Audit or not? How to determine what your organization needs

By Hannah Hugen, CPA

SUMMARY

Not every nonprofit needs an audit. This article highlights the purpose and limitations of audits, situations where other services may be a better fit, and considerations for selecting the right financial and compliance support for your organization. See Frequently Asked Questions.→

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Considering the current environment for nonprofits, an audit may seem like the fix for all your organization’s problems. But an audit isn’t always the best option. Of course, if your organization is required to have an audit by the state or to meet funding requirements, then you your hands are tied and an audit is your only choice.

In some cases, however, an alternative service, such as an internal control consultation or compilation of your organization’s financial statements, may be a better solution.

To help you understand if your organization needs an audit or a different type of service, here are a few things to consider.

What an audit is and isn’t

The primary goal of an audit is to provide reasonable assurance that your organization’s financial statements are free from material misstatement, whether due to fraud or error.

Your auditor begins the audit process by gaining an understanding of your organization. Next, they plan and execute procedures using a risk-based approach of where in the financial statements and disclosures there’s a chance of there being a risk of material misstatement. Throughout the process your auditor will also gain an understanding of your organization’s internal controls but will not actually test or conclude on them.

The outcome is a formal audit report that includes your auditor’s opinion on your organization’s financial statements.

An audit will:

• Offer an independent opinion on if the auditor can give reasonable assurance that the financial statements are free from material misstatements (i.e., the auditor is fairly confident there are no glaring issues within the financial statements)
• Provide high-level recommendations for strengthening internal controls

An audit will not:

• Help you fix your accounting/bookkeeping
• Identify fraud
• Test all transactions and account balances
• Test internal controls for accuracy

Is your organization required to complete an annual audit?

Audit requirements vary from state to state. For example: If your organization is a nonprofit in Minnesota with more than $750K in annual revenue, the answer is likely yes. But Arizona, for instance, does not have an annual audit requirement. Audit requirements can also be tied to covenants, federal funding, and grants.

Some organizations may not be required to have an annual audit but want one for different reasons. However, an audit alone may not be the right fit.

3 examples of when an audit alone doesn’t make sense

1 – Your organization isn’t audit-ready

Your auditor is responsible for conducting your audit but not necessarily for getting your books audit ready (i.e., on the GAAP accrual basis).

Your auditor can, however, be a resource for learning how to get and keep your books audit ready. This might involve providing you with templates and common accrual entries or helping you setup monthly and year-end close checklists. Auditors can also be a resource for upcoming changes in accounting standards to keep you on top of the ever-changing rules.

2 – You need a deeper dive into your internal controls

One client we worked with had requested an audit. But after having a few conversations, we determined they really wanted was a review of their financial statements and help with internal controls.

As an alternative to the audit, which would have given them only an opinion, we provided them with financial statements they can submit to grantors when applying for new funding. We also conducted an internal control consultation to recommend areas for improvement. In this case, the client saved the cost of the audit and got recommendations for internal controls that can help their organization going forward for many years in the future.

3 – You suspect fraud

A common misconception is that your auditor will be able to identify fraud. But if you suspect fraud is taking place within your organization, an audit won’t necessarily catch it, especially if internal controls aren’t being followed or collusion is occurring.

If you need help identifying fraud, an Agreed Upon Procedures (AUP) that focuses on fraud examination may be the best fit. At Abdo, our forensic accountants tailor the fraud examination to the organization’s needs and provide a report of their findings.

Audit alternatives or add-ons

Internal control consultation

This type of consultation focuses on assessing and improving an organization’s internal
controls, which are processes designed to ensure the integrity of financial and
accounting information, promote accountability, and prevent fraud.

Internal control consultations can be conducted by internal or external experts who analyze the effectiveness of current controls and recommend improvements.

This service is advisory in nature and does not provide assurance on financial statements but aims to enhance the efficiency and reliability of financial reporting and compliance processes.

Review

A review is less comprehensive than an audit and provides limited assurance rather
than reasonable assurance. It involves the performance of analytical procedures and
inquiries regarding the financial statements and disclosures

The procedures in a review are narrower in scope compared to an audit, focusing mainly
on identifying any material modifications needed for the financial statements to be in
accordance with the applicable financial reporting framework.

The result is a review report, which states that the auditor is not aware of any material modifications needed, but it does not provide an opinion.

Compilation

A compilation is less comprehensive than a review and does not provide any assurance on the financial statements. It involves assisting management in the preparation and presentation of financial statements based on information provided by management.

The procedures in a compilation are limited in scope compared to a review, as the accountant does not perform analytical procedures or inquiries to evaluate the financial statements. Instead, the focus is on applying accounting expertise to organize and present financial information in the appropriate financial reporting framework, without verifying the accuracy or completeness of the underlying data.

The result is a compilation report, which indicates that no assurance is provided on the financial statements and that the accountant has not audited or reviewed the information.

Accounting services

Accounting services provide ongoing support for an organization’s financial records, reporting, and internal processes. These services typically include maintaining general ledger activity, performing month‑ and year‑end close procedures, reconciling accounts, and preparing periodic financial statements in accordance with applicable accounting standards.

Accounting services also involve monitoring transactions for accuracy and completeness, assisting with internal controls, and providing financial information that management can rely on for operational and strategic decisions.

Agreed-upon procedures (AUP)

This engagement involves specific procedures agreed upon by the organization and the auditor to address aspects of the financial statements or operations.

Within an AUP, the auditor reports on factual findings rather than providing an opinion or
assurance. These procedures are tailored to the organization’s needs and can cover a
variety of areas, such as fraud examinations, compliance, specific account balances, or the effectiveness of certain internal controls.

The result is a report detailing the procedures performed and the findings, without providing any conclusions.

What’s the best solution for your organization?

If your organization isn’t required to have an audit, be sure to consider your alternatives. Often an internal control consultation, review, compilation, accounting services or even an AUP can give you what you need.

If you’re not sure an audit makes sense for your organization, we can help. Our auditors and accountants can sit down with you to learn about your needs and guide you through your options.

To learn more about how we can light the way for your organization, contact us today.