Updated Checked by the Tax-Services.ca editorial team How we check
An audit committee in Canada is a group of directors that reviews a corporation’s financial statements before the board approves them. Under section 171 of the Canada Business Corporations Act, a distributing corporation (one that sells securities to the public) has to have one, and it needs at least three directors, most of whom can’t be officers or employees.
What do audit committees in Canada actually do?
The statute gives them one named job: review the financial statements before they’re approved.
An audit committee shall review the financial statements of the corporation before such financial statements are approved under section 158.
Canada Business Corporations Act, section 171, laws-lois.justice.gc.ca
In practice that puts the committee between management, who prepared the numbers, and the auditor, who checked them.
The auditor is entitled to notice of every committee meeting, and can attend and speak at the corporation’s expense. If the committee asks, the auditor has to attend. That’s how the committee hears the auditor’s concerns without management in the middle.
Who has to have one, and who doesn’t?
| Corporation | Audit committee under the CBCA |
|---|---|
| Distributing (sells securities to the public) | Required, unless the Director grants an exemption |
| Not distributing (most private companies) | Optional |
| Provincially incorporated | Follows the provincial act, which we didn’t review |
Corporations Canada publishes a policy on exemptions. The Director will exempt a distributing corporation only if satisfied that shareholders won’t be prejudiced by having no committee. Securities regulators set their own rules for listed companies, and we haven’t covered those here.
How many people should sit on it?
At least three directors, with a majority who aren’t officers or employees of the corporation or its affiliates. Take a five-person board where two directors are also senior managers. Three outside directors could form the whole committee, and a committee of three could include at most one of the managers.
The rule is a floor. It doesn’t say who should chair or how often to meet, so those choices sit with the board.
What should a committee ask about the numbers?
Good questions are plain ones. Why did the margin fall? A product sold at $1,500 with a cost of $1,080 earns a 28.0% gross margin, and the profit margin calculator shows it. If the cost climbs to $1,260, the margin drops to 16.0%. A twelve-point fall that nobody in management can explain is exactly what a committee should press on.
Other questions follow the same logic. Do payroll figures match what was sent to the CRA? You can test that with the payroll remittance estimate. Is the tax expense sensible? The corporate tax calculator gives a rough check, though it doesn’t model every credit or adjustment. And did a big purchase earn its keep? The ROI calculator gives a starting number.
Can a small private company use the idea anyway?
If you run a small private company, you probably don’t need a formal committee. But you can borrow the habit: once a year, sit down with someone who didn’t prepare your books and ask them to poke at the numbers. It could be a trusted outside advisor, a retired controller from your network or a fellow owner willing to swap favours. Give them the bank reconciliation, the last two sets of statements and a list of your five biggest expenses, then let them ask whatever they like. A coffee and an hour of that is a lot cheaper than finding out about a problem from the auditor.
Mistakes committees make
Rubber-stamping is the obvious one. A committee that meets once, the night before the board, hasn’t reviewed much. Another is filling the seats with people who report to the CEO, which defeats the purpose of the majority rule.
There’s also a legal point directors sometimes miss. Directors and officers must promptly tell the committee and the auditor about errors they find in the statements, and an auditor who finds a material error has to inform the directors. Waiting for the audit to reveal a problem isn’t a plan.
For the difference between the auditor’s work and internal checks, read internal and external audits compared.
How we checked the figures
The composition rule, duties and auditor rights are from section 171 of the Canada Business Corporations Act, quoted above. The exemption test is from a Corporations Canada policy page. Margin figures are output from our own calculator. We didn’t find a reliable source for how often committees meet or what they cost, so we say nothing on either.
Frequently asked questions
Does every Canadian company need an audit committee?
No. Under the CBCA a distributing corporation must have one unless the Director exempts it. Other corporations may set one up but don't have to.
How many members does a CBCA audit committee need?
At least three directors, and a majority can't be officers or employees of the corporation or its affiliates.
What does an audit committee review?
The financial statements, before the board approves them. The auditor can attend its meetings.
Can a corporation be exempted from having one?
The Director can exempt a distributing corporation if satisfied shareholders won't be prejudiced by having no committee.
Do provincial corporations follow the same rule?
Provincial acts and securities rules may differ. We only reviewed the federal CBCA.
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