In a compilation, the CPA provides no tests or analysis but does ensure that the financial statements are prepared in a format consistent with Generally Accepted Accounting Principles. The financial statements are provided along with the accountant’s review report. In a review, an independent CPA firm obtains the nonprofit’s financial statements, asks questions of managementĪnd performs certain analyses, including tests of revenue and expense change, functional expense percentages and liquidity, to determine whether the financial statements reflect expected results. For organizations that can’t afford a Generally Accepted Auditing Standards audit of their financial statements but still want the input of an independent accounting firm, there are two other levels of service to consider: There are other alternatives to an audit of the financial statements under GAAS. The CPA firm reports the findings in a formal letter. In an AUP engagement, the nonprofit and the CPA firm agree in advance on specific procedures, such as a review of all checks written over a specified dollar amount or a test of the controls surrounding transactions during a two-month period. Or the nonprofit might decide to engage an independent CPA firm to perform an Agreed-Upon Procedures engagement (AUP). A not-for-profit may, for example, decide at the request of its finance committee to conduct some testing internally to review the support for financial transactions performed by management. But if cost is an issue, there are alternatives to an independent GAAS audit. It’s then your responsibility to act on their recommendations.Īn organization that IS NOT required to be audited may nonetheless seek assurance about its financial statements and accounting controls. Additionally, they can suggest ways to improve existing controls and specific measures to implement.
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Your auditors are required to understand how your internal controls were designed and whether they’re being used appropriately. When an organization has its financial statements audited, it receives an opinion on the statements and, if significant internal control deficiencies are found during the audit, a letter explaining them. Organizations not exceeding state limits may still be required to undergo an audit for a specific grant or funder. Depending on the state, these thresholds can range from $100,000 to $2 million. Many states require Section 501(c)(3) organizations to have independent audits if they exceed legally defined amounts of revenue or specified levels of contributions.
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Organizations that receive a significant amount of government funding also might be required to have a compliance audit performed under Generally Accepted Government Auditing Standards (GAGAS), OMB Circular A-133 or the “ Yellow Book.” This is required when the organization expends more than $500,000 in federal awards. The rules for GAAS audits not only include the testing of account balances such as cash, payables, revenues and expenses, but also require a consideration of fraud risk and an understanding of internal controls. The most common is performed under Generally Accepted Auditing Standards (GAAS).
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There are two types of independent audits. Here we’ll focus on audits of financial statements performed by independent CPA firms. There are many kinds of audits, including those conducted by state agencies, the Internal Revenue Service and lenders. I have recently written about the importance of “ Not-For-Profits and Transparency.” Although preparing financial statements is the organization’s responsibility, an independent audit of those statements can give granting agencies, donors and others confidence that the numbers are accurate and properly reported.