Exercise 2: Below is the summary of the SEC listing requirements for audit

committee responsibilities of companies listed on this stock exchange. For each

requirement, state how it is intended to help to address the risk of fraud in publicly
traded organizations.
 
A. Obtaining each year a report by the external auditor that addresses the company’s
internal control procedures, any quality control or regulatory problems, and any
relationships that might threaten the independence of the external auditor.
 
The primary responsibility of an external auditor is to verify the accuracy and
reasonableness of the assertions of the management’s financial statements whether
these assertions are in conformance with related criteria. However, especially for
publicly traded companies, it is a must to obtain a management report - representing
business results, issues and risk factors; from an external auditor. It is because of the
following reasons:
 Having the management report from the auditor will give you a better
understanding of how well the business operation and its related internal control
corresponds with each other. Fraud and other risks will be avoided inside the
organization once proper internal control procedures are well implemented and
monitored. For instance, an external auditor suggested the enhancement of
internal control  by properly monitoring segregation of duties among employees
to avoid fraud by simultaneously conducting distinct business transactions by
only one personnel.
 External auditors don't have material and direct interest towards the information
contained in the report because they issue independent and unbiased judgment.
Hence, information provided is reliable and credible. Management and other
users of the information can extract decisive and clear decisions from the report
that mitigate exposure to threat and danger.
 These reports will help the management to respond to problems at an early time
which can result in serious damage if not addressed immediately.

The intention of SEC in including this is to assure that Audit Committee is doing their
job - to ensure whether the organization operates in an ethical environment and
complies with laws and regulation.
 
 
B. Discussing the company’s financial statements with management and the external
auditor.
 
Since the Audit Committee is charged with oversight of financial reporting, risk
management and internal controls, they are also responsible for selecting the public
accounting firms that serve as their organization’s external auditor as well as for
maintaining relationships with their organization’s own internal audit team. They
should ensure that external auditor and the management must agree on such terms.
Engagement letter, management representation letter, audit procedures and other
disclosures that need to be disclosed is a must in order to ensure the reasonableness of
the assertions regarding the business events and transaction and to properly address
the responsibility of each other to avoid future conflicts. However, agreeing doesn’t
mean falsifying. The integrity, independence and objectivity of the auditor will
prevail at all cost. Before the auditor can issue an unqualified opinion, the
management must comply and fix on matters of the financial statements that are not in
compliance of what it should have been. If the management doesn’t want to cooperate
then the auditor will issue a qualified, adverse or a disclaimer of opinion which is not
a good manifestation of the integrity of the management. The financial statements will
be disclosed for public consumption which will be utilized by many for decision
making which have financial consequences. Also, the financial statements are
complex and involve a high degree of comprehension. Information provided in
financial statements involved a high degree of professional judgment. Hence, material
misstatements are inevitable. Being said, the auditor must ensure a high degree of care
and competence on dealing with the matters provided in the financial statement since
many are relying on this matter. The external auditor must possess independence,
professional skepticism and observance of due care in order to ensure the integrity of
the financial statements. It is important for the management and the external auditor to
be fair and honest in dealing and discussing matters in the financial statements.  
 
C. Discussing in its meetings the company’s earnings press releases, as well as
financial information and earnings guidance provided to analysts.

The management must have a reasonable remuneration policy and procedures and be
sure to discuss the details during the company's orientation or meetings. The
employees and other members must be well aware of the remuneration, earning
potential and other major financial information and each information must be
supported with facts and documents to not let workers leave the working ground. For
publicly traded companies, disclosure of earning procedures and other financial
aspects is a must to let the public be aware of how well the company is performing to
attract investors, creditors and other interested parties. If the public is involved, before
releasing it to the press, an extensive thorough analysis must be observed first. The
audit committee should ensure that the financial statement is understandable and
reliable and to ensure the transparency in its activities.
 
 
D. Discussing in its meetings policies with respect to risk assessment and risk
management.
 
During a meeting, various representatives and other members are present to discuss
matters involving the management stewardship of the company. Risk assessment and
management pertains to identifying the risks and controlling threats that should be
addressed even before the commencement of the business. Discussing the risk
assessment and risk management during the meeting will give them a better and wider
understanding of the entity’s internal and external environment. If these risks are
given importance at an early time, a subsequent error and fraud will have no room and
in return the entity might have a cost saving. The audit committee should ensure that
the organization establishes a thorough risk management process and effective
internal controls.
 

E. Meeting separately with management, internal auditors, and the external auditor
on a periodic basis.
 
Meeting separately with management, internal auditors and the external auditors once
for a while is not a treason to the members. There are matters that need to be
discussed privately along with the concern parties. This happens most especially when
the majority of the members does not have an influence, direct relationship, concern
and does not have to do with them. For instance, reviewing with the external auditor
any audit problems or difficulties that they had with management and whether the
members of the audit team is under generally accepted auditing standards. The audit
committee should ensure that they review the management’s policies, particularly in
areas such as ethics, conflict of interest, fraud, and litigation and regulatory
proceedings. Also, the audit committee should ensure a periodic communication with
the management’s internal auditor and review all audit findings.

F. Reviewing with the external auditor any audit problems or difficulties that they had
with management.

According to the Theoretical Framework of Auditing, short term conflict between the
external auditor and the management is still acceptable unless it becomes a long term
conflict. Both of them must agree with the application of the auditing and accounting
procedures and find any significant problems or areas encountered in the course of
their procedure and address it immediately to avoid future costs and conflicts. Before
the auditor can issue a clean report or also known as an unqualified report, the auditor
and the  management must agree and be persuaded on terms that come into their
understanding. When an external auditor encounters conflict with the assertion of the
management, the auditor should report it to the audit committee instead of direct
reporting it to the management to ensure independence. As responsible for oversight,
the audit committee, ensure that each and everyone are carrying its responsibilities
and in line with the Code of Conduct.

 
G. Setting clear hiring policies for employees or former employees of the external
auditors.
 
The audit committee is responsible for selecting the public accounting firm that serve
as their external auditor. They should properly monitor the compliance with all the
applicable laws and regulations regarding the hiring of any employees or former
employees of the independent auditors. Just like in accepting a client before the
commencement of the audit, a preliminary assessment of the job description and skills
required should be clear to hire and put the right person for the right job. Also, the
audit committee should help ensure that the management has the talent and resources
in order to maintain quality financial reporting.

H. Reporting regularly to the board of directors.

 
The audit committee assists the management on their effective discharge of their
responsibilities. They serve as an oversight with regards to the entity’s financial
reporting, internal control consideration, risk management, internal and external audit
and other related functions. Since they are appointed by the Board of Directors as an
oversight function, a need to regularly report the happenings to the Board of Directors
is a must so that to control effectively and efficiently every task delegated. A written
report is not yet enough to satisfy whether tasks are completed, hence, discussion of
the audit committee with the BOD will help the company identify key aspects that
need to be focused on and recommend areas for improvement. There are various users
relying with the financial statements, hence, the audit committee should define its
composition, how members will be appointed and any requirements for expertise
among the members. They should describe how the audit committee will conduct its
meetings, how often and who will it be. Being able to report to the BOD regularly
guarantees that they are transparent, responsive, accountable and effective.