ROLES AND RESPONSIBILITIES OF THE AUDIT COMMITTEE
- The audit committee is a committee of the Board. Its members, all independent of the organization, typically include those that understand financial statements that are prepared in accordance with accepted accounting principles, the financial statement audit process, and the organization’s internal controls.
- An important purpose of the audit committee is to evaluate the internal and external risks of the organization.
- The audit committee should meet with the board of directors, external auditors, and if the organization has these functions/requirements: internal auditors and corporate/Medicaid compliance officer/quality assurance officer.
- The audit committee reviews and approves the organization’s audited financial statements, auditor’s findings, reports from government audits and its funding sources, and its annual IRS Form 990 and applicable state returns. If the organization has a pension plan, the audit committee should also review the pension to make sure it is properly being benchmarked on a periodic basis.
- The audit committee will meet periodically throughout the year and minutes must be maintained for all meetings held.
THE AUDIT COMMITTEE’S ROLE IN THE AUDIT PROCESS
- Audit Committee members play an important role in the selection of the organization’s external auditor.
- The audit committee will prepare a request for proposal to send out to various CPA Firms, including the organization’s existing external audit firm.
- There are many factors to consider when selecting an audit firm. Does the firm have experience working with other organizations in the same industry? The firm should provide references to organizations that are comparable to your organization. COVID-19 brought a change in how audits are performed. Is the firm’s use of technology appropriate for remote working and secure for sharing of sensitive audit documents? Other than performing the audit, is the auditor available to answer questions throughout the year? Do they provide resources for accounting and industry updates? Other factors to consider are staffing patterns, will the partner and manager have significant involvement in the audit; demeanor and communication style, responsiveness to emails, deadline awareness, flexibility of the auditor to work with you with respect to audit adjustments and findings; fees and extra billing, how does the firm budget for annual increases and will they bill for additional time spent above the quoted audit fee. Price is an important factor for many organizations; however, audit quality should be in line with the price of the audit. Lastly, the audit firm’s most recent peer review report should be reviewed.
- Based on the previously noted factors, the audit committee should develop a scorecard to compare the type of factors that are most important in the decision of the audit firm.
- Once the audit firm is selected, the audit committee will review the engagement letter to ensure understanding of management and the auditor’s responsibilities.
- The audit committee will meet with the auditors before and after the audit, approve the audited financial statements and audit findings, if any, and present to the full board of directors.
INTERNAL COMMUNICATION AND UNDERSTANDING RISK
- The audit committee interacts with the Board of directors, management of the organization, internal and external auditors.
- There is a purpose for the audit committee’s communication with each of these groups. The discussions with the board of directors are for the plans and results of internal and external audits; results of risk management; internal controls; board policies and compliance with annual return filings. The audit committee will discuss with organization management, any changes to internal controls and risk management reviews. Communication with the internal auditors over risk assessments and audit tests will help the audit committee in its risk management process.
- The audit committee’s risk management includes its assessment on several factors that can have a significant impact on the organization. The audit committee being aware of these factors can help to ensure the organization reduces its exposure to risk of non-compliance with laws and regulations, as well as the risk of significant audit findings from both its external auditors and if applicable, audit findings from its funding sources. Some factors include having the required board policies, proper internal controls, compliance with funding source contracts, compliance with annual filing requirements (i.e. 990 and audited financial statements to the NYS Charities Bureau), reviewing and understanding the finances of the organization, compliance with regulations surrounding human resources, and ensuring there are proper information technology policies and security in place.
Each of these webinars and materials are available on our website. Please share them with your audit committee. We also provided an audit committee self-assessment guide. We recommend reading this over and performing your own self-assessment to ensure the audit committee is functioning in the manner it was designed and that best fits the organization.
Tania Quigley, CPA
Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area since 2005 where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.