A. Explanation

This Provision sets out some of the key duties of the AC:

• Financial reporting
  Many stakeholders, especially investors and creditors, rely on the financial statements and disclosures of the company. One of the most important roles of the AC is to ensure the integrity of the financial statements and related announcements. To achieve this, the AC needs to review all significant financial reporting matters, especially judgements made by management. The AC should also obtain and review the assurance from the CEO and the CFO that the financial records have been properly maintained and the financial statements give a true and fair view of the company's operations and finances (Provision 9.2).
• Internal controls
  Effective controls reduce the risk of asset loss and help ensure that financial statements and other operational information are reliable. The AC should annually review the adequacy and effectiveness of internal controls and risk management systems so that it can help the Board effectively comment on these areas, and also provide the AC, itself, with the assurance to concur with the Board statement as required by the Listing Rules (MR 1207(10) and CR 1204(10)). The AC may conduct its review internally, or seek the assistance of external professionals.
• Internal audit
  The internal audit function is, in many respects, the right hand of the AC. It is essential to managing risks in the company. It provides the AC with the critical support which the latter needs to ensure sound risk management and internal control systems. The AC should thus ensure that the internal auditor function is adequately resourced, independent and effective.
• External audit
  The external auditor provides an independent audit report on the financial statements of the company. It also recommends where improvements can be made to the financial reporting and internal control systems. The AC should thus:
  
  • Review the external audit report and findings.
  • Review and ensure that the scope of the audit is appropriate.
  • Review and ensure the independence and objectivity of the external auditors.
  • Recommend that the Board proposes to shareholders the appointment or change in auditors, and their remuneration and terms of engagement.
• Whistleblowing
  Surveys show that a large proportion of fraud and irregularities are reported by whistle-blowers. The AC is required to review and ensure that whistle-blowing or equivalent arrangements are in place, that the existence of such a policy is publicly disclosed (such as on the company’s website and other platforms) and that these policies and procedures are clearly communicated to its employees.

In addition to the Code provisions, directors should note Section 201B (5) of the Companies Act which lists the AC’s functions:

1. To review —
   i. with the auditor, the audit plan;
   ii. with the auditor, his evaluation of the system of internal accounting controls;
   iii. with the auditor, his audit report;
   iv. the assistance given by the company’s officers to the auditor;
   v. the scope and results of the internal audit procedures; and
   vi. the financial statements of the company and, if it is a parent company, the consolidated financial statements, submitted to it by the company or the parent company, and thereafter to submit them to the directors of the company or parent company; and
2. To nominate a person or persons as auditor, notwithstanding anything contained in the constitution or under section 205 of the Companies Act, together with such other functions as may be agreed to by the AC and the Board.

B. Practice Guidance

• Practice Guidance 10: Audit Committees

C. Related Rules and Regulations

• Section 201B of the Companies Act: Audit Committee.
• MR 712 and CR 712: Appointment of Auditors.
• MR 719(1) and CR 719(1): Internal Controls
• MR 719(2) and CR 719(2): Suspected Fraud or Irregularity.
• MR 1207(10) and CR 1204(10): Annual Reports.
• MR Practice Note 12.2 and CR Practice Note 12B: Internal Controls and Risk Management Systems.

D. CG Guides

• AC Guide 1.3: Terms of Reference [AC Composition].
• AC Guide Appendix 1C: Sample AC Terms of Reference [AC Composition].
• AC Guide Appendix 1D: Sample ARC Terms of Reference [AC Composition].
• AC Guide 3.3: Fraud Risk Management [Risk Management and Internal Controls].
• AC Guide 4.4: Establishing an Internal Audit Function [Internal Audit].
• AC Guide 6.4: Accounting Policies, Estimates and Judgements [Financial Reporting].
• AC Guide 6.5: AC Duties in Financial Reporting [Financial Reporting].
• AC Guide Appendix 6E: AC Duties in Financial Reporting [Financial Reporting].

E. Related Articles

• “Audit committees must now work even harder” by Gerard Tan. (66KB)
• “Responding to financial reporting surveillance reviews” by Kevin Kwok. (58KB)
• “How good is your auditor?” by Ramlee Buang. (46KB)
• “Raising the game: The AC-internal audit relationship” by David Toh. (47KB)
• “Disclosures and audit committees are key in turbulent times” by Wayne Kolins, Ben Neuhausen & Rosemary Schlank. (369KB)
• “Eight habits of highly effective audit committees” by John F. Morrow and Joan Pastor. (2.3MB)
• “Issues of the day for boards and audit committees” by Mak Keat Meng and Glenn Daly. (189KB)
• “Audit committees' duties and concerns” by SID. (1.2MB)
• “Hard work ahead for audit committees” by Gerard Tan. (253KB)
• “Whistleblowers: The directors' ally” by Michael Gray. (65KB)
• “Responding to anonymous whistleblowers” by Willie Cheng. (155KB)
• “Fighting corporate fraud on the frontline” by Chris Leahy. (75MB)
• “Auditor rotation – Is it time?” by Willie Cheng. (177KB)