Audit Committee Primer

San Francisco Pride Celebration Committee, Inc.

Committee Structure & Authority

The Audit Committee is unique among Board Committees as it has special composition rules and operates under direct Board supervision.

Key Points:

Chaired by an individual appointed by the Board of Directors
May include non-directors (unlike other committees)
Subject to the supervision of the Board of Direct ors
Has specific independence requirements

Committee Composition

Who Can Serve

The Audit Committee:

May include persons who are not members of the Board of Directors
May not include: Staff members, the President, or the Treasurer
May include members of the Budget & Finance Committee, but:
- The Audit Committee Chairperson may not be a member of Budget & Finance
- Budget & Finance members must constitute less than one-half of the Audit Committee

Independence Requirements

Members of the Audit Committee:

Shall not receive compensation from the corporation beyond what Board Directors receive for Board service
Shall not have a material financial interest in any entity doing business with the corporation

Purpose: These requirements ensure the Audit Committee can provide independent oversight of the organization’s financial affairs.

Non-Director Members

When a non-director serves on the Audit Committee:

All committee actions are subject to Board supervision
The non-director participates fully in committee work
Final decisions rest with the Board

Core Responsibilities

1. Auditor Selection & Retention

The Audit Committee is responsible for recommending to the Board of Directors the retention and termination of the independent auditor.

Auditor Selection Process:

Research qualified audit firms
Request proposals from potential auditors
Evaluate auditor qualifications and fit
Interview finalists
Recommend selection to the Board

Auditor Evaluation:

Annually assess auditor performance
Determine whether to retain or change auditors
Recommend termination if performance is inadequate

2. Auditor Compensation Negotiation

The Audit Committee negotiates the independent auditor’s compensation on behalf of the Board of Directors.

Negotiation Considerations:

Scope of audit work
Organization complexity
Industry standards
Budget constraints
Value for services provided

3. Financial Affairs Oversight

The Audit Committee confers with the auditor to satisfy its members that the financial affairs of the corporation are in order.

Oversight Activities:

Review audit findings and recommendations
Discuss internal controls with auditors
Assess financial risks
Evaluate management responses to audit findings
Monitor implementation of audit recommendations

4. Audit Review & Acceptance

The committee reviews and determines whether to accept the audit.

Review Process:

Receive draft audit report
Meet with auditors to discuss findings
Review management letter and recommendations
Assess completeness and accuracy
Recommend acceptance (or rejection) to the Board

5. Auditor Independence

The committee assures that any non-audit services performed by the auditing firm conform with applicable standards for auditor independence.

Independence Safeguards:

Review all non-audit services provided by audit firm
Ensure services don’t compromise auditor independence
Comply with professional standards and regulations
Pre-approve any non-audit services

6. Non-Audit Services Approval

The committee approves performance of non-audit services by the auditing firm.

Pre-Approval Required For:

Tax preparation or advisory services
Financial consulting
Any other services beyond the annual audit

Purpose: Maintain auditor independence and avoid conflicts of interest

Relationship with Budget & Finance Committee

Separate but Coordinated

The Audit Committee and Budget & Finance Committee have distinct roles:

Audit Committee:

Independent oversight
External auditor relationship
Audit review and acceptance
Internal control evaluation

Budget & Finance Committee:

Budget development
Financial strategy
Ongoing financial monitoring
Day-to-day fiscal management

Membership Overlap

While members can serve on both committees:

Audit Chair cannot be on Budget & Finance
Budget & Finance members must be less than half of Audit Committee
This ensures Audit Committee independence

Annual Audit Cycle

Planning Phase (Q1)

Review audit plan and scope
Discuss risk areas with auditors
Coordinate audit timeline

Fieldwork Phase (Q2-Q3)

Auditors conduct fieldwork
Committee available for questions
Monitor audit progress

Review Phase (Q4)

Receive draft audit
Meet with auditors
Review findings and management letter
Discuss any concerns

Acceptance Phase (Year-End)

Finalize audit review
Recommend acceptance to Board
Present audit to full Board
File required documents

Internal Control Oversight

Understanding Internal Controls

The committee should understand:

Financial reporting controls
Asset safeguarding procedures
Compliance controls
Operational controls

Evaluating Control Effectiveness

Work with auditors to assess:

Control design adequacy
Control operating effectiveness
Material weaknesses or deficiencies
Management’s remediation plans

Fraud Prevention

The committee helps prevent fraud by:

Reviewing fraud risk assessments
Ensuring strong internal controls
Promoting ethical culture
Monitoring whistleblower reports

Best Practices

Independence & Objectivity

Maintain arm’s-length relationship with management
Question assumptions and challenge assertions
Seek independent verification of information
Avoid conflicts of interest

Financial Literacy

Committee members should have financial expertise
Understanding of nonprofit accounting
Ability to read and interpret financial statements
Knowledge of audit standards

Communication

Regular meetings with auditors (with and without management present)
Clear reporting to the Board
Documentation of committee actions
Transparency with stakeholders

Continuous Learning

Stay current on nonprofit audit standards
Understand regulatory changes
Learn about emerging risks
Participate in professional development

First Committee Meeting

At the first committee meeting following the October Board meeting, the committee should:

1. Chair Appointment

Confirm chair appointed by the Board of Directors

2. Organizational Matters

Review committee scope and unique composition rules
Discuss meeting schedule for the year ahead
Submit annual meeting calendar to staff by January 1

3. Committee Membership Review

Review current committee composition
Ensure compliance with independence requirements
Confirm no prohibited members serving (Staff, President, Treasurer)
Verify Budget & Finance member ratio (must be under 50%)

4. Auditor Relationship Review

Review current auditor contract and performance
Discuss auditor relationship and communication
Plan for upcoming audit cycle

5. Internal Control Assessment

Review previous audit findings
Assess status of management’s response to audit recommendations
Identify any ongoing control concerns

Suggested Meeting Cadence

Recommended Frequency: Quarterly minimum, with additional meetings as needed

Meeting Schedule:

Q1 (Oct-Dec): Audit planning
Q2 (Jan-Mar): Fieldwork phase monitoring
Q3 (Apr-Jun): Mid-year check-in
Q4 (Jul-Sep): Audit review and acceptance

Additional Meetings As Needed For:

Auditor selection/retention decisions
Significant audit findings requiring discussion
Internal control deficiencies
Compliance issues

Rationale:

Audit cycle requires specific touchpoints
Independence from day-to-day operations (unlike monthly finance review)
Intensive work during audit review period
Ad hoc meetings for significant issues

Meeting Duration: 60-90 minutes

Executive Sessions: Committee should regularly meet with auditors without management present to discuss any concerns freely.

Annual Calendar

October-December (Q1 - Audit Planning)

October: First committee meeting; confirm chair; review committee composition
November-December: Audit planning
- Review and approve annual audit plan
- Discuss risk areas and scope with auditors
- Coordinate audit fieldwork timeline

January-March (Q2 - Fieldwork)

January: Submit annual meeting calendar to staff (by Jan 1)
- Audit fieldwork begins (timing may vary)
February-March: Monitor audit progress; available for auditor questions

April-June (Q3 - Continued Fieldwork/Prep)

April-May: Continue audit fieldwork
June: Pride event period (may impact audit timing)

July-September (Q4 - Audit Review & Acceptance)

July-August: Receive draft audit report
- Review audit findings and management letter
- Meet with auditors to discuss results
- Evaluate internal controls and any deficiencies
September: Finalize audit review
- Determine whether to accept audit
- Present audit to full Board
- Plan for next audit cycle

Key Deadlines:

January 1: Annual meeting calendar due to staff
Within 120 days after fiscal year end (Sept 30): Financial reports due to Board (late January)
Varies: Audit completion and acceptance (typically late summer/early fall)

Key Documents to Review

2.2 Committee Structure - Committee scope and special composition rules
C.07a Financial Responsibilities - Financial governance
C.07b Financial Accounting - Accounting standards
B.02 Conflicts of Interest - Conflict policies
Annual audited financial statements
Form 990 (nonprofit tax return)

Document Prepared: January 4, 2026