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Focus on Not-For-Profits: Should Your Not-For-Profit Be Audited?

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Many not-for-profits may wonder, “Is an audit necessary for our organization?” In reality, there is no one-size-fits-all answer to that question. There are several different levels of assurance services available to satisfy the varying needs of an organization. Some are much more in-depth than others, but all services can provide value to any not-for-profit organization.
December 9, 2016

Many not-for-profits may wonder, “Is an audit necessary for our organization?” In reality, there is no one-size-fits-all answer to that question. There are several different levels of assurance services available to satisfy the varying needs of an organization. Some are much more in-depth than others, but all services can provide value to any not-for-profit organization. There are some situations where a not-for-profit organization may be required to have an audit and others where a review, compilation or possibly an agreed-upon procedures or consulting project might be more appropriate.

When is an Audit Required?

There are a number of situations in which a not-for-profit may be required to have a financial statement audit performed. First, a not-for-profit is required to have a financial statement audit and single audit if it “expends $750,000 or more in federal awards in a given fiscal year”. Additionally, other funders, such as the United Way, an organization’s bylaws, debtors and certain states require audits. Each state has different rules as to whether or not a not-for-profit is required to have an audit, review or compilation. For more information on your state’s requirements, visit the National Council of Nonprofits’ State Law Nonprofit Audit Requirements guide.

Which level of assurance service is right for your organization?

Choosing the level of service that is right for your not-for-profit organization depends on your organization’s needs and goals.

  • Do your by-laws require an audit?
  • Is your organization required by a voluntary membership organization to conduct an audit as a condition of membership and accreditation?
  • Does your organization have a loan covenant that requires an audit or are there plans for a future facility or renovations that will require financing?
  • Would the additional accountability provided by an external audit provide comfort to your organization and the community?
  • Is your organization interested in the by-products of an audit, such as suggestions to strengthen internal controls surrounding cash processes?

Understanding the differences between the various levels of assurance service can provide assistance in matching the service with your needs and goals. All not-for-profit organizations can benefit from the value-adds which assurance services can provide, but it is important to know which services would provide the most value to your organization.

Compilation

The objective of a compilation is to take information that is in the organization’s general ledger and compile financial statements in much the same format as would be derived from a review or an audit. A compilation requires the certified public accountant (CPA) to have knowledge of the industry and accounting principles. Your internal numbers will be compiled into a financial statement format that meets the standards of generally accepted accounting principles (GAAP) or an other comprehensive basis of accounting (OCBOA), such as cash basis. Adjusting entries may be proposed if there are obvious departures from GAAP or OCBOA, but generally the internally-produced financial records will be utilized. The financial statements may also contain footnotes, although they are not required. The accountant’s report would not express an opinion or any other form of assurance. As a compilation involves less work, the cost can be substantially less than a review or an audit. A compilation would provide your organization with standard financial statements that it could use to show its potential donors how collected money is being spent; however, no assurance would be provided by the CPA.

Review

The objective of a review is to provide “limited assurance” that the financial statements do not have known errors or departures from generally accepted accounting principles. Different from a compilation, a review requires the CPA to be independent from your organization and to have an increased understanding of your business. Additionally, the CPA must perform inquiry and analytical procedures. Additional procedures may be performed if information obtained is questionable.

In summary, a review is designed to determine if the financial statements make sense without applying procedures required to perform an audit. A review does not require the CPA to obtain an understanding of the organization’s internal control, assess control risk, test accounting records and responses to inquiries by obtaining corroborating evidential matter, or perform certain other procedures ordinarily performed during an audit. A review does require assessment of the accounting principles used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation.

The accountant’s report states that a review has been performed in accordance with AICPA professional standards, that a review is less in scope than an audit and that the CPA did not become aware of any material modifications that should be made in order for the statements to be in conformity with GAAP. A not-for-profit may engage CPA’s to review its financial statements when it has bank loans and the lenders do not require audited financial statements.

Financial Statement Audit

The third and highest level of assurance service is an audit. The objective of an audit is to provide reasonable, but not absolute, assurance that the financial statements are presented in accordance with GAAP. An audit includes all of the procedures conducted in a compilation or review but additionally requires the auditor to have an extensive knowledge of the economy, the relevant industry and your business.

During an audit, verification and substantiation procedures are performed (including, but not limited to, third-party verification of cash, investment and debt balances, direct correspondence with creditors, physical inspection of assets, sample testing of transactions, review of board/committee minutes, contracts, etc.). When performing an audit, the auditor is required to have knowledge and understanding of the system of internal controls in place and must assess the risk the controls may not prevent, or detect and correct, material misstatements of the financial statements on a timely basis. An auditor’s report states that an audit was performed in accordance with generally accepted auditing standards and expresses an opinion that the financial statements present fairly the entity’s financial position and results of operations.

While the auditor does not express an opinion on the organization’s internal controls, it may identify material weaknesses or significant deficiencies in internal control. The auditor may offer suggestions to improve internal controls, as well as opportunities to improve efficiency, and best practices regarding policies, procedures and corporate governance.

Agreed-Upon Procedures or Consulting Project

If your not-for-profit determines an audit is not desired at this time, yet is concerned about strengthening internal controls, improving segregation of duties, developing accounting policies and procedures, and/or implementing best practices related to oversight and governance, another type of engagement may be beneficial. An agreed-upon procedures or consulting project could be tailored to focus on the specific issues and concerns identified by your organization, as well as provide assistance in implementing the recommended improvements. These procedures generally take less time than an audit but can make a real impact by improving the controls and efficiencies of your day-to-day operations. This would protect not only the dollars that have been given to your entity, but also your staff’s integrity and your organization’s peace of mind.

If you have any questions or would like more information, feel free to contact one of RubinBrown’s Not-For-Profit professionals.

 

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

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