Audit committee mandate
The audit committee gives investors independent oversight of management's financial reporting, under mandatory requirements that National Instrument 52-110 Audit Committees sets for reporting issuers. This standing committee of the board of directors oversees the integrity of financial reporting, the independence of the external auditor, and the adequacy of internal controls.
Composition and independence
NI 52-110 requires that the audit committee consist entirely of independent directors. A director is independent if the director has no direct or indirect material relationship with the issuer — a relationship that could, in the view of the board, reasonably interfere with the exercise of the director's independent judgement.
The following relationships create a per se non-independence finding: current employment by the issuer, participation in an equity compensation plan, acceptance of compensation from the issuer other than board remuneration, and family relationships with officers of the issuer.
All audit committee members must also be financially literate — able to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues reasonably comparable to those of the issuer's financial statements. NI 52-110 requires the issuer to disclose whether a designated "audit committee financial expert" sits on the committee; it requires this disclosure, not the expert's presence itself.
For venture issuers and other smaller reporting issuers, NI 52-110 provides certain exemptions from the full independence and composition requirements. These exemptions do not relieve the issuer of the obligation to have a functioning audit committee with oversight responsibilities.
Core responsibilities
Financial statement oversight. The audit committee reviews the annual and interim financial statements before they are approved by the board and filed on SEDAR+. The review includes examination of significant accounting policies and estimates, areas of management judgement, and any identified material weaknesses or significant deficiencies.
External auditor oversight. The audit committee is directly responsible for the appointment, compensation, and oversight of the external auditor. This responsibility includes review of the auditor's independence, review and pre-approval of all audit and permitted non-audit services, and review of the auditor's report and any management letters.
Internal controls. The audit committee oversees management's processes for maintaining adequate internal controls over financial reporting. This includes review of management's assessment of internal control adequacy and discussion with management and the external auditor of any significant control deficiencies.
Whistleblower procedures. The audit committee must establish procedures for the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters, including procedures for the confidential, anonymous submission of concerns by employees.
Audit committee information circular disclosure
Reporting issuers are required to disclose in their management information circular or AIF the names and financial literacy of audit committee members, the charter of the audit committee (often attached as an exhibit), and any services pre-approved by the committee. Disclosure of audit and non-audit fees paid to the external auditor is required annually.
See also
- board-governance-structure — the broader board governance framework
- Continuous disclosure obligations — the financial reporting obligations the audit committee oversees