This week’s post comes courtesy of Kathy Grogan, audit and advisory partner with Hood & Strong LLP. During her more than twenty-six years in public accounting, her experience has been concentrated in and currently only serves clients in the not-for-profit sector. Services provided to this sector include internal control and operations reviews, analysis of accounting systems and preparation of financial statements in audit engagements. Kathy is also the leader of Hood & Strong LLP’s Not-For-Profit Industry Service Group.
For many not for profits, audit season is approaching. At Hood & Strong LLP we work with a number of not for profits and many members of our team also serve on audit committees. Here are some thoughts on what we have learned from those partnerships on what makes the relationship between the independent audit firm, management and the audit committee of the board of directors successful.
First, schedule an audit meeting in advance of the audit fieldwork. The purpose of the meeting is to communicate and inform the interested parties on a number of topics. We recommend that the meeting attendees should be the executive director, members of the finance department (CFO, controller, director of finance), and the audit partner and manager. For some organizations it makes sense to have other members of the senior management team at the meeting – such as the chief operating officer, development director and human resources director. Generally, the chair of the audit committee will work with management to establish a meeting agenda. Following is an example of a meeting agenda and discussion topics that are most common in the pre-audit planning meeting:
- Communications with those charges with governance – this is where the auditors discuss their responsibilities under generally accepted auditing standards, discuss the approach to internal control relevant to the audit, scope of the audit, a review of the engagement letter, timing of the work and the deliverables. At this time the auditors may provide information on new accounting and auditing standards relevant to the organization and report on their applicability and impact for the Organization’s financial statement audit. The auditors would also confirm their independence to the organization and discuss any non-audit services, such as the preparation of the Organization’s information returns, commonly known as the Form 990.
- Management update on operations – often times audit committee members may not hold a position on the board of directors. This is an opportunity for the audit committee to hear from management about the organization’s finances – year to date financial information can be provided along with an overview of significant transactions, estimates and other items that the committee should be made aware of. If there has been changes in finance department personnel this is a good time to discuss the personnel changes that occurred and any significant changes to procedures that resulted.
- Communications during the audit – generally throughout the audit the audit committee is not consulted. Sometimes, although not very frequently, the audit committee will need to be consulted. It is important to understand who the auditors should be communicating with and making sure that all parties are aware of how to contact one another.
- Executive Session – this is a point in time where the auditors would meet with the audit committee, without management present. This is an important part of the meeting and committee members are generally asked the following types of questions:
- Does the audit committee have any audit, accounting or fraud concerns?
- What are there perspectives on fraud occurring within the organization? Is there any particular area that they feel the organization may be more vulnerable than others?
- During the year have there been any instances of errors or irregularities, or breakdowns in internal controls or processes that could materially impact the financial statements?
- Are they aware of any material litigation or claims against the Organization? Any significant transactions that may occur prior to the issuance of the financial statements?
- Is there anything that the committee would like the auditors to look into while conducting our fieldwork?
The pre-audit planning meeting is a necessary component of the audit plan. Often times, given the size of an organization, a full blown audit committee meeting may not be practical. In those situations we recommend that consideration be given to have a telephone call with the audit committee chair to discuss the items in executive session and providing the required communications to those responsible for governance in writing.
The AICPA has a number of tools to assist audit committees. They can be found at aicpa.org.