The Independent Audit

The word audit can sometimes make people a little nervous. However, there are several benefits associated with having an organization’s financial statements audited by an independent certified public accountant (CPA). Here’s an overview of what’s involved.How does an audit differ from a compilation or review?A compilation is the most basic financial statement service CPAs provide. After obtaining a general understanding of the organization, the CPA assists the organization in presenting financial information in the proper form of financial statements. The CPA does not give any assurance that there are no material modifications that should be made to the statements.When performing a review, the CPA asks the organization’s management about accounting practices, principles, and procedures; actions taken by the board of directors; significant subsequent events; and other matters. The CPA also performs analytical procedures with the organization’s financial data to better understand important relationships among certain numbers. These procedures allow the accountant to obtain limited assurance that no material modifications should be made to the financial statements.An audit is the highest level of service. In addition to inquiry and analytical procedures, the CPA performs verification and substantiation procedures, obtains an understanding of the organization’s internal controls, and assesses fraud risk. Upon completion of the audit, the CPA provides an opinion regarding the financial statements (basically, whether they are fairly presented, in all material respects, in accordance with generally accepted accounting principles).When is an independent audit required?Requirements vary. A state contract may require an independent audit, some states require audits at specified levels of state funding, and many states require charitable nonprofits to submit copies of audited financial statements as part of the registration process. Local government funders, private foundations, and lenders may also require an independent audit. If an organization expends $500,000 or more in federal funds in a year, a “single audit” -- which has special requirements -- must be performed.*What if an audit isn’t required?If your organization is not required to have an independent audit, you might want to arrange for one anyway. An independent audit demonstrates to donors, stakeholders, and the public that you take financial transparency seriously and that accountability is a priority. For the same reason, it may help with watchdog organizations that rate nonprofits. Additionally, an independent audit is a “best practice” that can play an important role in the functioning of an organization’s financial checks and balances.How is the board of directors involved?The board is responsible for overseeing the organization’s finances and, therefore, the audit. However, the board may give audit oversight responsibility to a smaller group or subcommittee (e.g., an audit committee).What can our organization do to prepare for the audit?You can expedite the audit process by getting a list of items the auditor will need to examine ahead of time. If the information is accessible and well organized, the auditor may be able to finish sooner.* There is a proposal to increase the threshold amount of spending that triggers a single audit to $750,000 a year.