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16
Audit Committee Handbook - March 2007
1
CONTENTS
Page
Foreword
3
Chapter 1 Introduction
5
Chapter 2 Good practice principles for audit committees
7
Chapter 3 The role of the audit committee
9
Chapter 4
Membership, independence, objectivity and
understanding
11
Chapter 5 Skills
13
Chapter 6 Scope of work
15
Chapter 7 Communication
17
Annex A The role of the chair: good practice
19
Annex B Committee support: good practice
21
Annex C
Model letter of appointment of an audit
committee member
23
Annex D Model terms of reference for an audit committee
25
Annex E
Example core work programme for an audit
committee meeting four times a year
29
Annex F Key questions for an audit committee to ask
31
Annex G Audit committee competency framework
35
!UDIT#OMMITTEE(ANDBOOK-ARCH
&/2%7/2$
4HE CONSTITUTION AND ROLE OF !UDIT #OMMITTEES IN CENTRAL GOVERNMENT HAS
DEVELOPEDSIGNIFICANTLYINRECENTYEARS4HEREHASALSOBEENANONGOINGINITIATIVETO
EMBED EFFECTIVE RISK MANAGEMENT AT ALLLEVELSOFTHEMANAGEMENTOFGOVERNMENT
ORGANISATIONS WHICH INCREASES THE NEED FOR EXPLICIT ASSURANCE ABOUT RISK CONTROL
AND GOVERNANCE IN THE ORGANISATION #ONSEQUENTLY THE VALUE THAT !CCOUNTING
/FFICERSAND"OARDSPLACEONTHEWORKOF!UDIT#OMMITTEESHASINCREASED
4HIS EDITION OF THE !UDIT #OMMITTEE (ANDBOOK PROVIDES UPDATED GOOD PRACTICE
GUIDANCEWHICH
v SUPPORTS !UDIT #OMMITTEES AND IN TURN THEIR "OARDS IN ACHIEVING THE
PRINCIPLESANDPROVISIONS OF h#ORPORATEGOVERNANCE IN CENTRAL GOVERNMENT
DEPARTMENTS#ODEOF'OOD0RACTICEv
v REFLECTS THE INCREASING AVAILABILITY OF GOOD PRACTICE EXPERIENCE FOR !UDIT
#OMMITTEESINCENTRALGOVERNMENTAND
v REFLECTS THE INCREASING SIGNIFICANCE OF RISK MANAGEMENT AND ASSOCIATED
ASSURANCENEEDSINTHEGOVERNANCEOFGOVERNMENTORGANISATIONS
4HE GUIDANCE IN THIS HANDBOOK SETS OUT FIVE FUNDAMENTAL PRINCIPLES WITH
EXPLANATORYGOODPRACTICENOTES)TSHOULDHELPWITHREVIEWOFTHEAPPROPRIATENESS
AND FITNESS FOR PURPOSE OF THE CONSTITUTION MEMBERSHIP AND ACTIVITY OF ANY
PARTICULAR!UDIT#OMMITTEE
4HECONTENT OFTHE (ANDBOOKHASBEENDEVELOPEDWITHTHE HELPANDSUPPORTOFA
WIDERANGEOFSTAKEHOLDERS(-4REASURYISINDEBTEDTOTHOSEWHOHAVEHELPEDWITH
THIS REVISION AND CONFIDENT THAT THEIR ASSISTANCE HAS HELPED PROVIDE A (ANDBOOK
THAT PROMOTES CHALLENGING BUT ACHIEVABLE GOOD PRACTICE WHICH WILL SUPPORT THE
CONTINUINGQUESTTOIMPROVERISKMANAGEMENTINTERNALCONTROLANDGOVERNANCEIN
GOVERNMENT
-ARY+EEGAN
(EADOF'OVERNMENT&INANCE0ROFESSION
(-4REASURY
Audit Committee Handbook - March 2007
5
1.1
The Treasury guidance “Corporate governance in central government
departments: Code of good practice” (hereafter referred to as “the code”) provides that:
“Principle 5: The board should ensure that effective arrangements are in place
to provide assurance on risk management, governance and internal control. In
this respect, the board should be independently advised by:
x an audit committee chaired by an independent non-executive member;
x an internal audit service operating in accordance with Government Internal
Audit Standards.”
1.2
On Audit Committees, this principle is supported by two provisions :
“Provision 5.2: The board should establish an audit committee, of at least three
members. The chairman of the committee should be an independent non-
executive member of the board and at least one of the committee members
should have recent and relevant financial experience. The audit committee
should be established and function in accordance with the Audit Committee
Handbook.
Provision 5.3: The terms of reference of the audit committee, including its role
and the authority delegated to it by the board, should be made available
publicly. The department should report annually on the work of the committee
in discharging those responsibilities.”
1.3
The code proposes, in paragraph v of its introduction:
“The principles and techniques outlined in the code will also prove useful for
other parts of central government, other central government bodies and lower
tiers of control and management, and in executive agencies. In these cases the
code should be applied with adjustments to suit their scale, responsibilities and
accountability chains.”
In the context of central government Audit Committees, this should be
interpreted to mean that Audit Committees should be established in all
departments, Executive Agencies and other Arms Length Bodies including
executive Non-Departmental Public Bodies.
1.4
Sponsoring departments and their arms length bodies should ensure that the
inter-relationship (including cross-attendance arrangements, if any) of their respective
Audit Committees is agreed and appropriately documented (the inter-relationship of
Accounting Officer responsibilities is an important factor in the inter-relationship of
Audit Committees). Attention should be given to the processes by which information
and assurance is communicated between Audit Committees, in particular assurance
necessary to support the departmental Statement on Internal Control.
1.5
Some Audit Committees may also have wider responsibilities assigned to them.
This can be valuable but care should be taken to ensure that the wider responsibilities
do not provide a conflict with the guidance in this handbook. For example, an Audit
Committee that is asked to also act as a Risk Committee needs to take particular care to
avoid taking up the executive risk management function and to maintain its
independence.
1
INTRODUCTION
1
I
NTRODUCTION
6
Audit Committee Handbook - March 2007
1.6
The variety of governance models found in government organisations means
that a degree of flexibility will be needed in applying the guidance in this handbook to
particular organisations. The basic governance model assumed by this handbook is that
of an organisation headed by an Accounting Officer who is supported by a Board, which
he or she chairs. In the case of organisations where the Accounting Officer does not
chair, or is not a member of, the Board, (particularly NDPBs) the need for both the
Board and the Accounting Officer to be supported by the Audit Committee will have to
be appropriately accommodated – but the principles remain equally applicable. The
purpose of the Audit Committee is not materially affected by the Board or governance
structure which they support, although size of organisation and specific governance
arrangements may well impact on the way in which the Audit Committee functions.
1.7
The Code requires that the Audit Committee should publicly report annually on
its work and how it has discharged its responsibilities. As the Code also requires that the
Audit Committee should be established in accordance with the Audit Committee
handbook, the report should explain any non-compliance with the five principles of
this Handbook, taking account of the supporting good practice guidance.
[...]... FOR AUDIT COMMITTEES Committee support: the Audit Committee should be provided with appropriate Secretariat support to enable it to be effective This is more than a minute taking function - it involves providing pro-active support for the work of the Committee and helping its members to be effective in their role 8 Audit Committee Handbook - March 2007 3 T HE ROLE OF THE AUDIT COMMITTEE “The Audit Committee. .. Government Internal Audit Standards, Standard 9, Reporting) There is consequently a major synergy between the purpose of the Head of Internal Audit and the role of the Audit Committee Audit Committee Handbook - March 2007 15 6 SCOPE OF WORK 6.5 The role of the Audit Committee in relation to Internal Audit should include advising the Board and Accounting Officer on: the Audit Strategy and periodic Audit Plans,... the auditors 16 Audit Committee Handbook - March 2007 7 C OMMUNICATION “The Audit Committee should ensure it has effective communication with the Board, the Head of Internal Audit, the External Auditor and other stakeholders” CO-ORDINATION BETWEEN THE COMMITTEE AND THE BOARD 7.1 The work of the Audit Committee needs to be effectively communicated if it is to be effective After each meeting of the Audit. .. reference for an Audit Committee are suggested at Annex D 3.8 The Audit Committee should have appropriate authority to require any member of the organisation either to: attend an Audit Committee meeting; or provide written report(s) to the Audit Committee for the purpose of providing information to assist the Audit Committee in fulfilling its role of advising the Board 3.9 The Audit Committee will require... effectiveness of the Audit Committee 10 Audit Committee Handbook - March 2007 4 M EMBERSHIP , INDEPENDENCE , OBJECTIVITY AND UNDERSTANDING “The Audit Committee should be independent and objective; in addition each member should have a good understanding of the objectives and priorities of the organisation and of their role as an Audit Committee member.” INDEPENDENCE 4.1 An effective Audit Committee must... Audit Committee Audit Committee Handbook - March 2007 21 B COMMITTEE SUPPORT: GOOD PRACTICE B.4 When the Audit Committee decides to meet privately , the Chair should decide whether the secretariat members should also withdraw If so, the Chair should ensure that an adequate note of proceedings is kept to support the Committee s conclusions and advice 22 Audit Committee Handbook - March 2007 C M ODEL LETTER... achieving Audit Committee effectiveness Good practice guidance on these roles is provided in Annexes A and B: the role of the chair: the Chair of the Audit Committee has particular responsibility for ensuring that the work of the Audit Committee is effective, that the Committee is appropriately resourced, and is maintaining effective communication with stakeholders; and Audit Committee Handbook - March 2007. .. performance as an Audit Committee member is decided to be unacceptable (see appraisal) or if your conduct (including conflicts of interests) is unacceptable your appointment may be terminated by the Board / Accounting Officer (delete as appropriate) 24 Audit Committee Handbook - March 2007 D M ODEL TERMS OF REFERENCE FOR AN AUDIT COMMITTEE The Board has established an Audit Committee as a Committee of the... of particular matters; the Board or the Accounting Officer may ask the Audit Committee to convene further meetings to discuss particular issues on which they want the Committee s advice 26 Audit Committee Handbook - March 2007 MODEL TERMS OF REFERENCE FOR AN AUDIT COMMITTEE D INFORMATION REQUIREMENTS For each meeting the Audit Committee will be provided with: a report summarising any significant changes... consider areas in which the Committee will particularly promote cooperation between auditors and other review bodies in the coming year; re-visit emerging findings from auditors and review actions in response to the External Audit management letter; consider the Committee s own effectiveness in its work 30 Audit Committee Handbook - March 2007 F K EY QUESTIONS FOR AN AUDIT COMMITTEE TO ASK This list .
2
G
OOD PRACTICE PRINCIPLES FOR AUDIT COMMITTEES
8
Audit Committee Handbook - March 2007
x Committee support: the Audit Committee should be provided with. of the
effectiveness of the Audit Committee.
Audit Committee Handbook - March 2007
11
INDEPENDENCE
4.1
An effective Audit Committee must have members
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