Audits and Audit Committees

Internal controls

—      What is the tone from the top regarding a strong and effective internal control system?

—      Is the company experiencing any significant resource constraints in complying with Section 404?

—      What are the implications of an adverse opinion on the effectiveness of internal controls or on the late filing of the company’s Form 10-K?

—      Has the company developed a system to monitor compliance with the SEC’s Regulation Fair Disclosure on the dissemination of material, nonpublic information?

—      How have internal controls kept pace with the company’s growth and increased complexity?

—      Does the company have an internal audit department? How large is the department? What are its responsibilities? Are members of that department independent of all accounting functions? To whom does it report?

—      Do auditors, either internal or external, visit all of the company’s locations at least annually?

—      How does the company protect its internal systems and network from “hackers”?

—      Did the auditors identify any material weaknesses in internal control? Have corrective actions been taken?

—      What procedures are in place to prevent overrides in the internal control system? Has management discovered any overrides in the system? What procedures were implemented to prevent this from occurring? Did the company report these violations to the auditors and audit committee?

—      What did the external auditors conclude about the adequacy of the company’s computer control activities?

—      Are there adequate physical safeguards for computer software and hardware? Is there a disaster recovery plan in place?

—      Has the company taken measures to prevent the infiltration of computer viruses or other intrusions?

Fraud prevention and detection

—      Does management adequately evaluate the risk of fraud throughout the organization? What is management doing to deter and detect fraud?

—      Does the company have a documented procedure for following up on all reported issues through the company's hotline?

—      How were reported issues resolved during the year?

—      Has the company appointed a chief compliance officer?

—      What is the audit committee’s responsibility for fraud awareness and detection?

—      How does the audit committee address the risk of management override of controls?

The audit committee

—      How did/will the Sarbanes-Oxley Act, along with the rules adopted by the SEC and the various stock exchanges, improve the workings of the audit committee?

—      What criteria are used to select the members of the audit committee? What are their qualifications and backgrounds?

—      Does the company’s present audit committee include at least one financial expert under the new SEC definition? Who is (are) the financial expert(s) on the audit committee? What are the qualifications of the financial expert(s)?

—      How are the qualifications of the “non-financial expert” members of the audit committee assessed?

—      Does the audit committee receive continuing education?

—      How does the company monitor that the audit committee members are independent?

—      How are audit committee members compensated?

—      Does the company indemnify audit committee members in the event litigation arises that relates to possible conflicts of interest or negligence of the board? Is D&O insurance provided? Is the insurance adequate and available next year?

—      Have any audit committee members or their immediate families been employed by the company within the last 5 years?

The audit committee’s responsibilities

—      Did the audit committee implement a whistleblower policy? Did the audit committee develop a complaint system to receive, retain, and treat complaints? Who monitors complaints in the company?

—      Does management review the company’s annual report with the audit committee? Did the audit committee question any of the conclusions reached by management? Do the external auditors discuss the quality of the accounting principles used by the company with the committee?

—      Were the company’s interim financial statements and press releases reviewed by the external auditors and discussed with the audit committee before they were issued?

—      Does the audit committee have access to adequate resources to perform its duties properly? What is its budget for the coming year?

—      Do the external or internal auditors have direct access to the audit committee? How many times did the external or internal auditors meet with the audit committee during the past fiscal year? Does the work of the internal auditors complement the work of the external auditors?

—      Did the audit committee evaluate the work performed by the external auditors?

—      Did the audit committee evaluate internal controls by reviewing the external auditors’ and internal auditors’ recommendations for improving internal control and monitoring management’s implementation? Did the audit committee express any significant concerns regarding the company’s internal control system?

—      Is the audit committee aware of any possible illegal acts or conflicts of interest? If so, what is being done about them?

—      Do management and the external auditors discuss the accounting treatment for large and unusual or significant year-end transactions with the audit committee?

—      Does management discuss with the audit committee the company’s critical accounting policies? Has the audit committee required any changes to the company’s critical accounting policies based on those discussions? Has the audit committee engaged consultants to assist them in obtaining an understanding of the critical accounting issues?

—      What issues did the audit committee discuss with the external auditors last year? How were these issues resolved?

—      Does the audit committee review the internal auditors’ reports? How are the recommendations made by internal auditors evaluated for possible action?

The audit committee’s oversight of tax risks

—      Does the audit committee oversee tax risks? Does the company’s tax director regularly brief the audit committee on areas of tax risk and exposure?

—      Does the company compare its tax rate with those of its competitors? Does the audit committee agree with the company’s philosophy with regard to tax minimization and tax planning?

—      Does the audit committee feel the company has adequate tax expertise and resources to manage its tax risks?

—      Does the audit committee challenge the strength and completeness of internal controls over tax accounting and tax risk mitigation? Does it review the estimates and judgments involved in accounting for income taxes?

—      Does the audit committee determine that executive compensation plans are tax-compliant?

Relationship with auditors

—      How were the external auditors selected?

—      When will the lead partner and concurring partner rotate off the company’s audit? Do the replacements have adequate expertise? Has the audit committee reviewed their credentials?

—      Do the external auditors provide non-audit services to the company? What is the nature of these services, and how much has been incurred in fees? Does the company plan on using the external auditors for non-audit services in the future?

—      What criteria does the audit committee use in deciding whether to pre-approve nonaudit services?

Relationship with auditors (continued)

—      Were there any disagreements with the external auditors that arose during the year or were issues discussed with them that relate to management’s integrity? If so, what were they? Were they brought to the attention of the board of directors or audit committee, and how were they resolved?

—      What percentage of the consolidated audit hours do firms other than the principal external auditors provide?

—      Why were the external auditors changed last year? What criteria were used to select the current auditors?

—      Did the external auditors report on the adequacy of the company’s internal control? If not, why not?

—      What were the results of the external auditors’ latest peer review?

—      Did the external auditors provide advice and assistance in reviewing the financial statements of merger candidates prior to their acquisition during the year?

—      Did the external auditors review the “pro forma” disclosures in the company’s recent press releases?

—      Does the company use outside accountants other than the external auditors for non-audit services? If so, what did these services involve? Were the external auditors informed if other outside accountants were consulted on issues that might affect the company’s accounting or financial reporting?

—      Why do firms other than the principal auditing firm audit certain subsidiaries, divisions, or segments? Does the principal auditor take responsibility for the audit work performed by others?

—      How significant are the fees paid by the company to the external auditors in relation to the total revenues of the external auditor?

Other

—      Has the company paid its PCAOB support fees?

—      Which transactions were executed with related parties? What was the business purpose of the transactions? Were the terms of the transactions at amounts approximating arm’s-length or fair value? Who are the related parties? Why were related parties used? Are these transactions benefiting any specific shareholders, creditors, or others? Is the board of directors required to approve these transactions? Did it?