NONPROFIT AUDIT 101 - GALA Choruses
NONPROFITAUDIT 101A Guide to the Fundamentals and MoreClick the sections below to navigate123THEFUNDAMENTALSSELECTING THERIGHT AUDITORTHE AUDITOR’SPERSPECTIVE4TECHNOLOGY’SROLE
NONPROFIT AUDIT 101 GUIDE2OverviewIf you’re a nonprofit leader, you know all toowell the audit process can seem cumbersome.In fact, according to 2016 Nonprofit FinanceStudy respondents, more than half of theirorganizations require two weeks, plus, toprepare for an audit.This burden is compounded for the 36 percentof nonprofit finance professionals who reportundergoing more than one audit a year.In addition to feeling burdensome, audits canbe costly – ranging from 5,000, up. Way up.However, you also know that the benefits yourorganization can glean from financial clarity andtransparency can mean the difference betweenmission success and merely getting by, yearover-year.From the nuts and bolts of the nonprofit audit, toselecting the right auditor for your organization,to recognizing how technology can empower andprotect you through the process, our NonprofitAudit 101 Guide covers exactly what yournonprofit finance team must understand to drivegrowth and success.INSESSIONNONPROFITAUDIT 101Click the sections below to navigate123THEFUNDAMENTALSSELECTING THERIGHT AUDITORTHE AUDITOR’SPERSPECTIVEBACK NEXT PAGE4TECHNOLOGY’SROLE
NONPROFIT AUDIT 101 GUIDE3Chapter One:The Fundamental Nuts and BoltsAn “audit” or “audited financial statements” refer tothe “work product” resulting from the independentexamination of a nonprofit’s financial records by alicensed certified public accountant (also referredto as an auditor or auditing firm), according to theCouncil of Nonprofits.Some types and formats of an “audit” may include:Independent Financial AuditsIndependent audits are called such, because thecertified public accountant (CPA) conducting yourexamination is not employed by your nonprofit,but instead contracted to provide an unbiased“independent” opinion regarding whether yourfinancial statements are free from materialmisstatement.Pantone 7711Pantone 7752An independent audit typically includes theexamination of financial statements, comprised of yourorganization’s statement of financial position, relatedstatement of activities, cash flows for the year ended,and related notes to the financial statements.Pantone 7540Pantone 174Pantone 7711Pantone 7680Pantone 7752Pantone 7744Pantone 7711Pantone 7752Pantone 7540Pantone 17412The auditor conducts his or her audit in accordance1 (GAAP).with generally accepted accounting principles31An audit involves performing procedures toobtain2audit evidence about the amounts and disclosures in4 arethe financial statements. The procedures selected2at your auditor’s discretion, including the assessment3of the risks of material misstatement of thefinancialstatements, whether due to fraud or error.534Pantone 7540Pantone 174Pantone 7680Pantone 7744Pantone 7680Pantone 7744An audit also includes evaluating the appropriatenessof accounting policies used and the reasonableness1THEFUNDAMENTALSof significant accounting estimates made bymanagement, as well as evaluating the overallpresentation of the financial statements.Many CPAs or auditing firms refer to their workas Assurance Services, because an audit is thehighest level of assurance an auditor can provideand an organization can receive on a set of financialstatements.The end product, submitted to your Board ofDirectors and/or Audit Committee, is typically calledan Independent Auditor’s Report, or opinion letter,because it expresses an opinion regarding yourfinancial statements, based on the completed audit.Three Stages of an Audit121312423534Stage One: PlanningIn this stage, your auditor will likely send youan engagement letter, which is essentially avendor agreement, along with a “Prepared byClient” list that outlines what supportingschedules your auditor needs you to prepareand share.Stage Two: Field WorkHere, the actual audit is performed, completewith testing and conversations with key staffmembers.Stage Three: Post WorkThe auditor’s final report is submitted to yourBoard of Directors and/or Audit Committee.664455Clickthe sections below to77navigate5523 6688SELECTINGTHETHE66 AUDITOR’S77RIGHT AUDITORPERSPECTIVE9977BACK NEXT PAGE4TECHNOLOGY’SROLE 3
NONPROFIT AUDIT 101 GUIDE4Chapter One:The Fundamental Nuts and Bolts (continued)Common Misconceptions of anIndependent Financial Audit1231423546Misconception: The auditor’s reportincludes an opinion on the nonprofit’sinternal controls.Fact: Though your auditor is certainly checkingto see if your internal controls are designedand implemented appropriately, he or shewill not render an opinion regarding theoperating effectiveness of your internal controls.Misconception: The audit is intended todetect fraudulent activity.Fact: An audit is not initiated to detectfraudulent activities; however, in reviewingand questioning financial statements andpersonnel, fraud may be detected. If somethinglooks off, either due to fraud or error, it will bebrought to your board’s attention.75Your Role in the Independent Audit869 includes the design, implementation, andThis7maintenance of internal controls relevant to theand fair presentation of financial10preparation,8statementsthat are free from material misstatement.As the client, you’re expected to prepare and fairlypresent your financial statements in accordance withaccounting principles generally accepted in the U.S.9110THEFUNDAMENTALSSingle AuditsIf your nonprofit expends 750,000 or more in federalor state funds in a single fiscal year, you’re requiredby law to undergo a single audit under the 2 CFR Part200, Subpart F (Uniform Guidance).The Single Audit Act of 1984 was passed (and lateramended to extend the single audit concept tononprofit organizations) to provide assurance tothe federal government that a nonprofit’s (or state’s,city’s, or university’s) management and use of thesesubstantial federal funds comply with the federalgovernment’s funding requirements.A single audit differs depending on the recipient andthe federal program, but generally speaking, it coversthe entire scope of an organization-wide financialaudit, plus a compliance-based audit.The federal government requires auditors to performa compliance audit in both the planning stage andfield work stage. In the planning stage, the auditoris required to determine whether there’s a high riskthat the nonprofit doesn’t comply with laws andregulations, identify the relevant federal program, andevaluate the program.In the actual field work stage, the auditor audits thefederal or state assistance and programs. Per the Officeof Management and Budget (OMB), the auditor must“perform a compliance audit that scrutinizes operationsof the specific government-funded program, examiningfiles, documents, contracts, checks, etc. These functionsare compared with the laws and regulations applicableto the program to see if they comply or not. The auditoris required to perform enough procedures to form anopinion on whether the program (as a whole) complieswith laws and regulations.”Click the sections below to navigate23SELECTING THERIGHT AUDITORTHE AUDITOR’SPERSPECTIVEBACK NEXT PAGE4TECHNOLOGY’SROLE
NONPROFIT AUDIT 101 GUIDE5Chapter One:The Fundamental Nuts and Bolts (continued)Other Types of Financial Reviews(Non-Audits)Compilation ReportAn Independent Accountant’s Compilation Reportis just as it sounds, a compiled report of anorganization’s financial position, including relatedstatements of activities, functional expenses, and cashflows. It’s not an audit or even a review of financialstatements. And thus, no opinion or assurances areprovided regarding whether the financial statementsaccurately reflect the organization’s financial positionor are in accordance with GAAP.A compilation report merely provides an organizationwith formatted financial statements and records thatcan be easily reviewed and consumed by third parties,such as your board or bank.Independent auditors are contracted to take thenumbers provided by management and preparecompilation reports on the rare occasion a nonprofitsimply doesn’t have the internal capacity or expertiseto put together financial statements in proper format,or when it’s looking for a substantially lower cost thanconducting an independent financial review or audit.applying analytical procedures to management’sfinancial data and making inquiries of an organization’smanagement.A financial review is conducted in accordance withStatements on Standards for Accounting and ReviewServices, issued by the American Institute of CertifiedPublic Accountants. These standards require theauditor to perform procedures to obtain limitedassurance that there are no material modificationsthat should be made to the financial statements.Nonprofit leaders will typically have a financial reviewconducted to provide some kind of assurance toeither a regulatory body, insurance company, orlender that their organization’s financial statementshave been reviewed by a CPA. And, because you’reprovided less assurance, the price tag for a financialreview is lower than that of an audit.Financial ReviewAn Independent Accountant’s Financial Review fallssomewhere between a compilation report and an audit.Substantially less in scope than an audit, it’s a reviewof a nonprofit’s statement of financial position,statement of activities, and cash flows. It includesClick the sections below to navigate123THEFUNDAMENTALSSELECTING THERIGHT AUDITORTHE AUDITOR’SPERSPECTIVEBACK NEXT PAGE4TECHNOLOGY’SROLE
NONPROFIT AUDIT 101 GUIDE6Chapter One:The Fundamental Nuts and Bolts (continued)Why Conduct a Financial Audit or Review?You may not be required, by law, to conduct anaudit or review. So, why go through the entireprocess and related expense?Having your financials audited or reviewed by an unbiased,third-party professional is all about fiduciary capacity.When a nonprofit acts in a fiduciary capacity to safeguardthe funds entrusted to it by donors and other fundingsources it feels obligated (or perhaps should) to assurefunders that it is, in fact, protecting their funds.?In a nutshell, an audit or review: Assures supporters – and particularly your highwealth donors – that you’re being a good stewardof their donations, which can positively impactfuture fundraising efforts. Assures government funders that you’reconducting your accounting correctly. Gives board members and executive leadershipthe confidence to make important data-drivendecisions that impact the future sustainability andgrowth of your organization and mission.?Click the sections below to navigate123THEFUNDAMENTALSSELECTING THERIGHT AUDITORTHE AUDITOR’SPERSPECTIVEBACK NEXT PAGE4TECHNOLOGY’SROLE
NONPROFIT AUDIT 101 GUIDE7Chapter Two:How to Select the Right Auditor for Your OrganizationIn addition, a comprehensive audit will analyze theway contributions are used, by computing the relativepercentages of each type of income distribution andcomparing the results with other “like” nonprofits in yourrevenue range, vertical, and geographic area. Again, thepurpose is to identify and investigate anomalies.Planning for Your AuditPantone 7711Before beginning your auditor search, youshould conduct thorough internal planning. FiscalManagement Associates (FMA), in its Nonprofit AuditorSelection Guide, suggests these five planning steps:Pantone 77521122Nonprofit audit services require a unique expertise,so you’ll want to look for an auditor who specializesin nonprofit audits; someone with a firm grasp onaccounting principles that specifically relate to thenonprofit sector.Pantone 7540Pantone 174Pantone 7680Pantone 7744Pantone 7711Pantone 7752Ensure that the board’s audit committee isinvolved in the selection process fromthe beginning. If your organization doesn’thave a separate audit committee, the financecommittee should take on this role. Identifyone individual from the committee to managethe process and coordinate with membersof management.33114411Clarify the logistics of the selection process111122 and determine a timeline to complete theprocess and finalize the decision.2255222233 Conduct initial research (for example,33gathering recommendations from peer336633 organizations).44Some merely offer the basics, while others will 44key attributes of the auditor and4477 Identify44conduct detailed analytic procedures that comparedetermine a method for auditor evaluation.55your organization’s current year financials to priorConsider your organization’s strategic55year’s. During this procedure, the auditor will compare885555year-over-year performance, and note and investigate66 objectives and plans in selecting an auditor.any anomalies to identify potential high-risk areas.99666666771010 77777788Click the sections below to navigateBACK NEXT PAGE8888889123 94999999 DAMENTALSRIGHT AUDITORPERSPECTIVEROLE101010101010Pantone 7711Pantone 7752You might consider using a request for proposal (RFP)to solicit proposals and narrow the field. You’ll findplenty of examples and templates online by searchingkey words such as, “nonprofit audit RFP.” In-personinterviews should also be conducted, whether you gothe RFP route or not. These interviews are a primeopportunity for you to understand the level of detailan auditor will provide.Pantone 7711Pantone 77527540Pantone 7711Pantone7752174PantonePantone 7540Pantone 174Pantone 7540Pantone 1747680Pantone 7540PantonePantone7744174Pantone 7680Pantone 7744Pantone 7680Pantone 7744Pantone 7680Pantone 7744
NONPROFIT AUDIT 101 GUIDE8Chapter Two:How to Select the Right Auditor for Your Organization(continued)Word to the wise: Don’t be terribly concerned ifanomalies are uncovered during your audit – this isnot an uncommon occurrence. And, unless they’resignificant, they likely don’t point to a high risk ofmaterial misstatements in your financials.A thorough audit will also carefully analyze youraccounting system to ensure you’re taking extra careto avoid unethical accounting practices and costlymistakes. This includes closely examining your systemof internal controls – the policies and safeguardsyou have in place to protect your cash and financialrecords from fraud and/or mismanagement.Lastly, when conducting an exhaustive audit, your CPAwill review your reporting procedures to ensure thatreports are accurate and submitted in a timely fashion.Of course, the more comprehensive the audit, thecostlier. For example, a small, two-person audit shopthat provides you with minimum assurance that thereare no material misstatements in your financials maycharge as little as 5,000 to conduct your independentaudit. While, a detailed audit for a large nonprofit withmultiple operations and significant revenue could costinto the millions.What Role Do Internal Controls Play in Your Audit?Proper internal controls are essential for all organizations,says the Greater Washington Society of CPAs EducationFoundation. They can also help ensure a clean audit. Controlsaround cash are generally the most important to a nonprofit,as cash is the asset that’s most likely to be misappropriated.Here are sample controls you should consider:Cash - General Do not allow a single employee to handle a cashtransaction from beginning to end. The cash handling function should be separated fromthe function of recording cash transactions in thebooks of account. Cash receipts should be deposited to the bank intacton a daily basis. Employees not involved with cash processing shouldprepare bank reconciliations. Bank reconciliations should be performed on a timelybasis at the end of each month.Cash – Disbursements A separate purchasing function that includes allnecessary approvals, well-organized information, anddocumentation for all purchases. A separate receiving function to verify that all goodsordered have been received in proper condition, etc.,using documentation from the purchasing function. A process whereby the accounting departmentprepares the disbursement check from thevendor invoice, including all approved and matcheddocumentation from purchasing and receiving. Checks signed only by authorized individuals,only with the availability of the complete voucherpackage, and only after complete agreement of alldocumentation is reviewed (also, the voucherpackage should be effectively canceled after paymentto ensure that duplicate payments do not occur).Click the sections below to navigate123THEFUNDAMENTALSSELECTING THERIGHT AUDITORTHE AUDITOR’SPERSPECTIVEBACK NEXT PAGE4TECHNOLOGY’SROLE
NONPROFIT AUDIT 101 GUIDE9Chapter Two:How to Select the Right Auditor for Your Organization(continued)What Happens if Fraud is Discovered?As you’re interviewing independent auditors, be sureto ask them what happens if they find fraud. Will they simply alert you of the anomalies they’vediscovered? Do they have the capacity to guide you through the“what’s next?” Can they connect you with a fraud examiner tofurther the investigation? Or will they help to gather evidence and assist inthe investigation?Can they advise you on how to bolsteryour internal controls to avoid fraudfrom going undetected again in the future?ClickClick thethe sectionssections belowbelow toto navigatenavigate123THEFUNDAMENTALSSELECTING THERIGHT AUDITORTHE AUDITOR’SPERSPECTIVEBACK NEXT PAGE4TECHNOLOGY’SROLE
NONPROFIT AUDIT 101 GUIDE10Chapter Three:From the Auditor’s PerspectiveIn most standard audit opinions, you’ll see languagethat outlines “Management’s Responsibility for theFinancial Statements.”Basically, you’re “ responsible for the preparation andfair presentation of financial statements in accordancewith accounting principles generally accepted in theUnited States of America; this includes the design,implementation, and maintenance of internal controlrelevant to the preparation and fair presentationof financial statements that are free from materialmisstatement, whether due to fraud or error.” Explanations for any large variances your auditor willuncover during the analytical process. (For example,if your fixed assets went up by 30 percent this year,you should let your auditor know, up front, that yournonprofit added a new program during the fiscal yearand had to purchase two new vehicles to support it.) Dedicated accommodations in which your auditorcan conduct his or her field work. A point-person in your organization to act as a liaisonbetween your finance team and independent auditor.So, what all does that entail? Here, from an auditor’sperspective, is how you can create a “perfect world”scenario for the field work stage of your audit. Youshould provide:Red FlagsThese red flags may, at the very least, mean youraudit will be a bumpy ride, and at most, indicateyou’re at risk for material misstatements: All the supporting schedules (requested by yourauditor in the planning stage) for all your financialsgathered, well organized, and ready to hand over.This list may include schedules and reconciliationsaround cash, investments, accounts receivables,accounts payable, expenses, fixed assets, revenue,net assets, debt, and more. All your numbers on yoursupporting schedules should add up and agree toyour accounting records. If they don’t, there’s not awhole lot your auditor can do.! You don’t have supporting schedules! Your numbers don’t add up and/or don’t agreedon’t have internal controls, or if you do,! Youthey’re not documented and accessiblehave large “Miscellaneous” or “Other”! Youexpense categories (indicating a possibleclassification issue) Thorough documentation around your accountingprocedures and internal controls – either provided toyour auditor in a Word document or spreadsheet.Your documentation should answer questions like,“How do you process money coming in?” “How doyou process money going out?” And, “How do youhandle cash?” If you don’t have this documented,your auditor will have to gather this informationthrough interviews with your nonprofit’smanagement.unorganized, handing o
accounting principles that specifically relate to the nonprofit sector. You might consider using a request for proposal (RFP) to solicit proposals and narrow the field. You’ll find plenty of examples and templates online by searching key words such as, “nonprofit audit RFP.” In-person interviews should also be conducted, whether you go
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