The Year-End Financial Statement Process:
A Practical Guide for Small Nonprofit Organizations having a CPA Audit (or Review)
(Part 1 of 5)
Part I: Introduction
This article is an overview of the financial statement audit process for a small non-profit organization. The objective is to help the governing board, management and other interested parties understand the annual financial statement audit process. The information provided here could be used as a guide for a review engagement as well.
Although all types of nonprofits could receive an annual audit, smaller organizations that have an audit are most likely a 501(C)(3) organization. 501(C)(3) organizations are often required to have an annual financial statement audit by the state charity regulatory body. Also, charitable organizations may be required to have an audit in order to qualify for grants or other funding. The Internal Revenue Service (IRS) does not require financial statement audits. Although they will do compliance audits.
Having an audit is a major endeavor for smaller 501(C)(3) organizations. Firstly, the cost could be prohibitive. Another factor is finding an accounting firm servicing this segment. Optimally, an accountant would need to be a peer reviewed CPA, provide audits to small organizations and specialized in not-for-profit organizations. The same audit standards apply to small nonprofits as they do for large corporations. Accounting firms need to tailor their approach to efficiently serve these smaller organizations at a reasonable cost while complying with professional standards.
The “audits” we are dealing with in this overview are “financial statement” audits. Most people know the term audit as it relates to an IRS audit of business or personal taxes. Financial statement audits are quite different from an IRS audit. Although there will be testing and evidence support needed to substantiate the amount on your financial statements, the CPA will not look at every transaction or every receipt. Also, it is important to realize the financial statements being audited are prepared by the organization, not the auditor. In order to effectively audit the financial statements and provide assurance on them the auditor needs to obtain an understanding of the organization and its environment, including internal controls and governance. Deficiencies in internal controls and other matters will be communicated to the organization at the conclusion of the audit.