What are the primary functions of an audit committee, and why must it be independent?

• A. Hire external auditors and manage vendor contracts.
• B. Oversee financial reporting, internal controls, and external audits; independence ensures objective oversight.
• C. Approve mergers and determine dividend policy.
• D. Manage day-to-day financial operations and set audit schedules.

Answer: (B)

This item tests how the audit committee functions within corporate governance and why independence is essential for its work. The audit committee’s main duties are to oversee the financial reporting process, monitor the internal control system over financial reporting, and supervise the external audit. By focusing on these areas, the committee helps ensure that the company’s financial statements are accurate, complete, and prepared in accordance with applicable accounting standards. It also reviews the effectiveness of internal controls and risk management related to financial reporting, and it coordinates with external auditors to address any issues found during the audit.

Independence matters because it gives the committee the objectivity needed to challenge management when numbers, disclosures, or processes look questionable. An independent committee can critically assess the fairness of the financial statements, oversee the auditor’s work without undue influence, and report findings to the board and shareholders with credibility. This impartial oversight is what underpins reliable financial reporting and strengthens trust in the company’s governance.

The other options mix in responsibilities that are outside the audit committee’s primary remit. Hiring external auditors and managing vendor contracts touches on procurement and administration rather than ongoing audit oversight. Approving mergers and determining dividend policy involve strategic and financial decisions that sit with the board or special committees. Managing day-to-day financial operations and setting audit schedules are either management duties or operational tasks, not the governance-focused oversight the audit committee provides.