Acknowledgements iii
Preface v
Part I: Audit Committee Administration
Chapter 1 — Benefits of a Private Company Audit Committee 3
Financial Benefits 3
Better Decision Making 4
Stronger Relationships With Stakeholders 4
Other Benefits 5
Chapter 2 — Audit Committee Member Roles and Responsibilities 7
Audit Committee Process and Procedures 8
Oversight of the Financial Reporting Process 8
Oversight of Financial Reporting 9
Oversight of the Independent Auditor 9
Oversight of the Internal Audit Function 9
Oversight of Risk Management 10
Oversight of Ethics and Compliance 10
Limitation of Audit Committee’s Role 10
Chapter 3 — Audit Committee Charter Matrix 11
Chapter 4 — Audit Committee Financial Expert Decision Tree 29
Audit Committee Financial Expertise 29
Alternative Approaches 30
Audit Committee Financial Expert 31
Chapter 5 — Sample Request for Proposal Letter for CPA Services and Qualifications (Private Company) 33
Background of ABC Company 34
Services to Be Performed 34
Key Personnel 35
Relationship With Prior CPA Service Provider 35
Other Information 36
Your Response to This Request for Proposal 36
Background on the Firm 36
Experience in Our Industry 37
Expected Approach to This Audit 37
Evaluation of Proposals 37
Chapter 6 — AICPA Peer Reviews and PCAOB Inspections of CPA Firms: An Overview 39
Peer Review of a CPA Firm 39
Peer Review Reports 40
Common Misconceptions of Peer Review 41
Questions for the Auditor Regarding Peer Review 41
PCAOB Inspection 42
Questions for the Audit Committee Regarding the PCAOB Inspection 42
Chapter 7 — Guidelines for Hiring the Chief Audit Executive (CAE) 45
Role of the Audit Committee in Hiring and Evaluating the CAE 45
CAE Qualifications 45
Chapter 8 — Engaging Independent Counsel and Other Advisers 51
Part II: Key Responsibilities
Chapter 9 — Internal Control: Guidelines and Tool for the Audit Committee 55
Internal Control Primer 55
Internal Control Effectiveness 56
What Internal Control Cannot Do 57
Roles and Responsibilities 57
Internal Control Over Financial Reporting 59
Key Terms in Internal Control Over Financial Reporting Control 60
ICFR Results 62
Conclusion 62
Internal Control—Checklist of COSO Essentials for the Board 63
Chapter 10 — Fraud and the Responsibilities of the Audit Committee: An Overview 71
Definition and Categories of Fraud 71
Roles of the Audit Committee in the Prevention, Deterrence, Investigation, and Discovery or Detection of Fraud 72
Governance Considerations 73
Expertise of Forensic Accounting Consultants 74
When Fraud Is Discovered 74
Conclusion 75
Chapter 11 — Whistleblower Policy: Complaint Reporting Procedures and Tracking Report 77
Reasons for Tool 77
Whistleblower Common Practices Checklist 79
Sample Procedures For Handling Complaints (Whistleblower Policy) 82
Statement of Purpose 82
Employee Complaints 82
Director Complaints 82
Other Complaints 83
Processing Complaints 83
Retention of Complaints 83
Chapter 12 — Issues Report From Management 85
Defining Significant Issues, Critical Accounting Estimates, Significant Unusual Transactions, and Judgments 85
Sample Issues Report From Management 87
Issues Report From Management 88
Chapter 13 — Guidelines and Questions for Conducting an Audit Committee Executive Session 89
What Is an Executive Session? 89
Additional Questions to Consider: Tool for Audit Committee Members 91
Chapter 14 — Independent Auditor Communications with Audit Committee 111
Background 111
Objectives of Communications 111
Timing of Communications 112
1 Terms of the Firm’s Audit Engagement 112
2 Inquiries About Matters Relevant to the Audit 113
3 Audit Strategy, Timing, and Approach 113
4 Evaluation of the Quality of the Company’s Financial Reporting 114
5 Other Significant Communications 115
Illegal Acts 117
Internal Control Matters 117
Fraud 118
Chapter 15 — Responding to the Identification of a Material Weakness — A Checklist for the Audit Committee 119
Background 119
Internal Control Evaluation Requirements 119
Responding to the Identification of a Material Weakness 120
Additional Resources 120
Steps the Audit Committee Can Consider If Faced With an Adverse Report on Internal Control 121
Part III: Performance Evaluation
Chapter 16 — Evaluating the Internal Audit Function: Questions to Consider 127
Chapter 17 — Evaluating the Independent Auditor: Questions to Consider 131
Questions for Audit Committee Members 131
Questions for Management and/or Internal Audit 134
Chapter 18 — Conducting an Audit Committee Self-Evaluation: Questions to Consider 137
Part IV: Other Tools
Chapter 19 — Enterprise Risk Management: A Primer on the COSO Framework 143
Enterprise Risk Management Primer Basics of ERM and Its Relationship to Internal Control 144
Relationship Between COSO Enterprise Risk Management — Integrated Framework and Internal Control — Integrated Framework 145
Other Key Terms in Enterprise Risk Management 147
Portfolio View of Residual Risk Example 148
Roles and Responsibilities 148
Limitations of Enterprise Risk Management 149
Conclusion 150
Enterprise Risk Management: A Tool for Strategic Oversight 150
Chapter 20 — Enteprise Risk Management: A Tool for Strategic Oversight 151
Chapter 21 — SEC Final Rule on Audit Committee Financial Experts 157
A Audit Committee Financial Experts 157
1 Title of the Expert 157
2 Disclosure of the Number and Names of Audit Committee Financial Experts 158
3 Disclosure of Independence of Audit Committee Financial Experts 158
4 Definition of “Audit Committee Financial Expert” 159
5 Safe Harbor from Liability for Audit Committee Financial Experts 164
6 Determination of a Person’s Status as an Audit Committee Financial Expert 165
7 Location of Audit Committee Financial Expert Disclosure 165
8 Change in Item Number 165
Chapter 22 — IFRS Implementation 167
Implementation 167
Stage 1: Assessment 168
Stage 2: Conversion 168
Stage 3: Integration 169
Conclusion 170
Chapter 23 — Resources for Audit Committees 171
