What’s the threshold for when an audit is required?

Federal, state, and local governments may have thresholds that require not-for-profits to conduct a review or audit. These requirements include an independent audit, review, or compilation of generally accepted accounting principles (GAAP) financial statements. As many as 26 U.S. states require charitable not-for-profits to submit a copy of their audited financial statements when submitting their registration. For example, California requires an audit when gross annual revenue exceeds $2 million. Washington State requires an audit when gross revenue exceeds $3 million over three preceding years. Other states, such as Oregon and Texas, have no state law requirement.

What is a financial statement audit?

An audit consists of an examination of financial records, internal controls, accounting policies, and operations. The audit is performed through walk-throughs, analytical procedures, testing, and the understanding of transactions by an independent auditor. An audit provides reasonable assurance that the financial statements are materially correct.

What is a financial statement review?

A review consists principally of inquiries of organization personnel and analytical procedures applied to financial data. The scope of a review is significantly less than that of an audit, and it doesn’t provide a basis for the expression of an opinion on an organization’s financial statement. Rather, a review provides limited assurance that no material modifications should be made to the financial statements to bring them into conformity with the applicable financial reporting framework, such as GAAP. A review may be a viable option to provide a limited level of assurance when a not-for-profit is small and unable to incur the cost of an audit.

What is a financial statement compilation?

A compilation differs significantly from, and is substantially less in scope than, a review or audit of an organization’s financial statements. A compilation is one of the lowest level financial statement services an accountant can provide. The objective of a compilation is to present information, in the form of financial statements, that’s the representation of management. A compilation requires significantly fewer procedures than either an audit or a review. A compilation doesn’t include the expression of an opinion or any assurance on the financial statements, and an accountant need not be independent to perform a compilation engagement.

What are the benefits of a financial statement audit?

The beneficial byproducts of a financial statement audit include: Training and assistance for the accounting staff Recommendations from a best practice perspective related to internal control and documentation Assurance that significant transactions are supported with appropriate documentation

What can you expect from a financial statement audit?

The audit process involves significant communication from the beginning to the end of the process as well as throughout the year. A prepared-by-client (PBC) request listing with timelines should be provided to management early in the process to help make the audit as smooth as possible. During the audit process, auditors dedicate time to perform extensive procedures. The procedures are performed to accomplish the following: Examine records supporting transactions and balances Understand and test estimates Check calculations Understand controls Confirm or verify assets and liabilities

Article

How financial statement audits can benefit not-for-profit organizations

April 18, 2022 · Authored by Sheila Herrera

Though many not-for-profit organizations aren’t required to obtain a financial statement audit, there are various benefits that come with going through the process, such as providing financial transparency to stakeholders and internal members.

Why should a not-for-profit consider a financial statement audit?

Not-for-profit organizations may be audited for several reasons, including the following:

Financial transparency
Applying for or receiving grant funding
Contract or agreements that requires an audit
Federal, state, and local government audit requirements

Financial transparency

Not-for-profit entities may have many users — external and internal — of the financial statements. It’s important to understand who those users are and the information they may rely on to make decisions about the organization.

Regular audits can help the organization be accountable to themselves and stakeholders as well as help management and the board evaluate performance. In many cases, even when a financial statement audit isn’t required, it’s still a way to provide financial transparency and trust within the organization.

To express an opinion on the financial statements, the auditors are required to follow professional standards in performing audits, giving management and users confidence that the audit can be relied on.

Grant funding

A common reason not-for-profits conduct an audit is when the organization applies for or receives grant funding. Many grantors seek audited financial statements to support that the awarded grant funds are spent in accordance with the grant.

Many grant givers also have a responsibility to their donors or boards when they have policies to only do business with transparent organizations or organizations that have proper controls and policies in place. An audit helps grant givers in these decisions.