Creating an Audit Committee Terms of Reference (UK)

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Also note: This is not legal advice.

Introduction

Having a comprehensive set of Terms of Reference (TOR) in place for an Audit Committee is essential for its effectiveness. These TOR provide a framework for the Audit Committee to act within, ensuring it has the necessary authority and autonomy to effectively carry out its duties. This includes overseeing financial reporting processes and monitoring risk management protocols, but also provides a safeguard for the organisation against any legal or regulatory risks by setting out clear expectations both for the committee and its members.

The TOR should outline details such as how many members are required, what qualifications they must have and what roles they must perform. In addition to this advice on training requirements, meeting schedules and reporting obligations should also be provided to ensure that they have all the resources they need to deliver their duties correctly.

Moreover, having detailed TOR in place helps ensure that Audit Committees are properly aligned with the organisation’s overall goals and objectives; this will help protect the financial integrity of said organisation by making sure all activities meet strategic objectives while keeping them compliant with applicable laws too.

At Genie AI we understand just how important having a robust set of Terms of Reference is for an Audit Committee’s effectiveness which is why our team has created millions of datapoints showing what market-standard terms look like as well as offering guidance on how best to customise these documents if need be - with no lawyer fees required! Our free template library provides everything needed to draft effective ToR quickly saving you time and money whilst providing peace of mind that your committee will be suitably resourced with reliable information at hand.
To learn more about our step-by-step guidance or discover how you can access our library today, read on below!

Definitions (feel free to skip)

Audit Committee: A committee of the board of directors of a company or other organization responsible for overseeing financial reporting and disclosure.

External Audit: An independent evaluation of a company’s financial records to ensure accuracy and compliance with regulations.

Internal Controls: A set of procedures used by an organization to ensure the accuracy and integrity of its financial statements.

Financial Statements: Documents that report a company’s financial performance, such as income statements and balance sheets.

Qualified Accountant: A professional accountant who has passed a series of examinations and has met certain experience and education requirements.

Financial Analyst: A professional who evaluates investments and provides advice and recommendations to their clients.

Terms of Reference: A document that outlines the purpose, roles, responsibilities, and processes for a particular purpose or organization.

Minutes Book: A written record of the decisions and proceedings of a meeting.

Stakeholders: Individuals or organizations that have an interest in the activities or performance of a company.

Legal Requirements: Rules and regulations set by a governing body that must be followed by an organization.

Professional Standards: Principles and guidelines set by a professional body that members of a profession must follow.

Scope: The range of activities or items that falls under a particular purpose or organization.

Contents

• Establishing an Audit Committee
• What is an Audit Committee?
• Who should be part of an Audit Committee?
• What are the roles and responsibilities of an Audit Committee?
• What are the objectives of an Audit Committee?
• Documenting an Audit Committee
• What should be included in an Audit Committee Terms of Reference?
• How should Audit Committee decisions be documented?
• How should an Audit Committee report to stakeholders?
• Implementing an Audit Committee
• What is the process for setting up an Audit Committee?
• What are the legal requirements for an Audit Committee?
• What are the key considerations when establishing an Audit Committee?
• How should an Audit Committee be monitored and reviewed?

Get started

Establishing an Audit Committee

• Decide who will make up the Audit Committee and ensure they have the necessary skills and experience
• Establish the size, purpose and responsibilities of the Audit Committee
• Draft the Terms of Reference for the Audit Committee
• Ensure the Terms of Reference are approved by the Board of Directors
• Publish the Terms of Reference

You will know you can check off this step when the Terms of Reference have been approved and published.

What is an Audit Committee?

• Understand the function and purpose of an Audit Committee
• Research and review UK regulation and guidance on Audit Committees
• Read up on the roles and responsibilities of members of an Audit Committee
• When you have a good understanding of the purpose and scope of an Audit Committee, you can move on to the next step.

Who should be part of an Audit Committee?

• Identify the required members of the Audit Committee.
• An Audit Committee should be made up of at least three independent non-executive directors and/or external members who have the appropriate skills and experience relevant to the company.
• The Chairman of the Committee should be an independent non-executive director, and the other members should also have appropriate qualifications and experience in accounting, finance, corporate governance, internal control and risk management.
• The Committee should also include representatives from the management, such as the Chief Financial Officer, Chief Internal Auditor and Chief Risk Officer.
• All members should have sufficient time to dedicate to the Committee and should be able to understand the financial statements, internal control systems and risk management processes of the company.

You will know when you can check this off your list and move on to the next step when all the appropriate members of the Audit Committee have been identified.

What are the roles and responsibilities of an Audit Committee?

• Understand and review the organization’s financial reporting process
• Ensure the effectiveness of internal control systems
• Review the annual and interim financial statements
• Ensure the organization is compliant with legal and regulatory requirements
• Appoint and oversee the external auditor
• Set the terms of reference of the external auditor
• Review the external auditor’s fees and independence
• Review the effectiveness of the external auditor
• Review the performance of the finance department
• Review any reports by the external auditor
• Ensure the organization has adequate risk management policies
• Review any significant financial transactions
• Evaluate the organization’s financial performance

When you can check this off your list and move on to the next step:

• Once you have reviewed and understood the roles and responsibilities of an Audit Committee, you can move on to the next step: what are the objectives of an Audit Committee?

What are the objectives of an Audit Committee?

• Understand the key objectives of an Audit Committee and ensure that the Terms of Reference clearly outline the purpose and scope of the Committee
• Review the effectiveness of the organisation’s internal control systems and procedures
• Monitor the internal financial reporting process
• Monitor and review the effectiveness of the external audit process
• Provide independent assurance to the Board on the organisation’s risk management systems
• Monitor the organisation’s compliance with relevant laws and regulations
• Review the organisation’s external financial reporting process

You will know you can check off this step and move on to the next step when you have a clear understanding of the key objectives of an Audit Committee and have outlined them in the Terms of Reference.

Documenting an Audit Committee

• Develop a framework for the Audit Committee’s role and responsibilities
• Draft the Terms of Reference for the Audit Committee
• Obtain approval of the Terms of Reference from the Board of Directors
• Ensure the Terms of Reference are kept up-to-date
• Distribute the approved Terms of Reference to Audit Committee members
• Provide guidance to the Audit Committee on their roles and responsibilities

When you have drafted the Terms of Reference for the Audit Committee, obtained approval from the Board of Directors, and distributed the document to committee members, you can check this step off your list and move on to the next step.

What should be included in an Audit Committee Terms of Reference?

• Outline the purpose and scope of the Audit Committee
• Set out the composition, size and selection criteria for Audit Committee members
• Define the authority of the Audit Committee
• Outline the duties and responsibilities of the Audit Committee
• Define the reporting and communication procedures for the Audit Committee
• Establish the meeting schedule for the Audit Committee
• Outline the process for dealing with conflicts of interest
• Set out the procedure for the selection and appointment of external auditors
• Outline the process to be followed in relation to the annual audit
• Define any other relevant terms or requirements

Once you have included all the necessary information in the Audit Committee Terms of Reference, you can check this step off your list and move on to the next step.

How should Audit Committee decisions be documented?

• Document all Audit Committee decisions in the form of a written resolution.
• Include the date, the decision being made, who proposed the decision, and who seconded the decision.
• Ensure a quorum of members is present in all Audit Committee meetings and decisions are made by majority vote.
• Record the decision in the minutes of the meeting and ensure that all members of the Audit Committee receive a copy of the minutes.

Once all of the above steps have been completed, you can move on to the next step, which is how to report to stakeholders.

How should an Audit Committee report to stakeholders?

• Ensure that the committee issues a formal report to stakeholders at least annually
• Ensure that the report outlines the committee’s responsibilities and its performance in discharging those responsibilities
• Include an overview of any significant issues that have arisen, and the actions taken to address them
• Summarise any other matters that the committee has considered over the course of the year
• Once the report is published, check it off your list and move on to the next step.

Implementing an Audit Committee

• Identify the members of the Audit Committee who have the appropriate skills and experience
• Obtain approval from the Board to appoint the Audit Committee members
• Prepare a Terms of Reference document for the Audit Committee
• Obtain approval from the Board for the Terms of Reference document
• Present the Terms of Reference document to the Audit Committee for agreement
• Agree and sign the Terms of Reference document

When you have identified the members of the Audit Committee, obtained approval from the Board to appoint them, prepared a Terms of Reference document, obtained approval from the Board for the document, and presented it to the Audit Committee for agreement and signing, you can move on to the next step.

What is the process for setting up an Audit Committee?

• Establish the size and composition of the Audit Committee: Decide the number of members and their respective roles and responsibilities. Consider the backgrounds and qualifications of the members, as well as their independence from the company.
• Draft the Terms of Reference: This document should outline the purpose, responsibilities, and reporting requirements of the Audit Committee. It should also include any other details relevant to the operation of the Audit Committee.
• Finalise the Terms of Reference: Ensure that the document is approved by the Board of Directors and that it is updated as needed to reflect changes in the law or the company’s business.

You will know that you can check this off your list and move on to the next step when the Terms of Reference have been approved by the Board of Directors.

What are the legal requirements for an Audit Committee?

• Check the Companies Act 2006 for any specific legal requirements for the Audit Committee.
• Check the company’s Articles of Association for any specific requirements for the Audit Committee.
• Check the UK Corporate Governance Code for any specific requirements for the Audit Committee.
• Ensure the Audit Committee is independent of the Board and any third parties, with the majority of members being independent.
• Ensure the Audit Committee has the power to investigate any matter within its terms of reference and the authority to access any information it requires.
• Consider whether the Audit Committee has the necessary skills and experience to carry out its role effectively.

When you have completed this step, you have reviewed the legal requirements for an Audit Committee and considered the necessary skills and experience required, and can move on to the next step.

What are the key considerations when establishing an Audit Committee?

• Understand the size and complexity of the organisation and the associated risks
• Think about the type of skills and experience needed from members of the Audit Committee
• Consider how best to structure the Audit Committee and decide what tasks it should take on
• Determine the objectives, duties and responsibilities of the Audit Committee
• Consider the experience, expertise and independence of the individual members of the Audit Committee
• Establish the reporting lines and communication protocols of the Audit Committee
• Establish a regular schedule for the Audit Committee meetings
• Establish the relevant terms of reference for the Audit Committee

Once you have considered these points, you will have determined what the key considerations are when establishing an Audit Committee and can move on to the next step.

How should an Audit Committee be monitored and reviewed?

• Monitor the effectiveness of the Audit Committee by performing a yearly evaluation of its performance.
• Consider the review of the committee’s performance by the external auditor.
• Review the committee’s composition on a regular basis to ensure it remains appropriate.
• Assess whether the committee’s Terms of Reference remain relevant and up-to-date.
• Review the processes and procedures used by the Audit Committee.
• Verify that the committee is adequately resourced to fulfil its duties.
• Review the committee’s performance against the expectations set out in its Terms of Reference.
• Check that the committee is fulfilling its obligations as set out in applicable legislation, regulations, codes of practice, and guidance.

Once you have completed the above steps, you can move on to the next step in creating an Audit Committee Terms of Reference (UK).

FAQ:

Q: Will an audit committee still be necessary in the UK after Brexit?

Asked by Mary on October 13th 2022.
A: Yes, an audit committee is still necessary in the UK after Brexit. This is because audit committees play an important role in providing oversight for financial reporting, ensuring accuracy and providing guidance for the internal control systems of a company. Audit committees are also important for maintaining good corporate governance and ensuring that the company complies with all applicable laws and regulations. In addition, audit committees help to ensure that the company’s financial statements are accurate and up to date. Therefore, an audit committee is still necessary in the UK after Brexit, even if the UK no longer has access to the EU’s regulatory framework.

Q: Are there any specific requirements for members of an audit committee?

Asked by Sarah on June 18th 2022.
A: Yes, there are specific requirements for members of an audit committee. In the UK, the Companies Act 2006 states that all members of an audit committee must have sufficient knowledge and experience in financial reporting and auditing to be able to provide adequate oversight of a company’s financial reporting process. In addition, members must also have knowledge and experience in related areas such as corporate governance, internal control systems and risk management. Furthermore, all members must be independent from the company’s management team and should have no business or financial relationship with the company or its management team.

Q: What are the responsibilities of an audit committee?

Asked by John on April 5th 2022.
A: The primary responsibility of an audit committee is to provide oversight for a company’s financial reporting process. This includes reviewing financial statements before they are released to shareholders, assessing whether accounting policies are being applied appropriately and monitoring internal control systems. In addition, audit committees are responsible for ensuring compliance with legal and regulatory requirements and providing guidance on risk management practices. Furthermore, audit committees can also provide input into strategic decisions regarding finance, accounting and corporate governance as well as review any proposed changes to accounting policies or procedures.

Q: How often should an audit committee meet?

Asked by David on March 14th 2022.
A: The frequency of meetings for an audit committee will depend on a number of factors such as the size of the company and its complexity. Generally speaking, most companies will hold regular meetings at least twice a year with additional meetings as required to review specific matters or make important decisions. It is important that meetings are held regularly so that issues can be addressed promptly and decisions can be made in a timely manner.

Q: Are there any specific skills that should be represented on an audit committee?

Asked by Michael on April 22nd 2022.
A: Yes, there are certain skills that should be represented on an audit committee to ensure that it can effectively carry out its responsibilities. These include expertise in accounting and auditing as well as knowledge of corporate governance and risk management practices. In addition, it is beneficial if members have experience dealing with legal or regulatory matters as well as knowledge of business operations and strategy. Finally, it is important that all members have strong communication skills to ensure clear dialogue between members and management teams.

Q: What type of information should be provided to members of an audit committee?

Asked by Matthew on August 12th 2022.
A: Members of an audit committee should be provided with all pertinent information relating to a company’s financial reporting process such as financial statements, internal control systems reports, risk management reports and legal compliance reports. In addition, they should also receive regular updates regarding changes in accounting policies or procedures as well as any new developments in corporate governance regulations or legislation that might affect the company’s operations. Finally, they should also receive regular updates from management teams regarding current performance trends or any potential issues that might require attention from the audit committee.

Q: How should conflicts of interest be managed within an audit committee?

Asked by Jessica on June 6th 2022.
A: Conflicts of interest should be managed within an audit committee by implementing clear rules regarding who can serve on the committee and what type of relationships they may have with the company or its management team. For example, all members should be independent from management teams and should not have any business or financial relationship with the company or its management team beyond what is necessary for them to carry out their duties effectively. Furthermore, potential conflicts of interest should be declared prior to any decisions being made and reviewed regularly so that any potential issues can be addressed promptly and appropriately.

Q: What happens if a member of the audit committee has a conflict of interest?

Asked by Joseph on September 3rd 2022.
A: If a member of the audit committee has a conflict of interest then they should immediately declare this conflict before any decisions are made or discussions take place relating to their area of expertise or responsibility within the company. Furthermore, this conflict should then be discussed openly within the meeting so that appropriate action can be taken in order to ensure that no decisions are made which may benefit one party over another or lead to a breach of fiduciary duties from any party involved in making decisions relating to the company’s finances or operations

Example dispute

Lawsuits Referencing Audit Committee Terms of Reference

• A plaintiff may raise a lawsuit against a company that references audit committee terms of reference if they can provide evidence that the company has breached one or more of the terms specified in the audit committee terms of reference.
• This could include evidence of the company failing to comply with regulations, laws, or standards set out in the terms of reference.
• The plaintiff must be able to prove that the company’s failure to comply caused them harm or damage in some way.
• If the plaintiff is successful in their lawsuit, they may be entitled to monetary compensation to cover their losses.
• This could include reimbursement for any financial losses they have incurred, as well as compensation for any emotional or psychological distress caused by the breach.
• The amount of damages awarded in a lawsuit will depend on the severity of the breach and the extent of the harm caused.

Templates available (free to use)

Audit Committee Terms Of Reference Aim Listed Company

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