ACCA Audit and Assurance (F8) Practice Exam

What is the importance of the role of audit committees in corporate governance?

1. They increase profits for the shareholders

2. They create clear reporting lines for auditors

3. They handle public relations for the company

4. They monitor employee performance

The correct answer is: They create clear reporting lines for auditors

The significance of audit committees in corporate governance is primarily reflected in their role in establishing clear reporting lines for auditors. Audit committees act as an intermediary between the board of directors, management, and external auditors. By creating transparent and structured channels of communication, they help ensure that auditors can carry out their work effectively without interference from management. This fosters independence and objectivity in the audit process, which is vital for maintaining the integrity of financial reports and enhancing shareholder trust. Moreover, audit committees are responsible for overseeing the entirety of the financial reporting process, monitoring the effectiveness of internal controls, and ensuring compliance with relevant regulations. This oversight role directly supports the company's governance framework and enhances accountability, ultimately leading to better risk management and financial accuracy. In contrast, while increasing profits for shareholders may be a desirable outcome, it is not a direct function of the audit committee’s responsibilities. Handling public relations is typically managed by the communications or marketing department, rather than the audit committee. Monitoring employee performance falls under the purview of human resources and management, not the audit committee’s scope. Thus, the clear reporting lines established by audit committees are crucial for maintaining a robust corporate governance structure.