Your organization has determined that an audit is either required or desired. Starting on the right foot includes making a determination of who will oversee the audit process. What makes the most sense for your organization? This question will be answered in this article which is a continuation of a series of articles addressing preparation of an audit.
Who will be responsible for the audit process?
The board’s first step in preparing for a financial statement audit includes determining who will be responsible to oversee the audit. Either the whole board or a subcommittee of the board may be responsible for the audit process. Responsibilities include overseeing the hiring and evaluation of the audit firm, overseeing communication with the finance department throughout the audit, and reviewing and approving of the audited financial statements. It is important if a subset of the board is charged with governance of the audit that the official meeting minutes document the authorization and directly communicate the decision to the auditor.
What is an audit committee and what are their responsibilities?
An audit committee is part of the overall board of directors and is usually comprised of individuals that have strong financial backgrounds. Ideally audit committee members should have past experience serving on other organizations boards or significant business experience in a financial monitoring role. Having experienced individuals on the audit committee is crucial to ensure that the financial statements represent a fair presentation of the organization’s financial condition. The audit committee also is responsible to draft responses to the findings reported in the auditor’s management letter. A management letter may be issued by the audit firm that outlines deficiencies in the internal control environment identified by the audit. If further action is required to address findings in the management letter, the audit committee should work with the responsible parties of the organization throughout the year to ensure that the findings gets resolved in a timely and efficient matter. In some situations, governance will accept certain findings if the findings would be too costly to fix. A common example is a finding related to financial statement preparation performed by the auditor would be too costly to resolve this finding.
Do organizations need to have an audit committee? What are the benefits?
An organization is not generally required to have an audit committee unless an oversight organization requires one. However, many organizations find it beneficial as it reduces the work load of the board. With a smaller committee size, it creates efficiencies in scheduling meetings, which promotes meeting on a more frequent basis if desired. A subcommittee creates more open and comprehensive communication with the auditors as committee members have more time to devote to the audit process instead of limiting communication to a short presentation of the audited financial statements to the whole board. The subcommittee can also contribute by having a more consistent role which leads to a greater understanding of the organization’s accounting functions and to help facilitate and implement internal control improvements.
Governance involvement during an audit
At the beginning of the audit process, the auditor will contact a member of governance. The auditor will generally inquire about any noncompliance, fraud or any other matters that would have affected the organization in the current year. The auditor will also inquire about any concerns governance has and how the auditors can help address those concerns during the audit. Governance should review the engagement letter from the audit firm to accept the responsibilities and understand the services to be performed. If any difficulties occur in the audit process, governance will often assist with a resolution. During the final stage of the audit, governance will review, approve, and accept the audited financial statements to ensure that they adequately support the books and records of the organization. It is very important that governance is forthcoming and provides the audit firm with accurate and truthful information.
Stay tuned for the next installment of the preparation of an audit series where we discuss fraud and the planning process.
For additional information, please contact any of Ketel Thorstenson’s nonprofit experts.