a) Role and Responsibilities of the Audit Committee (12 marks)

i) Role in External Audit (6 marks):

• Monitoring Financial Integrity: The audit committee should monitor the integrity of the company’s financial statements. This requirement means that the audit committee has responsibilities regarding the external audit.
• Reviewing Audit Findings: The committee, in consultation with the auditors, reviews the findings of the audit. At the end of the audit cycle, it should assess the effectiveness of the audit. This assessment should include considering the way in which key accounting judgments have been treated and also obtaining feedback about the auditors’ conduct from individuals within the company, such as the Finance Director.
• Auditor Appointment: The audit committee should make recommendations to the board in relation to the appointment, re-appointment, or removal of the company’s external auditors. These recommendations are put to the shareholders for approval in the company’s general meeting. The committee should also approve the remuneration and terms of engagement of the external auditors that have been negotiated with the auditors by management.
• Ensuring Independence: The audit committee should review and monitor the independence of the external auditors and the objectivity and effectiveness of the audit process. Regarding auditor independence, the committee should develop and implement the company’s policy on using the external audit firm for non-audit work, consistent with the ethical guidelines of the auditing profession.
• Evaluating Audit Failures: The audit committee should review the reasons why the fraud by the employee in the treasury department was not identified, and whether the external auditors may have been at fault in any way in failing to identify the problem. Although auditors do not have responsibility for preventing and detecting fraud, they might be expected to identify and report suspicions of fraud uncovered during the audit.

ii) Role in Internal Control and Internal Audit (6 marks):

• Reviewing Internal Controls: The audit committee should review the company’s internal financial controls. Unless addressed by the board as a whole or by another board risk committee consisting of independent directors, it should also review the company’s internal control system.
• Considering Internal Audit Needs: If the company does not have a strong internal audit function, the audit committee should consider annually whether there is a need for such a function and make a recommendation to the board. If the decision is made not to have an internal audit function, the reasons should be explained in the audit committee’s report to shareholders in the annual report.
• Evaluating Whistle-blowing Procedures: The audit committee should review the adequacy of whistle-blowing arrangements in the company, ensuring that there are mechanisms for employees to report concerns about misconduct or fraud confidentially.

b) Recommended Changes to Address Internal Control Failures (8 marks):

• Strengthening Internal Controls: The fine for breach of banking regulations may indicate a failure by company employees to apply appropriate procedures or inadequate procedures within the company to ensure compliance. Management should maintain a proactive approach to identifying vulnerabilities and implementing effective internal controls to prevent serious breaches.
• Segregation of Duties: The fraud by the employee might have been enabled by lax financial controls and possibly inadequate whistle-blowing procedures. Ensuring the segregation of duties involving asset custody, transaction authorization, and record-keeping is crucial. No single employee should be in a position to both commit and conceal fraudulent activities.
• Investigating Control Failures: The adequacy of the company’s internal controls should be reviewed urgently. The audit committee, especially under its new chairman, should lead the investigation into the internal control failures and assess whether the external auditors played any role in failing to detect the issues.
• Establishing an Internal Audit Function: Given the internal control issues, the audit committee should recommend establishing a robust internal audit function to the board. This function would provide continuous oversight of the company’s controls and help prevent future issues.