What does an audit committee do?

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As a result of its oversight role, the audit committee may coordinate, monitor, and work closely with the nonprofit’s staff to prepare the nonprofit for the independent audit. The audit committee also may participate in the decision to hire the auditor and should be responsible for evaluating the audit process and recommending whether or not to reengage the audit firm for subsequent audits. The audit committee is also the body that presents the auditors' findings to the board of directors, making sure that the full board understands any recommendations made by the auditors before formally accepting the audit report. Finally, the audit committee recommends changes in practices or reporting in order to maintain or bring the nonprofit into a “best practices” position.

Typically these responsibilities mean that the audit committee:

  1. Drafts a charter for its own role and evaluates it periodically;
  2. Is responsible for the appointment, compensation, and oversight of the independent auditors' work;
  3. Asks questions of management and the independent auditors to evaluate the audit process;
  4. Receives reports directly from the auditors (not the executive director) in connection with the audit’s findings, and
  5. Receives and considers actions to recommend to the full board as a result of recommendations from the auditors about actions the nonprofit should take to improve its financial reporting and management practices, as needed.

Oversight for financial best practices and ensuring strong internal controls

As a foundation for its oversight role of the audit process, the audit committee needs to be aware of the overall financial health of the nonprofit. Before the initial audit takes place, committee members should understand the recommendations contained in prior years’ audit reports and should be prepared to work with management and the board of directors throughout the year on any financial practices that the auditors note need attention. During the year after the auditors have conducted the audit, the audit committee members usually arrange to meet with the nonprofit’s management and with the independent auditors to gain a deeper understanding of whether the organization’s financial reporting practices and internal controls are adequate. (Changes to programs and other financial practices from year to year may make this an important inquiry on an ongoing basis.) As a result, the audit committee may recommend policies and procedures to strengthen the nonprofit’s internal controls. The audit committee may also be delegated the authority in its charter or by board resolution to investigate/resolve any concerns about financial controls and to proactively take steps to prevent financial mismanagement.

Internal controls for a nonprofit

  • What internal controls are appropriate for a small nonprofit? Read Five Internal Controls for the Very Small Nonprofit from Blue Avocado, which describes critical internal controls that can help even the smallest nonprofit meet the expectations of segregation of duties and designing a chain of accountability.
  • The National Endowment for the Arts Office of the Inspector General issued a Financial Management Guide for Nonprofit Organizations designed to offer practical information for grantees on what is expected by the federal government in terms of financial accountability. It includes descriptions of the expectations for financial reporting and internal control procedures.

Evaluating the auditors and the audit committee

The audit committee is also responsible for evaluating the auditors' performance and for making a recommendation about whether or not to retain the same audit firm the following year or recommend that the nonprofit use another firm in the future. Part of the evaluation process should be a self-evaluation: How efficient was the audit process? How well did the audit committee move the process along? Was the nonprofit disrupted by the audit process or the auditors' fieldwork? If so, what could be changed next time to limit the disruption? Does the audit committee’s charter adequately describe its role and the scope of its authority? Are the right board members serving on the audit committee? Who will be the chair of the committee in the future? (Is there a clear leadership succession plan for the committee?) Did the audit committee provide a thorough report to the full board? Does the commitee or full board need more preparation or financial literacy education in order to really understand the audit function and the auditors' report? (If so, the audit committee might ask the auditors to present the report at a board meeting and use that as an opportunity to familiarize the board members with various concepts covered in the audit report.)

Handling complaints about financial mismanagement

In some organizations the audit committee is also the body that is designated as the “ombudsperson” for the receipt of complaints about financial management. Whether or not the audit committee plays this role is usually addressed by the nonprofit’s “whistleblower policy,” which may or may not identify the audit committee or the chair of the audit committee as the person to whom complaints should be directed. If the audit committee is assigned this role, when/if a staff member raises a concern about the financial accounting practices of the nonprofit, the employee reports his/her concerns to the chair of the audit committee. In response, the audit committee is responsible for investigating the complaint (within a prompt timeframe is optimal) and (this is very important in order to comply with the Sarbanes Oxley Act) ensuring that there is no retaliation against the employee making the complaint. The audit committee should report to the board on an annual basis or as needed whether any complaints or concerns about financial improprieties have been raised by employees or others, and how those complaints/concerns were investigated, managed, and resolved.

Resources for audit committees

  • Sample Request for Proposal (RFP) for audit services (Raffa)
  • Audit Committee Charter Matrix (AICPA Toolkit)
  • Questions the audit committee might ask during the audit planning meeting (Raffa)
  • Questions an audit committee might ask after completion of the audit (Raffa)
  • Conducting an Audit Committee Executive Session: Guidelines and Questions (AICPA Toolkit)
  • Conducting an Audit Committee Self-evaluation: Guidelines and Questions (AICPA Toolkit)
  • Audit committees and management can use this sample whistle blower tracking report to implement an effective whistle-blower program with appropriate policies and processes (AICPA Toolkit)

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