Advantages of Audits for Nonprofits

By their nature, non-profit organizations rely on support from a variety of sources such as government agencies, private foundations, or individual donors. Depending on the amount received or the grant agreement, an external audit by a CPA firm may be required.  However, even for organizations falling under such a threshold, there are several reasons why audits for nonprofits’ books and records can be beneficial.

• Audits are often needed for grant applications.
• Bank loan or line of credits may require external reporting on the organization’s finances.
• Government grant contracts often mandate an audit as a condition of receiving the funds.
• Many states have annual charitable organization filing submissions.
• Donors evaluating the worthiness of the organization look for assurance from an organization’s audit.

An additional benefit resulting from the steps involved in the annual audit is that it offers an opportunity for the organization to address concerns and/or learn of any weaknesses and how procedures could be improved.  The audit may also be a basic method of deterrence to potential fraud within the organization.

Types of Financial Statement Engagements – Audits, Reviews, and Compilations

While audits are the highest level of CPA service, review and compilation engagements offer many benefits and may be acceptable to fit the organization’s needs at a lesser cost.

What is the difference between the three types of engagements?

Audit

An examination of financial records, business transactions, internal controls, accounting practices and policies, including transaction testing and the operation of accounts. An audit determines if the financial report accurately reflects the financial position of the organization at a given time, providing reasonable assurance of accuracy to financial statement users.

Review

The scope of a review is significantly less than that of an audit, providing limited assurance. A review provides an analysis of the organization’s books limited to analytical procedures and assessment of management. With a review, an auditor can vouch that your financial statements are free from material misstatements and that they meet the applicable reporting framework, such as generally accepted accounting principles (GAAP).

Compilation

A compilation is the lowest level of financial statement services. It covers a significantly smaller scope of work than an audit or review. A compilation is a basic summary of the organization’s financial statements, focusing on management. It does not include the expression of an opinion or any level of assurance on the financial statements.

Making the Decision on Audit, Review, or Compilation

Choosing to have an audit, review or compilation may be governed by Federal or State requirements or the grantor agency.  It may also be a desire by the board to meet their fiduciary responsibilities.  The charts below provide some additional guidance.

Using Minimum Threshold of State Charitable Annual Registrations*

• More than half of the U.S. states have an annual registration requirement which includes submitting a financial statement when filing annually.

*Each state has certain statutory exemptions from filing for selected types of organizations.

Using Federal Grants Audit Requirement

• Under $750,000, as stipulated in the grant agreement
• Over $750,000 of Federal Funds – Office of Federal Financial Management mandates Single Audit

Using Grant Application Rules

• Financial Statement requirements as defined in the application

As Desired by the Board

• For transparency and upholding fiduciary responsibilities
• To address specific concerns, such as mismanagement, endowments, or grantee payments

 

Inquire today to learn how an audit, review, or compilation may be beneficial to your organization. Contact our professional audit accountants at The Innovative CPA Group.