The perspective of the external audit team is often that a nonprofit organization’s audit committee exists solely to meet with the external CPA firm and review the audited financial statements and form 990. While this is an important responsibility, it’s not the only responsibility of the committee.
For example, the audit committee should be involved in the following activities:
- Participate in overall risk assessment of the organization and methods to mitigate risk.
- Review any conflicts of interest between the organization and employees or board members.
- Be familiar with the system of internal control, specifically with respect to segregation of duties, to evaluate adequacy of controls.
- Ensure that recommendations from the external audit firm are being implemented.
With respect to the annual audit engagement, the committee should follow a reasonable timeline for needed discussion, such as the following:
Three months prior to year-end: Update the committee’s risk assessment of the organization and meet with the audit firm for discussion. At the same time, discuss engagement timeline with management and the audit team to ensure deadlines will be met.
During the audit engagement: Monitor timeline and any audit-related issues that arise that could affect completion of the audit engagement and preparation of Form 990. Be informed of any audit adjustments identified during the audit process that change internal financial results reported by management.
Following engagement completion: Interview both the external audit team and management about the audit experience and any improvements that should be made to the engagement for the current year. Also discuss whether changes to accounting or reporting standards will modify the audit or Form 990 preparation engagement. And, finally, consider any recommendations from the external audit firm and discuss with management how the recommendations will be implemented.
As you can see, the role of the audit committee within the nonprofit organization is primarily one of risk oversight, and its interaction with both management and the external CPA is to monitor risk and assess the quality of external reporting by the organization.
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