ACCA Audit and Assurance (F8) Practice Exam

What is a best practice regarding the membership composition of an Audit Committee?

1. All members should be internal executives

2. At least one member should have financial experience

3. Members should be shareholders

4. The majority should be affiliated with the external auditor

The correct answer is: At least one member should have financial experience

A best practice regarding the membership composition of an Audit Committee is that at least one member should have financial experience. This is crucial because having a member with financial expertise ensures that the committee can effectively understand the organization’s financial statements, the accounting principles applied, and any related challenges associated with the financial reporting process. This expertise is vital for the committee's role in overseeing the integrity of financial reporting and the effectiveness of internal controls. Furthermore, financial experience brings credibility and enhances the committee's ability to engage in rigorous discussions with both management and external auditors, leading to more informed decision-making and better oversight of financial practices. It is widely acknowledged that audit committees benefit from having members who are knowledgeable about finance and accounting matters, as this helps maintain the overall quality and reliability of financial disclosures. In contrast, while involvement of internal executives, shareholders, or affiliations with external auditors may have their contexts, they do not inherently provide the critical financial perspective necessary for effective audit oversight. Thus, focusing on the inclusion of at least one financially experienced member aligns with best practices for strengthening the audit committee's functionality and accountability.