Notes from the Audit Clinic; Do We Need an Audit?

Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

It must be nonprofit audit season, because the audit clinic is busier than ever.  That means more audit headaches.  Let’s see what’s going on in the audit clinic today… 

Nonprofit (NP):  “We’ve never had an audit before, but someone has asked for a copy of our audit report.  Is it time for us to get an audit?” 

Audit Clinic (Clinic):  “Well, let’s see.  Nonprofits usually have an audit to meet someone’s requirement.  Do you need it for federal awards?

NP:  “No.  We’re locally funded.” 

Clinic:  “For your state charitable registration?”

NP:  “No.  We’re still pretty small.”    

Clinic:  “Is a grantor asking for your audit report?” 

NP:  “Not yet, but a potential contributor asked about it and one of our Board members has suggested that we have an audit just to be ready.” 

Clinic:  “Hmm.  It’s probably time to weigh your options then.  I’ll be honest, an audit can be expensive.  Here’s a brochure with some fee estimates.”     

NP:  “Wow!  That cost is just not practical for us, at least not right now.  What else might we do until we can afford an audit?”      

Clinic:  “Well, you want to consider three things:  safeguarding your assets, verifying your accounts and seeing good financial reports.”

NP:  “Sounds reasonable.  How do I begin to address these areas until we’re ready for an audit?”

Clinic:  “First, you could have someone look over your financial operations.  That’s what auditors would do in planning your audit, to see where you might have loopholes that would affect their audit.  If you’re not being audited, it wouldn’t be a bad idea to get a CPA to analyze your policies and procedures, make suggestions to strengthen your accounting and reporting process and comment on some fraud prevention tips.  Maybe you have a CPA on your Board who could do this for you.”

NP:  “OK.  What about verifying the reports?”

Clinic:  “You could have a team of Board members verify the bank balances and look at backup for some of your payments.  If you have receivables on the books, they could check up on the collectability.”

NP:  “What about having a CPA do a Review of our financial statements?  I’ve heard it costs less than an audit.  Would that tell us our books are in order?” 

Clinic:  “A review is an independent report on whether your financial statements are in the right form and contain all the right disclosures.  There’s no outside verification and no study and evaluation of internal control.  Unless you already prepare CPA-level financial statements, you’re going to need some help getting to that point.  You might be better off just getting the CPA firm to provide some accounting assistance and compile a set of financial statements for you.  They don’t have to be independent to do that.”

NP:  “OK, so for now, what do I tell people who ask for my audit?”

Clinic:  “Well, try explaining that you are a small organization and you don’t have an audit.  Ask them if they would accept a copy of your Form 990 instead.  You’d be surprised how often they say yes.  Even if you have to prepare a full 990 instead of 990-EZ, it’s much cheaper than an audit.

NP:  “Thanks, Audit Clinic.  I’ll let you know how it works out.”

What can we learn?

Be proactive in financial oversight.  If you don’t have an audit, do your own internal procedures to address your internal checks and balances and verify your accounts.

Insist on timely financial reports.  You can’t steer the ship if you don’t know your current position.  Make sure you review a balance sheet and an income statement monthly.  Get an outside accounting firm if necessary to help with the closing and prepare statements.

Learn more about controllership in our 501(c)(fit!) Financial Intensive Training seminars coming soon.

Learn more about fraud prevention in our on-demand webinar, Fraud—You just lost $1 million

Learn more about the audit experience in our on-demand webinar, Acing Your Audit—managing your audit from start to finish:  

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