Conducting an Audit Committee Self-Evaluation:

We would suggest a minimum of three members. The audit committee should not be so large that:

• Its ability to operate efficiently and effectively is reduced.
• Members’ ability to raise issues is hampered.
• It is difficult to get a quorum when a time-sensitive issue arises.

The audit committee should have a sufficient number of members to ensure needed skill sets and knowledge are represented on the committee. An independent nominating/governance committee or independent directors have responsibility for appointing audit committee members and selecting the chair.

In addition to meeting the technical definitions of independence, committee members demonstrate their objectivity during meetings, through behaviors such as driving agendas, rigorous probing of issues, consulting with other parties, and hiring experts, as necessary.

Is the audit committee charter matrix used to document compliance with the precepts of the charter?

Examples of this could be through the following:

1. The committee has a full understanding of the composition of the organization’s statement of financial position, including the degree of management judgment inherent in the various accounts.
2. The committee understands which financial ratios and indicators are key to the organization and industry, how the organization’s performance compares with its budgetary targets and its peers, and how management plans to address any unfavorable variances.
3. The committee discusses the initial selection of or changes in significant accounting policies used in developing the financial statements, the reason for and impact of any changes in policy, and reasons alternative treatments were not adopted.
4. The committee discusses significant, complex, or unusual transactions with management and the external auditors.
5. The committee understands which areas represent high risk for material misstatement of the financial statements, and discusses assumptions and approaches used with management and the external auditors.
6. The committee forms its own view of the risk of material misstatement due to fraud, discusses with management and the external auditors their views on the risk of material misstatement due to fraud, and is comfortable that any differences in views can be reconciled.
7. The committee fully understands significant changes in financial statements from prior years and from budget, and is provided with sufficient, reliable evidence to support variances.
8. The committee commits sufficient time to review, discuss, and consider the financial statements.
9. The committee meets with financial management to discuss results reported before finalization.

For example:

1. The audit committee understands and agrees with the board on which categories or internal control it oversees. Categories include (from the COSO standards):
   • Integrity of financial reporting
   • Compliance with laws and regulations
   • Operational efficiency and effectiveness
   The committee and the board concur with any changes to the committee’s internal control oversight mandate.
2. The audit committee understands the current high-risk areas – including information technology and computer systems – in the categories of controls it oversees, as well as how management addresses those areas.