1. The chair of the audit committee shall be a member of the board of directors, in good standing, and all members shall be independent in order to serve on this committee.

Although not all audit committee members need be members of the board of directors, a majority of the audit committee members should be members of the board of directors.

Test for independence, based on the policies established by the organization.

Minimal independence standards would prohibit employees or those with direct financial interests in entities serving the organization from serving on the audit committee.

Additionally, an organizations independent auditors should not serve on the audit committee or on the board of directors.

Indicate in the audit committee minutes whenever a new member is appointed.

Affirm annually or whenever a change in status by any audit committee member occurs.

2. The audit committee should have access to financial expertise, whether in the form of a single individual serving on the committee, or collectively among committee members.

If the financial expertise is provided by one individual, it is desirable that he or she be a member of the board of directors. When no single member of the board has the requisite skills, other arrangements should be made to ensure that the audit committee has the financial expertise to carry out its duties.

(See the tool Audit Committee Financial Expertise Considerations, in this toolkit.)

Ascertain that the audit committee has the requisite financial expertise as defined by the organization.

Indicate in audit committee meeting minutes how financial expertise is available to the audit committee.

Affirm annually and when there is a change in status.

3. Review the committees charter annually, reassess the adequacy of this charter, and recommend any proposed changes to the board of directors.

Consider changes that are necessary as a result of new laws or regulations.

Review the charter each year. Assess the appropriateness of each point in the charter in light of the previous years experience. Assess the completeness of the charter in light of new best practices and new legal or regulatory requirements.

Report to the board on the appropriateness of the audit committee charter and any revisions recommended.

Review annually, unless changes are needed during the course of the year.

4. The audit committee will meet as needed to address matters on its agenda, but not less frequently than twice each year. The audit committee may ask members of management or others to attend the meeting and provide pertinent information as necessary.

In-person meetings should be held at least once each year. All members are expected to attend each meeting in person, via telephone conference, or videoconference.

Telephone conference meetings may be held more frequently.

The agendas for meetings should be prepared and provided to members in advance, along with appropriate briefing materials.

Prepare minutes that document decisions made and action steps following meetings and review for approval.

Meeting minutes should be filed with the board of directors.

Minutes should be distributed as soon as possible but no later than before the next meeting.

5. Conduct executive sessions with the outside auditors, executive director, and chief financial officer (CFO). If the organization has a chief audit executive (CAE), general counsel, or outside counsel, executive sessions should be conducted with each of these individuals as well. Circumstances may dictate that additional executive sessions may be needed with the director of financial reporting, controller, or others as desired by the Committee. (See the tool Conducting an Audit Committee Executive Session: Guidelines and Questions, in this toolkit.)

Establish these sessions in conjunction with regularly scheduled meetings or as necessary.

Develop action steps to be taken, if appropriate.

Review as necessary, but not less frequently than regularly scheduled meetings.

6. The audit committee shall be authorized to hire independent auditors, counsel, or other consultants as necessary. (This may take place any time during the year.)

(See the tool Points to Consider When Engaging External Resources, in this toolkit.)

(See the tool Sample Request for Proposal Letter for CPA Services, in this toolkit.)

Establish a policy for the audit committee to preapprove engaging independent auditors and other experts.

Discuss whether a budget should be established for this purpose.

Requests for proposals (RFPs) should be used if time permits.

Prepare an engagement letter for each engagement.

Report submitted by external accountant, counsel, or consultant.

Continually review the policy and compliance with it as needed.

7. Review and approve the appointment, replacement, reassignment, or dismissal of the CAE.

(See the tool Guidelines for Hiring the Chief Audit Executive (CAE), in this toolkit.)

Meet in executive session at each meeting with the CAE.

Hold special meetings as may be necessary to address appointment, reassignment, or dismissal of the CAE.

The audit committee chair should be available if any unforeseen issues arise between meetings relating to the CAE.

Meet at least once annually with other members of executive management and the independent auditors to discuss the performance of the CAE. Discuss job satisfaction and other employment issues with the CAE.

Report to the full board on the performance of the CAE, including the effectiveness of the internal audit function.

Conduct ongoing reviews, as changes can be made at any time during the year.

8. Appoint the independent auditors to be engaged by the organization, establish the audit fees of the independent auditors, and preapprove any nonaudit services provided by the independent auditors, including tax services, before the services are rendered.

Review with management the significance of bidding out audit services.

(See the tools Sample Request for Proposal Letter for CPA Services and Peer Review of CPA Firms: An Overview, in this toolkit.)

At least once each year, discuss each of these items with management, the CAE, and the board of directors.

Review total audit fee in relation to any nonaudit services being provided by the independent auditors.

Review and evaluate the professional relationship with the auditors, including continuity of partner, manager, and staff; and level of service provided by auditors.

Review the scope of all services provided by the audit firm throughout the organization.

Document these discussions in the audit committee meeting minutes. Report on findings and provide recommendations to the board as considered necessary.

Review soon after the audit has been approved by the board, so the recommendation for the appointment of the outside auditor in the next fiscal year can be documented in the board minutes.

9. Review with management the policies and procedures with respect to officers, key employees (executive director, CFO, chief operating officer), disqualified persons as defined by the IRS (under Internal Revenue Code Section 4958), expense accounts, and perks, including excess benefit transactions; consider the results of any review of these areas by the internal auditor or the independent auditors.

Ensure written policies and procedures exist.

Discuss with the CAE, or equivalent, the need for testing by either the internal auditors, independent auditors, or other parties.

Report issues, if any, to the board.

Review policies and procedures annually.

Review any significant findings as they arise.

10. Inquire of management, the CAE, and the independent auditors about significant risks or exposures facing the organization; assess the steps management has taken or proposes to take to minimize such risks to the organization; and periodically review compliance with such steps.

Document the material risks that the organization faces. Update as events occur. Review with management and the CAE on a periodic basis.

Submit a risk report to the board and the independent auditors including mitigation strategies and quantifiable risks and insurance to cover such risks, e.g., loss of business.

Review at least once each year, and more frequently if necessary.

11. Review with the independent auditors, CFO, controller, and CAE the audit scope and plan of the internal auditors, if applicable, and the independent auditors. Address the coordination of audit efforts to assure the completeness of coverage, reduction of redundant efforts, and the effective use of audit resources.

Meet with external audit partner, CFO, controller, and CAE to discuss scope of the previous years audit, and lessons learned. Later, discuss planned scope for audit of current year and the standard of work to be followed. In addition, discuss the timing of progress reports, to be provided by the independent auditors, and the communications process to be followed in the event of deviations from the plan.

Document the meeting in the audit committee meeting minutes.

On an annual basis, review the scope of the previous years audit, and the interrelationship between the internal and independent auditors with respect to the scope of the independent auditors work.

At another of the meetings each year, review the plans of Internal Audit for audits in the current year, if applicable.

12. Consider reviewing with management and the CAE:

Significant findings on internal audits during the year and managements responses thereto

Whether Internal Audit encountered any difficulties in the course of its audits, such as any restrictions on the scope of its work or access to required information

Review reports of all internal audits issued since the previous meeting and planned for the upcoming year along with the status of each planned audit.

Review and discuss the findings for each audit completed since the prior meeting, and managements response to the report.

Discuss internal audit department budget and staffing with the CAE.

Report on the status of all internal audits planned for the next quarter and/or year.

Internal Audit should provide a summary of findings for completed audits, including managements plan to address findings and weaknesses identified.

Review at each meeting.

Any changes required in the scope of its internal audit

The Internal Audit departments budget and staffing

The Internal Audit departments charter

Internal Audits compliance with the Institute of Internal Auditors (IIAs) Standards for the Professional Practice of Internal Auditing (Standards), if applicable.

Internal Audit should meet separately with the independent auditors.

Discuss Internal Audits compliance with IIA Standards, if applicable, including the requirement for a peer review once every five years. If the organization receives federal funds, Internal Audit is required to have a peer review once every three years if the independent auditors plan to rely on their work to reduce the external audit scope.

Review the internal audit charter periodically and update, if necessary.

13. Inquire of the executive director and CFO regarding the sources of support and revenue of the organization from a subjective as well as an objective standpoint.

Discuss sources of support and revenue with the executive director, CFO, and other executives. Identify any issues addressed, and their resolution.

Include an agenda for executive sessions. (See the tool Conducting an Audit Committee Executive Session: Guidelines and Questions, in this toolkit.)

Review, as necessary, but at least annually.

14. Review with the independent auditors and the CAE:

The adequacy of the organizations internal controls, including computerized information system controls and security

Any related significant findings and recommendations of the independent auditors and internal audit services, together with managements responses thereto

Review the reports of the internal audit team for all audits completed since the prior audit committee meeting.

Review key internal controls with the CAE, and understand how these controls will be tested during the year.

Review these plans with the independent auditors to understand their scope with respect to key controls.

Report to the board on issues relating to internal controls, with emphasis on managements ability to override controls and the monitoring and testing relating to this capacity.

Submit a comprehensive report to the board at a specified meeting each year.

Update on anything new, or any changes to the internal control system, at every meeting.

(See the tools Internal Control: A Tool for the Audit Committee, and Fraud and the Responsibilities of the Audit Committee: An Overview in this toolkit.)

Review with the CAE the plans for audits of other elements of the control environment.

Determine that all internal control weaknesses are quantified, reviewed, and addressed.

15. Review with management and the independent auditors the effect of any regulatory and accounting initiatives, as well as other unique transactions and financial relationships, if any.

(See the tool Unique Transactions and Financial Relationships, in this toolkit.)

Independently, through professional reading and continuing education, keep up-to-date on new developments related to the not-for-profit industry, the organizations specific sector, and the environment in which the organization operates, including any regulatory requirements it may be subject to.

Discuss with management and the independent auditors in meetings.

Record discussion and any action steps in audit committee meeting minutes.

Review as necessary.

16. Review with management, and the CAE, any interim financial reports issued since the last meeting.

Discuss the financial statements with emphasis on changes in reporting, new and unusual transactions, and financial trends.

Record discussion and any action steps in audit committee meeting minutes.

Review as necessary.

17. Review with each public accounting firm that performs an audit:

All critical accounting policies and practices used by the organization.

Discuss each matter, and related matters that may come to the attention of the audit committee and/or the independent auditors through this process.

Create an action plan and follow-up plan as necessary.

Submit reports and documentation of discussions and resolution of disagreements.

Review, at least annually, and/or in conjunction with the year-end audit.

All alternative treatments of financial information within generally accepted accounting principles that have been discussed with management of the organization, the ramifications of each alternative, and the treatment preferred by the organization.

(See the tool Issues Report From Management, in this toolkit.)

18. Review all material written communications between the independent auditors and management, such as any management letter or schedule of unadjusted differences.

Discuss each item with the independent auditors and management (including the CAE) and conclude on the appropriateness of the proposed resolution.

Submit reports and documentation of discussions, resolution of issues, and the action plan for any items requiring follow-up and monitoring.

Review, at the completion of the external audit.

19. Review with management and the independent auditors:

The organizations annual financial statements and related footnotes

The independent auditors audit of the financial statements and their report thereon

The independent auditors judgments about the quality, not just the acceptability, of the organizations accounting principles as applied in its financial reporting

Any significant changes required in the independent auditors audit plan

Discuss each matter, and others that may come to the attention of the audit committee through this process, with management (including the CAE ) and the independent auditors.

Review with management the course of action to be taken for any action requiring follow-up.

Monitor any follow-up action that requires continued audit committee intervention.

Submit reports and documentation of discussions, resolution of disagreements, or action plan for any item requiring follow-up.

Review at the completion of the annual external audit.