Plain definition
An audit committee is a committee of the board or equivalent governing body that oversees the integrity of financial reporting, the external audit relationship, internal audit, internal control, risk matters within its remit, and the handling of significant concerns. Its exact authority and composition depend on law, listing rules, and organisational structure.
The committee does not prepare accounts or operate management controls. It asks informed questions, receives independent information, challenges management and auditors, and makes or recommends decisions within its mandate. Effective oversight depends on members’ independence, relevant competence, access to information, and time for difficult issues.
Illustrative example
Suppose management reports a large year-end estimate for customer returns that materially affects profit. The audit committee asks the finance director for the data supporting the estimate, asks the external auditor what evidence was challenged, and asks internal audit whether the returns process has known control weaknesses. It requests sensitivity analysis and a clear explanation of management’s judgment before deciding whether further work or disclosure is needed.
The committee has not recalculated the estimate or chosen the accounting entry itself. It has ensured that the people responsible for it can explain the evidence, uncertainty, and implications to the governing body.
Committee membership, independence requirements, and authority vary by organisation; a title alone does not establish an identical legal role everywhere.
Why it matters
It gives the board a focused forum for difficult reporting, assurance, and control questions that need independent challenge.
It reduces the chance that significant matters are resolved only within the management team that produced them.
Practical consequence
Set a charter, calendar, information rights, and escalation route that match the committee’s mandate and the organisation’s requirements.
Require concise papers that state the decision requested, evidence, alternatives, uncertainty, and management and auditor views, then track agreed actions to completion.