Audit Committees : A Guide for Directors, Management, and Consultants

by Burke, Frank M.; Guy, Dan M.; Tatum, Kay W.

• ISBN13: 9780735539365
• ISBN10: 0735539367
• Edition: 3rd
• Format: Paperback
• Copyright: 2004-12-30
• Publisher: Wolters Kluwer

Table of Contents

List of Exhibits	xvii
List of Appendices	xxi
How to Use This Book	xxiii
About the Authors	xxv
Acknowledgments	xxvii
Preface	xxix
Chapter 1: The Need for an Audit Committee	1	(8)
The Board of Directors	1	(3)
Accountability and the Audit Committee	4	(2)
Assessing the Company's Support for the Audit Committee	6	(1)
Summary of Chapter	7	(2)
Chapter 2: Early History of the Audit Committee Concept - 1939 to 1987	9	(10)
Events from 1939-1970	9	(1)
Events from 1971-1980	10	(5)
The Audit Committee and Securities Litigation in the 1970's	15	(2)
Summary of Important Milestones from 1939 to 1987	17	(2)
Chapter 3: The 1987 Treadway Commission Report- A Defining Event	19	(8)
Recommendations for Audit Committees	19	(2)
Good Practice Guidelines for Audit Committees	21	(3)
Guidelines for General Matters	21	(2)
Guidelines for Selection of the External Auditor	23	(1)
Guidelines for Post-Audit Review	23	(1)
Management's Responsibility for the Financial Statements and Underlying Controls	24	(1)
A Post-Mortem	25	(1)
Summary of Treadway	25	(2)
Chapter 4: Additional Developments from Treadway to the Present	27	(18)
National Association of Securities Dealers Adopts Requirement	27	(1)
AICPA Issues SAS 61 to Require Communications to Audit Committees	27	(1)
American Stock Exchange Amends Listing Requirements	28	(1)
United States Federal Sentencing Guidelines Are Issued	28	(2)
Federal Deposit Insurance Corporation Mandates Audit Committees	30	(1)
Committee of Sponsoring Organizations of the Treadway Commission Issues Reports on Internal Control, Derivatives, and Fraud	31	(2)
Public Oversight Board Issues Special Report and Publishes a Report on the Professionalism of the External Auditor	33	(1)
SEC Chairman Delivers Major Speech on Earnings Management	34	(3)
Independence Standard Requires Communications with Audit Committee	37	(1)
Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees Issues Report	38	(1)
POB Issues Report from the Panel on Audit Effectiveness	39	(2)
SEC Requires Disclosure of Non-Audit Fees	41	(1)
Enron, WorldCom, and the Sarbanes-Oxley Act	41	(1)
Summary of Important Milestones from 1987 to the Present	42	(3)
Chapter 5: The 1999 Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees-Another Major Milestone	45	(16)
Overview and Recommendations	45	(10)
Recommendation 1 Meaning of Independence	47	(1)
Recommendation 2 All Independent Directors	48	(1)
Recommendation 3 Minimum Size and Expertise	48	(2)
Recommendation 4 Formal Written Charter	50	(1)
Recommendation 5 Disclosure of Information about Charter	50	(1)
Recommendation 6 Accountability of External Auditor	51	(1)
Recommendation 7 Statement from External Auditor Disclosing all Relationships to Company	52	(1)
Recommendation 8 External Auditor's Judgments about Quality of Accounting Principles	52	(1)
Recommendation 9 Report from Audit Committee	53	(1)
Recommendation 10 Required Timely Interim Reviews	54	(1)
Guiding Principles for Audit Committee Best Practices	55	(4)
Principle 1: The Audit Committee's Key Role in Monitoring the Other Component Parts of the Audit Process	56	(1)
Principle 2: Independent Communication and Information Flow between the Audit Committee and the Internal Auditor	56	(1)
Principle 3: Independent Communication and Information Flow between the Audit Committee and the External Auditor	56	(1)
Principle 4: Candid Discussions with Management, the Internal Auditor, and the External Auditor Regarding Issues Implicating Judgment and Impacting Quality	57	(1)
Principle 5: Diligent and Knowledgeable Audit Committee Membership	58	(1)
Summary of the Governance Recommendations	59	(2)
Chapter 6: The Sarbanes-Oxley Act of 2002	61	(12)
Public Company Accounting Oversight Board	64	(2)
External Auditor Independence	66	(2)
Audit Committee Independence, Resources, and Expanded Communications	68	(2)
Expanded Disclosures	70	(1)
Summary of the Requirements of the Sarbanes-Oxley Act	70	(3)
Chapter 7: Creating an Audit Committee	73	(8)
Resolution to Establish the Audit Committee	73	(1)
Size of the Committee	73	(1)
Term of Office	74	(1)
The Audit Committee Charter	75	(3)
Summary of Chapter	78	(3)
Chapter 8: Appointing and Educating the Audit Committee	81	(18)
Characteristics of Effective Audit Committee Members	81	(1)
Independence Requirements in General	82	(1)
Independence Requirements for Audit Committee Members-NYSE	83	(2)
A. NYSE Independence Requirements for Directors	83	(1)
B. Additional Independence Requirements for Audit Committee Members	84	(1)
Independence Requirements for Audit Committee Members-Nasdaq and AMEX	85	(2)
A. Nasdaq/AMEX Independence Requirements for Directors	85	(1)
B. Additional Nasdaq/AMEX Independence Requirements for Audit Committee Members	86	(1)
Conflicts of Interest and Other Independence Considerations	87	(1)
Audit Committee Member Serving on Other Audit Committees	88	(1)
Financial Literacy and Accounting/Financial Expertise	88	(2)
The Audit Committee Financial Expert-A Required Disclosure	90	(1)
Process for Appointing Committee Members and the Chairperson	91	(1)
Educating the Audit Committee	92	(3)
Summary of Chapter	95	(4)
Chapter 9: Understanding Financial Statements	99	(44)
The Annual Report	99	(2)
Financial Statements	101	(1)
Generally Accepted Accounting Principles	101	(2)
Balance Sheet	103	(2)
Income Statement	105	(5)
Comprehensive Income	110	(1)
Pro Forma Earnings	110	(2)
Statement of Retained Earnings	112	(1)
Statement of Cash Flows	113	(1)
Notes to the Financial Statements	114	(1)
Management's Discussion and Analysis	114	(1)
Accounting Principles and Net Income	115	(1)
Accounting Estimates and Net Income	116	(1)
Revenue Recognition	117	(1)
Expense Recognition	118	(1)
Quality of Earnings	119	(2)
Earnings Management	121	(1)
Management Certification of Financial Reports	122	(2)
Financial Literacy	124	(1)
Summary of Chapter	125	(4)
Supplement to Chapter 9: Excerpts from the Annual Report of Hershey Foods Corporation	129	(14)
Chapter 10: The Responsibilities of an Audit Committee	143	(38)
Appointing, Compensating, Retaining, and Evaluating the External Auditor	144	(2)
Reviewing the External Audit Plan	146	(1)
Evaluating the Annual Audited Financial Statements	147	(3)
Overseeing the External Audit Process and Audit Results	150	(1)
Monitoring Internal Control Over Financial Reporting	151	(1)
Evaluating Interim Financial Statements	152	(1)
Monitoring the External Auditor's Independence	153	(1)
Approving Audit and Non-Audit Services	154	(4)
A. Prohibited Non-Audit Services	154	(2)
B. Pre-Approval of Audit and Non-Audit Services	156	(1)
C. Required Disclosure of Services Provided by the External Auditor	156	(1)
D. Compensation of Audit Partners for Selling Non-Audit Services	157	(1)
Overseeing the Internal Audit Function	158	(1)
Establishing and Monitoring Whistle-Blower Procedures	159	(1)
Delegating Additional Responsibilities	160	(7)
A. Code of Ethical Conduct	161	(2)
B. Special Investigations	163	(1)
C. Laws, Rules, and Regulations	164	(1)
D. Communications from Attorneys about Potential Violations of Law	164	(1)
E. Litigation Matters	165	(1)
F. Related-Party Transactions	165	(1)
G. Expense Accounts and Perquisites	165	(1)
H. Financial Risks	165	(1)
I. Earnings Press Releases and Disclosure of Other Financial Information	166	(1)
J. Self-Assessment of Performance	166	(1)
Reporting to Shareholders	167	(2)
Summary of Audit Committee Responsibilities	169	(2)
Supplement to Chapter 10: Excerpts from the Proxy Statement of Coca-Cola Enterprises Inc	171	(10)
Chapter 11: The Audit Committee's Oversight of Internal Control	181	(20)
Definition of Internal Control	182	(2)
Components of Internal Control	184	(3)
The Audit Committee's Responsibilities for Internal Control	187	(1)
Deficiencies in Internal Control Over Financial Reporting	188	(2)
Management's Report on Internal Control	190	(1)
CEO and CFO Certifications on Internal Control Over Financial Reporting	191	(1)
The External Auditor's Audit of Internal Control-A New Requirement	191	(4)
Disclosure Controls and Procedures v. Controls Over Financial Reporting	195	(2)
CEO and CFO Certifications of Disclosure Controls and Procedures	197	(1)
Summary of Chapter	197	(3)
Supplement to Chapter 11: The External Auditor's Responsibility for Internal Control in a Private Company	200	(1)
Chapter 12: The Potential Impact of the Caremark Decision on Audit Committees	201	(8)
The Caremark Decision	202	(3)
Caremark and the Audit Committee	205	(1)
Recommendations Concerning Sarbanes-Oxley Compliance Matters	206	(1)
Summary of the Caremark Decision	207	(2)
Chapter 13: The Internal Audit Function	209	(26)
Internal Auditing Defined	210	(1)
Establishing an Internal Audit Function	211	(3)
Outsourcing Internal Audit Activities	214	(1)
The Institute of Internal Auditors	215	(1)
The Certified Internal Auditor	216	(1)
Professional Practices Framework	216	(2)
Code of Ethics	218	(2)
International Standards for the Professional Practice of Internal Auditing	220	(2)
The Internal Auditing Charter	222	(1)
Independence and Objectivity of Internal Auditing	223	(1)
Proficiency	223	(1)
Quality Assurance and Improvement Program	224	(1)
Compliance with the IIA Standards	225	(1)
Managing the Internal Audit Function	225	(1)
Nature of Work	226	(1)
Communicating Results	226	(1)
Oversight by the Audit Committee	227	(1)
Internal Audit Charter	228	(1)
Independence and Objectivity	229	(1)
Appointment or Termination of the Internal Auditor	229	(1)
Compliance with the Standards	230	(1)
Internal Audit Plans	230	(1)
Budget and Staffing of Internal Audit	230	(1)
Internal Audit Reports	231	(1)
Summary of Chapter	231	(4)
Chapter 14: The External Audit Function	235	(34)
Regulation of Accounting Finns by the PCAOB	235	(2)
Auditing Standards	237	(1)
External Auditor Reports on Financial Statements	237	(3)
Independence	240	(2)
Audit Partner Rotation	242	(1)
Engagement Letters	242	(2)
Responsibility for Fraud	244	(2)
Responsibility for Illegal Acts	246	(1)
Using the Work of the Internal Auditor	247	(1)
Management Representation Letter	247	(1)
Review of Interim Financial Information	248	(1)
Required Communications	249	(6)
Responsibilities for Other Information	255	(3)
Materiality	258	(1)
Oversight Responsibilities	259	(1)
Selecting, Evaluating, and Replacing the External Auditor	260	(1)
Reviewing the External Audit Plan	260	(1)
Evaluating the Annual Audited Financial Statements and Internal Control	260	(1)
Overseeing the External Audit Process and Audit Results	261	(1)
Monitoring the External Auditor's Independence	262	(1)
Evaluating Interim Financial Statements	263	(1)
Summary of Chapter	264	(5)
Chapter 15: Audit Committee Meetings	269	(8)
Number of Meetings	269	(1)
Meeting Agendas	270	(2)
Attendance by Committee Members	272	(1)
Attendance by Company Personnel and External Auditor	272	(1)
Preparation of Minutes	273	(1)
Location of Meetings	274	(1)
Summary of Chapter	275	(2)
Chapter 16: Termination of the External Auditor	277	(8)
Considerations in Changing Auditors	277	(1)
External Auditor's Accountability to the Audit Committee - A Reminder	278	(1)
Requesting Audit Engagement Proposals	278	(3)
A. Statement of Qualifications	279	(1)
B. The Formal Proposal	279	(2)
Protecting the Proposal Process	281	(1)
Respect the Proposal Process: Case Studies	282	(1)
Summary of Chapter	283	(2)
Chapter 17: Evaluating the Audit Committee	285	(4)
The Self-Assessment Process	285	(1)
General Questionnaire	286	(1)
Importance of the Annual Self-Assessment	286	(1)
Summary of Chapter	287	(2)
Chapter 18: Audit Committees for Not-for-Profit and Public Sector Entities	289	(8)
Use of Audit Committees	289	(3)
Internal Control in Not-for-Profit Entities	292	(1)
Internal Control in Public Sector Entities	293	(1)
Internal Audit Function	294	(1)
Number of Meetings	294	(1)
Adopting the Corporate Model	294	(1)
Reevaluating the Audit Committee	295	(1)
Summary of Chapter	295	(2)
Chapter 19: Legal Liability of Audit Committee Members	297	(14)
State Law	297	(1)
Duty of Care	298	(1)
Business Judgment Rule	298	(1)
Duty of Loyalty	299	(1)
Reliance on Information Furnished by Others	299	(1)
Federal Securities Law	300	(1)
Audit Committee Member Liability	300	(1)
Differential Liability	301	(2)
Minimizing Legal Liability	303	(1)
Use of Legal Counsel and Other Experts	304	(2)
Protection Against Liability	306	(2)
Summary of Chapter	308	(3)
Appendices	311	(60)
Where to Find More Information	371	(4)
Glossary	375	(20)
List of Acronyms	395	(2)
Index	397