Your audit committee should be highly involved in the organization’s financial reports, ensuring that presentation and disclosure of matters of significance are handled fairly and transparently. This includes:
1) Engaging the auditor –
The first job of the audit committee is to engage the audit firm. The committee should then evaluate the auditors annually and re-engage or disengage them based on that evaluation. If the committee chooses to remain with the same accounting firm for an extended time, it may consider requesting a change in the partner overseeing the account (e.g., the audit partner and audit manager rotate off at least every seven years).
By staggering the rotation of the partner and manager, the organization benefits from having a fresh pair of eyes on the audit while maintaining continuity with the firm that knows it best. If a change in auditors is required, the audit committee should then be at the helm during the RFP process and selection of new auditors.
2) Communicating with the auditor –
Modern auditing standards now require certain ongoing, two-way communication between the auditor and your audit committee or board of directors on such topics as:
• Planning the audit.
• Significant findings from the audit.
• Difficulties encountered in performing the audit.
• Observations arising from the audit that apply to your financial reporting process.
• Any “significant deficiencies” or “material weaknesses” in your organization’s internal controls as it relates to your financial reporting. One example would be a lack of appropriate segregation of duties created by staff vacancies or turnover that could qualify as a material weakness.
Schedule periodic conference calls between the audit committee chair and the audit firm to discuss audit status and issues. Designate a point person to review misstatements discovered during test procedures, discuss control deficiencies and approve the draft financial statements and notes.
3) Reviewing the audit –
To truly segregate duties and provide financial oversight, the audit committee should meet with the auditors — at some point in time — without management present. This can be done once the audit and management letters have been prepared and reviewed by management. The audit committee should also consider meeting in executive session without the presence of management to discuss audit findings before reporting results to the full board of directors.
Consider an Audit Alternative
In lieu of an audit, consider retaining an outside CPA for what is called a “financial statement review.” Such a review doesn’t conclude with an auditor’s “opinion” as to whether the financial statements were prepared in accordance with generally accepted accounting principles (GAAP) — just that nothing suggesting the financial statements are not in accordance with GAAP came to the outside CPA’s attention.
For more information regarding audit committee selection, please contact our office.