigation or minimization, then audits these mitigation efforts regularly.<\/span><\/li><\/ul><ul><li style=\"font-weight: 400\"><b>Engagement of a public accounting firm:<\/b><span style=\"font-weight: 400\"> Another main responsibility of the committee is to engage and pay an independent public accounting firm to audit the company. This accounting firm will report to the auditing committee overseeing its work while ensuring its independence and lack of any conflict of interest.<\/span><\/li><\/ul><ul><li style=\"font-weight: 400\"><b>Receipt and management of complaints:<\/b><span style=\"font-weight: 400\"> An audit committee should be able to put into place procedures for collecting and reacting to complaints or observations relating to accounting, controls, and auditing procedures. It should specifically implement procedures for reports or \u201cwhistleblowing\u201d by the company\u2019s employees. The committee should consider these submissions while also protecting the submitter\u2019s confidentiality\u00a0<\/span><\/li><\/ul><ul><li style=\"font-weight: 400\"><b>Engagement of advisors:<\/b><span style=\"font-weight: 400\"> The committee doesn\u2019t have to perform all of these functions by itself. An audit committee should have the power to engage legal counsel and other advisors as needed and should have access to a budget to do so.<\/span><\/li><\/ul>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-852b489 elementor-widget elementor-widget-text-editor\" data-id=\"852b489\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<table border=\"1\" cellpadding=\"8\" cellspacing=\"0\" width=\"100%\">\n  <thead>\n    <tr>\n      <th>Function \/ Area<\/th>\n      <th>Primary Responsibilities<\/th>\n      <th>Why It Matters<\/th>\n    <\/tr>\n  <\/thead>\n  <tbody>\n    <tr>\n      <td><strong>Financial Reporting Oversight<\/strong><\/td>\n      <td>Review quarterly &amp; annual financial statements; assess accounting policies and judgments.<\/td>\n      <td>Ensures accuracy and reliability of financial disclosures to investors and stakeholders.<\/td>\n    <\/tr>\n    <tr>\n      <td><strong>Internal Controls &amp; Risk Management<\/strong><\/td>\n      <td>Monitor internal audit function; assess internal control systems; evaluate business risk exposures.<\/td>\n      <td>Reduces risk of fraud, misstatements, and compliance breaches \u2014 supports long-term stability.<\/td>\n    <\/tr>\n    <tr>\n      <td><strong>External Auditor Oversight<\/strong><\/td>\n      <td>Select, compensate, and oversee independent external auditors; pre-approve audit and non-audit services.<\/td>\n      <td>Maintains auditor independence and objectivity; prevents conflicts of interest and ensures audit quality.<\/td>\n    <\/tr>\n    <tr>\n      <td><strong>Compliance &amp; Regulatory Reporting<\/strong><\/td>\n      <td>Ensure compliance with laws, regulations, and listing standards; manage disclosures and whistleblower mechanisms.<\/td>\n      <td>Helps avoid legal\/regulatory penalties and preserves corporate reputation and investor trust.<\/td>\n    <\/tr>\n    <tr>\n      <td><strong>Whistleblower &amp; Ethics Oversight<\/strong><\/td>\n      <td>Establish procedures for complaints or irregularities; oversee investigations and confidentiality protections.<\/td>\n      <td>Provides internal checks and accountability \u2014 critical for governance and ethical conduct.<\/td>\n    <\/tr>\n  <\/tbody>\n<\/table>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-6fe807b elementor-widget elementor-widget-text-editor\" data-id=\"6fe807b\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<h2>Challenges Faced by Audit Committees<\/h2><p><span style=\"font-weight: 400\">Audit committees face a difficult assignment. They\u2019re responsible for ensuring healthy, transparent, and compliant financial reporting and disclosure. They also need to oversee the assessment and management of financial risks. In this capacity, they face many challenges, including:<\/span><\/p><ul><li style=\"font-weight: 400\"><b>Managing conflicts of interest:<\/b><span style=\"font-weight: 400\"> Committee members have to avoid having any conflicts of interest which may interfere with their roles. This generally means they have to ensure their own independence and lack of association with the company. They must also ensure that the outside auditors they engage are truly independent and also not associated with the company. They must have no financial links other than being hired to provide auditing services.<\/span><\/li><\/ul><ul><li style=\"font-weight: 400\"><b>Regulatory compliance:<\/b><span style=\"font-weight: 400\"> Audit committees are regulated by stock exchanges and oversight bodies. Members must comply with the rules set out by the bodies that lay out conditions for their committee membership (independence, financial expertise, etc.). More importantly, they need to ensure that their accounting and reporting practices conform to those laid out by regulating bodies. When rules change, they must also be aware, react to them, and recommend operational changes to ensure constant compliance. When operating internationally, this will be an exercise in <a href=\"https:\/\/msadvisory.com\/what-is-global-compliance\/\">global compliance<\/a>.\u00a0<\/span><\/li><\/ul><ul><li style=\"font-weight: 400\"><b>Tone at the top:<\/b><span style=\"font-weight: 400\"> The committee also oversees ethics and compliance. As part of this oversight, it helps to set an example of ethical behavior and resist the potential for management to override controls.<\/span><\/li><\/ul><h2>Best Practices for Effective Audit Committees<\/h2><p><span style=\"font-weight: 400\">Effective audit committees should be composed of independent directors with adequate financial expertise. Members should demonstrate high levels of integrity and organizational skills. They should also be professionally skeptical and willing to put time and effort into deeply investigating risks and operations. They should also foster cultures of compliance both by leading by example and enforcing disciplinary actions for violations.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-3725b96 elementor-widget elementor-widget-text-editor\" data-id=\"3725b96\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<h2>Establishing Audit Committees<\/h2><p><span style=\"font-weight: 400\">Audit committees are usually mandatory for publicly traded companies, depending on the jurisdiction. For unlisted companies they are usually not mandatory, but can still constitute part of good corporate governance. They monitor and assess risks while ensuring the accuracy of companies\u2019 accounting and financial statements. Their due diligence and expertise help companies avoid accounting issues and build trust with investors.<\/span><\/p><p>For advice on committee set up and other corporate governance issues, <a href=\"https:\/\/msadvisory.com\/contact\/\">get in touch<\/a> with <strong>MSA&#8217;s company establishment experts<\/strong>.\u00a0<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-d39582d elementor-widget elementor-widget-text-editor\" data-id=\"d39582d\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t\t\t\t\t\t<p>Audit committees oversee financial reporting, internal controls, and risk management, making committee structure and expertise critical for corporate governance and stakeholder confidence. MSA Asia&#8217;s <a href=\"https:\/\/msadvisory.com\/service\/accounting-tax-filing\/assurance\/statutory-audit-china\/\">statutory audit in China<\/a> expertise includes audit committee guidance. <a href=\"https:\/\/msadvisory.com\/contact\/\">Reach out to our experts<\/a> on governance.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Key Takeaways An audit committee is made up of independent board members. The committee\u2019s role is to oversee financial reporting and auditing. Regulatory bodies can dictate who can sit on a committee. Audit committees must sign off on quarterly and annual reports Setting up an audit committee ensures that a company has checks and balances [&hellip;]<\/p>\n","protected":false},"author":20,"featured_media":32757,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"iawp_total_views":206,"footnotes":""},"categories":[93],"tags":[],"class_list":["post-32724","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/posts\/32724","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/comments?post=32724"}],"version-history":[{"count":10,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/posts\/32724\/revisions"}],"predecessor-version":[{"id":47274,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/posts\/32724\/revisions\/47274"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/media\/32757"}],"wp:attachment":[{"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/media?parent=32724"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/categories?post=32724"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/msadvisory.com\/wp-json\/wp\/v2\/tags?post=32724"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}