How the Audit Committee Functions

Authors: Phil Kenkel, Oklahoma State University,, and Bill Fitzwater,
Oklahoma State University

A good understanding of how an audit committee should work is critical to the financial professionals who are part of the cooperative’s internal and external audit teams. An audit committee must have four important concerns:

  1. Selection of the auditor
  2. Determining the scope of the audit
  3. Exercising diligence
  4. Ability to ask the hard questions

Selecting the outside auditor is one of most important jobs of the audit committee. The more training and experience the auditor has with similar cooperative businesses, the more familiar they will be with the special rules and procedures that apply. When engaging a new auditor, the committee may want to ask for references and discuss the auditor’s work with other cooperatives. In preparation for the audit, the auditor will prepare a contract called an “engagement letter” that will describe the responsibilities of the auditor, the audit committee and other cooperative employees. The committee should review the letter and resolve any questions prior to engagement.

Second, the audit committee must adopt an agenda so that it is in a position to find out what accounting issues are of concern to management and/or the outside auditor.

Third, the audit committee agenda should include a procedure for the analysis of the internal audit and internal audit controls so it can judge the effectiveness of the internal audit staff.

Fourth, the agenda should include participation in defining the scope of the work that the outside auditors are to perform as a result of the assessment of the internal controls and internal audit.

Fifth, the agenda should cover the annual review of the management and corporate code of conduct, as well as a review of its charter.

Sixth, the agenda should cover procedures so that the audit committee can receive candid assessments of the competence of the issuers’ financial professionals and necessary unrestricted access to management, the internal audit staff, the outside auditors and the outside consultants who furnish related services.

Perhaps the most important function is that the audit committee diligently discharges its function to ensure the integrity of the issuers’ financial statements through perseverance, earnestness, attention to detail and thoroughness. To do this, the audit committee should be proactive in analyzing information it receives from management and have a full understanding of the key accounting issues for that particular company.

Finally, audit committee members must devote sufficient time to obtain an adequate understanding of what the company’s financial statements represent. Members of the audit committee must have enough interest and time to be in a position to consult with outside counsel and experts, if necessary. Tough questions should be asked to be able to assess whether the answers it receives make sense and are correct for that issuer. Merely meeting for two or three hours a year is insufficient.