written by Joe Page
Not-for-profit entities are subject to significant scrutiny from various sources such as contributors and directors to lenders and federal and state regulators.
In response to this scrutiny, many not-for-profits assume they need to have an ‘audit’. While in many circumstances and audit may be either required or the most prudent course of action, there are instances when something short of a full audit may satisfy the needs of the not-for-profit.
In order to determine what is most appropriate for your entity, it is first important to understand the services an independent auditor can perform.
Types of Service Available
In general, there are three levels of financial statement services that are offered by most CPA’s: 1) an Audit, 2) a Review and 3) Agreed-upon-procedures.
1. Audits: An audit provides the highest level of assurance provided by CPA’s. An audit includes an opinion, or positive assurance, from the CPA relating to the entities compliance with Generally Accepted Accounting Principles or GAAP. An audit includes significant testing of transactions, confirmations with outside parties and consideration of the entity’s internal controls.
2. Reviews: A review is much more analytical in nature and generally includes a lesser degree of transaction testing. A review report includes what is referred to as negative assurance from the CPA which indicates that based on the review, the CPA did not become aware of any material modification needed in order for the financial statements to be in conformity with GAAP.
3. Agreed Upon Procedures (AUP): Agreed Upon Procedures is precisely what the name implies. The client and the auditor agree to the specific audit type procedures to be performed by the audit. The procedures can be limited to certain accounts, financial statement line items or internal control related processes and procedures. The CPA will issue a report detailing the results of the agreed upon procedures.
What level of service does your organization need?
In order to determine what level of service is most appropriate for your organization, you must first determine what is required by outside parties. Often, federal, state or other grants require audited financial statements in order to participate in their respective programs. Larger organizations may want to consider a full financial statement audit even if not required by outside parties in order to help demonstrate the organization’s commitment to prudent stewardship of its significant resources and wishes of donors.
If an audit is not required by outside parties, an organization next needs to consider what is most important to its board, management, donor and users of its financial statements. If outside users request full financial statements for various reasons, the organization may consider having a review performed. If the organization has specific concerns, such as the handling of donor restricted contributions, the organization should consider and agree-upon-procedures engagement.
Conclusion
Not-for-profit entities should consult with their CPA to help determine what level of service is most appropriate under their specific circumstances. Many not-for-profit entities assume they have to have an audit when other levels of services may be more appropriate.
Joe is Managing Partner and in charge of audit services for clients in fields such as nonprofit, colleges and universities, manufacturing and distribution, electric utilities and construction. He has been involved in public accounting since 1990. His expertise includes auditing and accounting, fraud examination and information systems consulting. Joe holds a Bachelor’s Degree in Business Administration from Wichita State University. He earned his Certified Fraud Examiner designation in 1999. He is active in professional and community organizations such as the Missouri Society of CPAs, American institute of CPAs and the Association of Fraud Examiners.
