Notes from the Audit Clinic; Findings We Can’t Fix
Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
Welcome back to the “audit clinic” where we help nonprofits with some of the more common audit headache symptoms and remedies. Every nonprofit leader has experienced a few. Let’s see what’s going on in the audit clinic today…
Nonprofit (NP): “My auditors keep reporting findings about things we can’t fix. Can’t they see we’re doing everything a small nonprofit can do?”
Audit Clinic (Clinic): “Give me an example.”
NP: “Listen to this. They said we have a material weakness because we get contribution checks in the mail and no one would really notice if one of them disappeared. Everyone gets contributions by mail! At some point you just have to trust people.”
Clinic: “Isn’t this the kind of thing you would want your auditors to tell you?”
NP: “Not if we can’t fix it. If we have that weakness, so does everyone else. They’re just making us look bad.”
Clinic: “Hmm. Have you considered collecting your contributions online or through your bank?”
NP: “That’s just not practical. Donors won’t relate to an impersonal P.O. box. Plus, we can’t afford the fees for a bank lock box or more online collections.”
Clinic: “Those are good points, but it’s your Board’s decision to make. The auditors can’t just leave it out of the letter. Auditing standards say that if the auditor believes your system has a big loophole in it, they have to report it in writing to you and the Board, whether you can fix it or not.”
NP: “So what can I do to get rid of this headache?”
Clinic: “There isn’t a cure, but you can manage it effectively.”
NP: “OK, how?”
Clinic: “Ask that management’s comments be added to the description of the finding. The auditors will describe what could possibly happen if the condition is not corrected. You need to add a description of the potential obstacles and costs you would incur if you did correct it.”
NP: “OK, so they have to report it, but I can add my observations to the letter too.”
Clinic: “Exactly. That way, you’re helping your Board make a good decision about how to address the issue. It’s their decision. By the way, here’s some helpful information on theft of incoming contributions.”
NP: “Thanks, Audit Clinic. I’ll let you know how it works out.”
What can we learn to promote a more positive audit experience?
Participate in the discussion. The auditors have to report control weaknesses, but they are not the accounting police. Your Board can decide not to correct the weakness. This still requires a discussion of the pros and cons of the issue. Guide this discussion by providing your thoughts and information on any obstacles you see. Then let the Board decide.
Ask for an update. When planning the audit schedule, include an update right at the end of fieldwork. Find out about any proposed adjustments, potential findings, missing information, remaining procedures and the schedule for completion.
Fix it before the letter goes final. If you agree with the finding and you fix it during the draft stage, ask the auditors to mention in the letter that you have already taken action to address the condition.
Learn more about supporting a positive audit experience in our on-demand webinar, Acing Your Audit—managing your audit from start to finish:
Read more notes from the audit clinic; Great Expectations.
Tell us about your audit headaches and we’ll try to address them (anonymously) in the audit clinic.
Learn more about fraud prevention in our on-demand webinar, Fraud—You just lost $1 million.
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