Overview of Types of Audits
There are two main types of audits that your organization may need to undertake this year: financial audits and performance audits. Financial audits are designed to assure the reliability of financial reports. Performance audits are conducted to establish whether your non-profit’s programs and activities are meeting stated goals and objectives, and to determine if non-profits are performing duties in the most economic and efficient manner possible.
A financial audit is designed to provide users of a set of financial statements with reasonable assurance from an independent source that the information presented in those statements is reliable. What does reasonable assurance mean? It’s not absolute and it seeks to affirm that financial statements are free from material misstatement. Material misstatement consists of an important or significant item, is quantitative, and qualitative.
Why does your organization need an audit? There are a variety of reasons. It could be a requirement in your by-laws, a grant stipulation, a debt covenant or bank requirement, a Commonwealth of Pennsylvania requirement, or a Uniform Guidance Audit requirement (if your organization receives over $750,000 in federal funding annually). An audit also provides a big picture view of your organization’s finances to your board of directors, funders, and the public at large.
About the Audit Committee
Your organization may rely upon your audit committee to help facilitate the audit process. If your organization does not have an audit committee, you could consider forming one to provide an extra layer of oversight when it comes to your organization’s financial reporting responsibilities. Audit committees are beneficial in addressing a changing regulatory environment where audit standards require an increased level of responsibility for management and governing bodies. Audit committees provide additional oversight responsibility for internal control and financial reporting and help to direct communication between independent auditors and board members.
Who should be on the audit committee? As recommended in The AICPA Audit Committee Toolkit Not-for-Profit Entities, 3rd Edition, the committee should consist of no fewer than three members, each of whom shall be an independent director. Also, at least one of the three shall be a “financial expert”. A financial expert is defined in the Toolkit as a person who has the following attributes:
●An understanding of generally accepted accounting principles, generally accepted auditing standards, and financial statements.
●The ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves.
●Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that can reasonably be expected to be raised by the entity’s financial statements or experience actively supervising (direct involvement) one or more people engaged in such activities.
●An understanding of internal control and procedures for financial reporting.
●An understanding of audit committee functions.
●A general understanding of the financial issues and specific knowledge of the sector in which the organization participates (for example, health care, non-profit, and higher education, among others).
●A general knowledge of any current relative concerns or regulatory issues surrounding the entity’s specific sector.
●An understanding of the past three to five years of the entity’s financial history.
What is the role of the audit committee? The committee will select an independent auditor and provide independent oversight and review of the financial reporting process and internal control. The committee will determine the appropriate scope of the independent audit, review the financial statements including the independent auditor’s report, follow up on corrective action undertaken as a result of the independent audit, review the non-profit’s internal control, and assess the performance of the auditors.
Managing Your Audit
After obtaining a written engagement letter, holding an audit planning meeting with Maher Duessel, or your current audit firm, will help to ensure an efficient and organized audit process. At the planning meeting, your auditors will discuss with you a list of documents and items they will need to complete the audit. They will want to discuss with you significant transactions that occurred during the audit year. These could include major purchases, debt, significant grants, unusual events, and significant changes, if any. They will discuss with you any open questions and problem areas, and go over the prior year audit adjustments. What records should be made available to your auditors?
●General ledger and subsidiary ledgers
●All records pertaining to cash receipts, such as, documentation and journals
●All records pertaining to cash disbursements
●Any separate records maintained by the treasurer, if applicable
●All bank statements, cancelled checks, voided checks, etc.
●Bank reconciliations with applicable support
●A list of depositories, their addresses, account numbers, account names, and authorized signatures for each account
●A schedule of investment transactions for the year
●All vouchers together with invoices and bills
●Support for all outstanding accounts, pledges, and contribution receivable balances
●Support for all amounts considered payable
●Support for accrued liabilities such as accrued vacation, sick leave, and interest on debt, etc.
●Fixed asset information
●Copies of financial information presented to the board of directors for meetings throughout the year
●An organization chart including names or persons in each position
●A copy of the chart of accounts
●A copy of your accounting policies and procedures
●Flow charts or narratives documenting transaction flow
●A summary of all litigation involving the non-profit
●Names and addresses of all attorneys dealt with during the year and their role
●Minutes of board meetings
●Records of outstanding debt – bank loans and bonded debt
●Copies of new debt documents, if any
●Copies of leases or significant contracts
●Copies of documents supporting advertising and bidding procedures
●Summaries of unique transactions including investments in derivative financial instruments, securities lending transactions, relationships with legally separate entities, and joint ventures with other non-profits, governments or for-profit entities.
●Significant grant agreements
If your organization offers an employee benefit plan, you will be asked to provide for defined benefit plans (which are rare):
●Copy of the pension plan and pension plan amendments
●Copy of the actuary report
If your organization offers a defined contribution employee benefit plan you will be asked for information needed for footnote disclosure of payments made to the plan. However, the auditor may also inquire about the audit of the separate employee benefit plan, if required.
Understanding Your Organization’s Internal Control
Prior to your audit (and throughout the year), you should reflect on your organization’s internal control. Consider the following key characteristics for your organization:
●The way people and their work are organized
●Methods and procedures used to safeguard assets and other resources
●Methods and procedures used to ensure that those assets and resources are used as effectively as possible
●Methods and procedures used to ensure those assets and resources are used as directed by the governing body and management
At a minimum, does your organization have a satisfactory system of internal control? Organizations with a satisfactory level of internal control will have a strong segregation of duties and have personnel that clearly understand their roles and responsibilities through adequate training. If you have strong internal control, transactions will be executed as authorized by individuals acting within their scope of authority and transactions will be recorded at the amounts and in the accounting periods in which they are executed and classified in the appropriate accounts. Additionally, organizations with strong levels of internal control will ensure that access to assets is limited to authorized personnel and balances of assets will be confirmed by someone other than the person responsible for recording and reporting of the balances. Lastly, if your organization has an acceptable level of internal control, your management will be aware that the establishment of a system of internal control is important and is their responsibility. Internal accounting control provides reasonable, but not absolute, assurance that its objectives will be accomplished. Inherent in the concept is that the cost of internal control will not exceed the benefits that are derived from it.
During The Audit
While the audit is taking place, it is best practice to ensure the process is as seamless as possible by:
●Making key personnel accessible
●Ensuring that “PBC” information is available
●Presenting financial records in “auditable condition”
●Not waiting until the first day of the audit to find your “PBC” list
●Not presenting records you have no faith in
●Not withholding information
What to Expect During the Exit Conference
At the conclusion of the audit, your auditors will meet with you to review the results of the audit. Management and the audit team will participate in this conference. Discussion items will include audit adjustments, audit conduct, and potential management letter comments. These comments include items relating to material weaknesses, significant deficiencies, and other recommendations with respect to internal control.