CSA Notice: 52-301 - Audit Committees

CSA Notice: 52-301 - Audit Committees

CSA Notice

October 1990

CSA NOTICE

AUDIT COMMITTEES

INTRODUCTION

1. Increasingly Canadian Securities Administrators are being asked their views concerning therole and the responsibilities that should be adopted by audit committees. The Administratorsstrongly support the efforts of audit committees which significantly improve the quality offinancial reporting. This notice sets out certain practice standards which should be followedif an audit committee is to discharge its responsibilities in an effective way.

2. An audit committee is a committee of the board of directors to which the board delegates itsresponsibility for oversight of the financial reporting process.

3. The objectives of an audit committee, as stated in a research study published by the CanadianInstitute of Chartered Accountants, are as follows:

(a) To help directors meet their responsibilities, especially for accountability;

(b) To provide better communication between directors and external auditors;

(c) To enhance the external auditor's independence;

(d) To increase the credibility and objectivity of financial reports; and

(e) To strengthen the role of the outside directors by facilitating in depth discussionsbetween directors on the committee, management and external auditors.

4. A number of recent reports, such as the Report of the Commission to Study the Public'sExpectation of Audits (the Macdonald Commission) have concluded that an audit committeecan make a major contribution towards improving the quality of financial reporting. Thisrelates to a fundamental requirement of securities regulation and the Administrators agreewith this conclusion.

5. Audit committees are a relatively recent development and it is emphasized that their role iscontinuing to evolve. Boards of directors of reporting issuers should adapt the responsibilitiesof their audit committees to their particular circumstances. It is also emphasized that nopublished set of practices can substitute for the active commitment to high standards by everyparty having responsibility for the corporate disclosure system.

6. The practices outlined in this notice complement the requirements for audit committees setout in the corporate law statutes and, in the view of the Administrators, can be followedwithout conflict with those requirements.

7. The Administrators consider that fulfilment of the responsibilities set out in this notice willresult in an audit committee becoming more informed, vigilant and effective.

8. Boards of directors of reporting issuers are encouraged to incorporate these matters in theterms of reference for their audit committees. Consideration should be given to disclosing theterms of reference to shareholders annually.

INTERIM FINANCIAL STATEMENTS

9. The Administrators gave particular consideration to the matter of audit committee review ofinterim financial statements. Financial statement users rely heavily on interim financialstatements but interim reporting is subject to fewer controls than annual reporting. While theexternal auditor may review quarterly results, any such review is frequently part of the annualaudit which is conducted after the end of the fiscal year, at which time it is too late to takecorrective action.

10. The Administrators recommend that audit committees review interim financial informationbefore it is released to the public.

MEMBERSHIP OF AUDIT COMMITTEES

11. The Administrators strongly encourage boards of directors of reporting issuers to selectindependent directors as members of audit committees and to limit membership to suchdirectors whenever possible.

12. The chairperson of the audit committee should be an independent director.

13. An audit committee should normally consist of no fewer than three persons.

MEETINGS

14. Meetings of the audit committee should be scheduled to take place on a regular basis.

15. Opportunities should be afforded periodically to the external auditor, the internal auditor andto senior management to meet separately with the independent members of the auditcommittee.

16. Minutes should be kept of all meetings of the audit committee.

RESPONSIBILITIES OF AUDIT COMMITTEES

17. The audit committee should periodically report the results of reviews undertaken and anyassociated recommendations to the board of directors.

18. Audit committee practices intended to preserve the independence of the external auditorshould include the following:

(a) review management's recommendations for the appointment of an external auditor;

(b) review the terms of the external auditor's engagement, the appropriateness andreasonableness of the proposed audit fees and any unpaid fees;

(c) when there is to be a change of auditor, review all issues related to the change,including the information to be included in the notice of change of auditor called forunder National Policy 31, and the planned steps for an orderly transition;

(d) review all reportable events, including disagreements, unresolved issues andconsultations, as defined in National Policy 31, on a routine basis, whether or notthere is to be a change of auditor; and

(e) review any engagements for non-audit services to be provided by the externalauditor's firm or its affiliates, together with estimated fees, and consider the impacton the independence of the external auditor.

19. Audit committee practices related to audits and financial reporting should include thefollowing:

(a) review the audit plan with the external auditor and with management;

(b) review with management and with the external auditor any proposed changes in majoraccounting policies, the presentation and impact of significant risks and uncertainties,and key estimates and judgements of management that may be material to financialreporting;

(c) question management and the external auditor regarding significant financial reportingissues discussed during the fiscal period and the method of resolution;

(d) review any problems experienced by the external auditor in performing the audit,including any restrictions imposed by management or significant accounting issues onwhich there was a disagreement with management;

(e) review audited annual financial statements, in conjunction with the report of theexternal auditor, and obtain an explanation from management of all significantvariances between comparative reporting periods;

(f) review the post-audit or management letter, containing the recommendations of theexternal auditor, and management's response and subsequent follow up to anyidentified weakness;

(g) review interim unaudited financial statements before release to the public;

(h) review all public disclosure documents containing audited or unaudited financialinformation before release, including any prospectus, the annual report, the annualinformation form and management's discussion and analysis;

(i) review the evaluation of internal controls by the external auditor, together withmanagement's response;

(j) review the terms of reference of the internal auditor;

(k) review the reports issued by the internal auditor and management's response andsubsequent follow up to any identified weaknesses; and

(l) review the appointments of the chief financial officer and any key financial executivesinvolved in the financial reporting process.

20. The responsibilities outlined in this notice are not intended to be comprehensive. Boards ofdirectors of reporting issuers should consider any additional areas which may requireoversight when determining the responsibilities to be assigned to the audit committee.