Not-for-profit organizations may not be mandated to produce audited financial statements, yet opting for audits can significantly bolster confidence among major donors and grant-making bodies regarding your financial stability. Moreover, audited statements might become imperative should your nonprofit seek financing from banks. When enlisting the services of a Certified Public Accountant (CPA) to audit your statements, the auditor's duty is to express an opinion on them while ensuring reasonable assurance of their freedom from material misstatements. Here are three effective tips to facilitate a smoother auditing process:
1. Clarify Roles and Responsibilities
To prepare for an audit, your organization must furnish estimates, such as an allowance for bad debts, adopt robust accounting policies, and establish and uphold internal controls. While auditors may offer suggestions on these matters, it is crucial to recognize that implementation remains the sole responsibility of your nonprofit.
Auditors are obligated to assess whether your internal controls, accounting policies, and estimates are sufficient to prevent or detect errors or fraud leading to material misstatements. However, decision-making authority ultimately rests with your organization.
2. Leverage Board Involvement
Often, nonprofits underestimate the pivotal role of their board in the annual financial statement preparation process. Your board should actively contribute to strategic planning and exercise oversight during this crucial phase, aligning with its fiduciary duty. Additionally, board members can offer valuable insights on technical aspects based on their professional backgrounds.
3. Grasp Statement Formats and Interpretation
Understanding financial statement items, such as debt ratios, program versus administrative expense ratios, and distinctions between restricted and unrestricted resources, is vital for gauging your nonprofit's financial health. Thus, when your financial team compiles these statements, prioritize user-friendliness.
To gain a comprehensive overview, compare your budget, internally generated financial statements, and those generated during the annual audit. Consistency in format between audited statements and internal reports facilitates this comparison. Should disparities arise, consider developing a bridge, possibly through an internal memo, to reconcile differences.
During the review, scrutinize for substantial discrepancies between audited statements and internal records, particularly audit correcting adjustments. Such variances may signal internal accounting deficiencies or budgetary misalignments.
First-Timers:
If this is your organization's initial foray into financial statement auditing, approach the process with confidence. Furnish your auditor with all requested documents and maintain open lines of communication. Your auditor will provide guidance on any concerns that arise, ensuring a smooth and successful audit.
By adhering to these strategies, nonprofits can navigate the financial statement auditing process with greater ease, reinforcing transparency and accountability in their financial management practices.
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.