Audit committees have been proposed as an important group to support the independence of the external auditor. The NYSE has made it mandatory for all companies listed on it to have an audit committee composed solely of outside directors. The AICPA and the IIA have recommended the formation of audit committees.

Required:

a. Define the term audit committee. Indicate its composition.

b. What is the basis for the requirement by the NYSE that audit committees be composed solely of outside directors?

c. What are the responsibilities of the external auditor to communicate information to the audit committee? Identify all required information that must be communicated to the audit committee and briefly indicate the likely rationale for requiring the communication.

d. What factors would you suggest that an audit committee look at in evaluating the external auditor’s independence?