Audits - A Good Start can mean a Better Finish

Aurora provides all levels of service surrounding audit support.  We will help you determine which type of audit you need, aide in the auditor selection process and perform all accounting functions necessary to produce audit-ready financial statements and required audit schedules.  Below is background information on audits and what nonprofit organizations should know. Just the term “audit” can bring forth all sorts of feelings of anxiety and misgivings. However, if you are running a proper accounting system and have instituted an appropriate internal control environment you should have no fear. An audit or other type of engagement performed by a CPA firm can be a positive experience when you work with an experienced firm that specializes in working with nonprofit entities. Such firms can add value to your organization by sharing best practices and insights as to how you may improve controls and operating efficiencies.

Audit Needs Analysis
The first step when contemplating an audit is to determine whether you actually need an “audit” and which type of audit is required. It is possible you do not need to have an “audit” performed but rather could opt for an engagement less in scope and therefore less costly. Recognize that all levels of engagements performed by CPA firms are dictated by audit standards. The following are the various types of engagements that may be performed.

•    Audit Engagement: An audit provides the highest level of assurance of all engagements performed by CPA firms. It is an intensive review. Auditors are required to perform a myriad of procedures dictated by audit rules and guidelines. Audits are very costly due to the volume of work required to be performed by the audit firm.
•    Review Engagement: A review engagement provides a lower level of assurance than an audit. A review consists of applying analytical procedures to the financial statements and inquiry of management as opposed to the substantive testing required during an audit engagement.
•    Compilation Engagement: A compilation engagement consists of presenting in the form of financial statements information prepared by management. It does not involve testing of account balances or the application of analytical procedures.
•    There is a forth level of service that may be performed by a CPA firm, the agreed upon procedural engagement. This engagement is as its name implies. It consists of the performance of procedures agreed to by management and the CPA firm.

There are several factors to research and consider when determining which level of engagement should be performed for your nonprofit organization. First is to research any state audit requirement and to carefully read through all of your grants and funding contracts to determine funder audit requirements. Recognize that there is no IRS requirement for an audit engagement. Many states however, impose an audit requirement based upon a gross revenue threshold. Also, a majority of state and government grants require an audit be performed. Similarly, individual and corporate funders often have their own audit requirements.
 
If you determine you do in fact need an audit engagement, you should become familiar with the various types of audit engagements that may be required. You must make sure you carefully read your grant and funder requirements to ensure you contract for the correct audit with your CPA firm.
 
The standard audit or the base audit, as we might think of it, is the audit performed in accordance with Generally Accepted Auditing Standards, “GAAS”. This is the standard audit performed by a CPA firm when you contract for an “audit” engagement. However, there are two other sources of authoritative audit standards that govern the audit world of nonprofits in addition to GAAS. These other standards require audit procedures above those required in the standard audit be performed. These standards are the Yellow Book and OMB Circular A–133.

•    The Yellow Book: Nonprofit organizations that receive government financial assistance over a certain dollar threshold, are required to have an audit performed in accordance with the Yellow Book. The Yellow Book specifically reflects standards that pertain to the auditors’ professional qualifications, the quality of the work performed and the characteristics of the reports issued. For example, the auditor must report on compliance with laws and regulations and on the organization’s internal control environment over financial reporting activities.
•    OMB Circular A-133: Nonprofit organizations that expend over a defined threshold of federal funds in a year must have an audit performed in accordance with OMB Circular A-133. In an audit performed in accordance with OMB Circular A-133 the auditor performs additional procedures to test and report on compliance with laws, regulations, and the provisions of contracts or grant agreements that directly impact federal award programs. Other requirements include reporting on financial statements, supplementary schedule of expenditures of federal awards and on the internal control environment related to federal award programs.

Absent a state or funder audit requirement, nonprofit organizations may struggle with the decision as to whether to have a CPA engagement performed. Sometimes an organization’s bylaws may require an “audit” be conducted. Nonprofits should discuss engagement options with their CPA firm. For example, in the absence of an audit requirement, a CPA firm may perform an agreed upon procedures engagement. Such engagement might entail confirming account balances, sampling expenses, identifying related party transactions and commenting on the internal control structure. Such an engagement is less in scope (and therefore less costly!) than an audit yet gives some comfort to board members and management that things are operating as intended.

Selecting an Audit Firm

It is important to select an audit firm that is experienced in the field of nonprofit auditing. Sometimes sole practitioners or well meaning firms offer to provide audit services at reduced fees to nonprofit organizations as a form of donation or assistance. While well meaning this effort can have negative effects as the proper reports and filings may not be issued. Nonprofit accounting and auditing is a unique and specialized service. It is important to engage professionals that are experienced and well versed in the field. Also, when searching for an audit firm an organization should request to view the firm’s most recent peer review report. This will ensure the firm chosen has met the minimum requirements to perform audit engagements.

Audit Costs
Audit engagements are expensive. Regardless of the size of an organization there are core procedures and checklists and documentation that must be compiled. Recognize that maintaining the certifications required to perform audits is also very costly. Consequently, there is often little room for audit firms to cut fees for nonprofit organizations to help to support a mission before the audit loses money. The best way to minimize audit costs is to maintain a well run organization with a sound set of controls and procedures and an accounting system that produces accurate and fully adjusted and complete financial statements.

Audit Preparation
A well run organization with a sound system of internal controls including the maintenance of an accurate and effective accounting system has little to do in the way of audit preparation. On the other hand, an organization that does not have an implemented internal control system and considers an accounting system to be little more than an electronic checkbook will have a lot of work to do.
 
Once you choose an audit firm to perform your engagement, you will be presented with a formal letter of engagement that will serve as a contract outlining the terms of engagement. The engagement letter is a form letter and contains all the verbiage CPA firms are required to provide in communication to auditees at the outset of an audit. Consequently, other than the fee arrangement, there is little auditee input into the engagement letter.

Once an audit firm is officially engaged to perform services you will be provided with a request list outlining items needed to perform the audit. Examples of commonly requested items include: a copy of the accounting system file if the accounting system is maintained in a software package such as QuickBooks or Sage, otherwise a complete copy of the general ledger must be downloaded and provided to the audit team; copies of all grant contracts and grant award letters; bank statements; minutes of board of directors meetings; accounts payable and accounts receivable listings; insurance schedules; and payroll reports. Recognize that the organization under audit should present the auditors with adjusted financial statements and footnotes and the auditors should audit them. The responsibility for the financial statements resides with management, not the audit firm.

At the conclusion of the audit, the organization must present the audit firm with a management representation letter. This letter consists of canned verbiage provided by accounting standards and is generally drafted by the audit firm on the auditee’s letterhead. The management representation letter outlines and confirms management’s representations to the audit firm.

The final deliverable resulting from the audit engagement is the auditor’s report. The final audit report for a standard audit engagement will include the audit opinion letter, the full set of financial statements and the related notes to the financial statements. Yellow Book and audits conducted in accordance with OMB Circular A-133 will include additional reporting. Recognize that the opinion letter is reflective of canned verbiage provided by audit standards and is not written by the audit firm. Consequently, the auditor is not free to cite the success of an organization in the opinion letter no matter how much the firm may recognize the organization’s accomplishments.

In addition to the auditor’s report, the auditor may also provide a letter of comment often referred to as a “management letter” to the management and board of directors of the organization. The management letter is the place where the auditors may cite control weaknesses and opportunities for improvement that are not significant enough to prevent the issuance of a standard audit opinion. Since no organization is perfect, an organization should specifically ask whether the auditors identified any areas for improvement during the engagement.

Auditors that specialize in nonprofit auditing can add much value to an organization by bringing forth best practices and critiquing an organization’s current system of accounting and internal controls. An audit should be viewed as an opportunity to improve and learn rather than as a dreaded event invoking trepidation. Audits are expensive. Get your money’s worth and glean as much knowledge and expertise as you can from your audit firm!