Consider the following when organizing an audit committee:

• An audit committee should include at least three directors. A smaller group may not provide enough varying perspectives.
• It’s useful to have a senior board member participate on the audit committee. Historical perspective could prove to be useful in asking the right questions of management and the auditors.
• Audit committee membership should rotate in a manner that provides both continuity and “fresh eyes” each year. The chairperson should have served at least one year on the committee.

Once the committee is established, its responsibilities should be documented for new member orientation purposes, as well as to remind members and management what their roles are. Consider including the following:

• The audit committee should be advised by management when changes to the accounting principles or policies are considered, particularly if the changes have a material effect on the financial statements as currently reported.
• The committee should be notified immediately about fraud or transactions or events that could create exposure to the Board.
• The audit committee should receive assurance that the organization complies with its contractual obligations.
• Management should brief the committee on the internal control environment. Management also needs to provide assurances to the committee about the effectiveness of internal controls.
• The audit committee will recommend to the board the selection, retention or termination of the organization’s outside auditors. Frequently, the audit committee will be involved in requesting audit proposals and/or reviewing those proposals. It may be very useful for the committee to meet each prospective audit team to assess its responsiveness to the organization’s needs.
• Pre-audit meetings with the audit firm and management can be useful. At a pre-audit meeting, the audit committee and auditors should discuss the scope of the audit and identify any specific concerns. The audit committee may identify specific controls it would like the audit firm to consider in more depth than would be required by the standard audit.
• The audit committee should review audited financial statements and management letter reports to verify that they faithfully reflect the past year’s transactions and events. At least one face-to-face meeting with the auditors a year is recommended. That meeting should focus on reviewing the results of the audit. The committee should also expect the audit firm to provide the following information, as required by the professional standards of auditors:
• the firm’s responsibilities under generally accepted auditing standards,
• changes in the organization’s significant accounting policies and their applications,
• use of management judgments and estimates in the financial reporting process,
• audit adjustments and differences,
• management’s consultation with other accountants, or issues discussed in connection with the retention or appointment of the auditors, and
• other matters considered necessary by the auditors.
• The audit committee will prepare a report to the board at the end of the audit process. The report should document the committee’s acceptance of the audit firm’s reports and identify any significant areas that the board should address.