The Annual Audit: Why must we suffer this ordeal? kidding (Part 2)
This primer on audits answers three questions:
- What are you buying?
- What does an auditor do?
- What are the Board of Directors responsibilities with respect to an audit?
The first article addressed the first two questions. In this article, we answer the third.
What are the Board of Directors' responsibilities with respect to an audit?
The first responsibility of the board of directors, generally through an audit committee, is to select an auditor. (Throughout the rest of this article we will use board of directors and audit committee interchangeably) Although in the real world this task is often delegated to management, it is the board of directors' responsibility to identify and engage qualified auditors.
When the board of directors is in the process of engaging an auditor it is tempting to either ask a CPA who is used by a board member (and strong arm him/her into providing the service as a donation or deeply discounted) or to solicit bids and go with the lowest bidder. We caution you on both fronts. Although we are the first to get on the soapbox and preach that you must run a not for profit like a business, the reality is that there are accounting standards that apply only to not for profit organizations. Additional standards come into play when an organization receives federal funding. Every CPA is not an expert in this arena. It is like asking your orthopedic doctor to give your child their annual physical -- they are clearly capable and have a general background in wellness, but there are probably nuances that may go unnoticed because it is not their area of expertise.
Deeply discounted work often leads to disappointment on both sides. Despite the good intentions, the process to deliver a report may fall behind schedule (full paying clients come first) while the organization has the expectation of a high level of service. Added in the mix is the all too frequent scenario of sloppy record keeping and a large number of year-end adjustments. The old adage "You get what you pay for" all too often proves to be true.
We do not encourage you to over pay for your audit, but be realistic about what is involved to actually render an opinion on your organizations financial statements. Too low of bid can signify one of three things: the auditor is unaware of the amount of work involved, the auditor is "buying the business" (may be new to the field) or the market environment supports the lower rates. Make sure that the rates and the experience/qualifications are both good. Another adage has too often proven true, "You can pay now or you can pay later, you will pay."
Ideally, once an auditor has been engaged, an opening meeting would occur in which the audit committee meets with management and the auditors to clearly define the expectations as to:
Level and types of service
- Single Audit requirement for those receiving federal funds
- Tax return
- Federal (US Form 990 or Canadian T3010)
- State (may be a copy of the federal forms, may need a license to solicit)
- Additional accounting services such as the creation of the financial statements
The standard by which to compare and the time period to be covered
- GAAP statements
- Cash Basis
- Two year comparative statements
Who will produce the financial statements (management or the auditor)
- Creation of the financial statements
- When and where the work will be performed
- Requirements of the Organizations' staff and treasurer
- Additional meetings, such as a closing conference
- When will the report be delivered
- How many copies of the report are required
Fees for services
- May be a fixed fee
- Or a blend based upon the condition of the books and records
Depending on the size of the organization and the skills of the staff, either the audit committee or the auditor may need to prepare various supporting information. Obviously more audit committee involvement is required if they need to prepare statements for the audit. If the auditor prepares that information, the fees will increase.
At the end of the audit, the auditor will either meet with the audit committee or board as a whole to present his/her report, or will issue a letter covering specific areas required by accounting standards to be communicated to the board of directors. These areas cover significant adjustments of the statements, significant estimates, change in accounting standards, disagreements with management and any other matters that auditor feels it is important for the board to know. In addition, the auditor may identify recommendations for improvements, either orally or in writing. These recommendations are generally related, but not limited to, the recording and reporting of financial information.
For many organizations, the board's lack of knowledge of the audit process can evoke considerable fear and anxiety. Ask yourself if you have really taken the time to understand what an audit really is. If not, we hope this article will help you past some of the fear (and loathing) of this process and encourage you to find out more.