Question

The audit committee of a company which is responsible for the appointment of the independent audit firm should consist of

a) Board members only.
b) Shareholders exclusively.
c) Both external and internal auditors.
d) Majority of independent directors.

Answer 1

The audit committee should consist of the majority of independent directors to ensure objectivity and proper corporate governance.

Step-by-step explanation:

The audit committee of a company, responsible for the appointment of the independent audit firm, should consist of the majority of independent directors. This structure ensures that the audit committee can operate with sufficient objectivity and is free from the influence of management or insiders.

The audit committee's role in corporate governance is critical as the board of directors, though elected by shareholders, could be influenced by the management whose activities they are supposed to oversee and hold accountable. In fact, the failure of such a system was evident in the case of Lehman Brothers, where corporate governance did not succeed in providing accurate financial information to investors.