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The Annual Audit: Why must we suffer this ordeal? kidding (Part 3)

In our primer on audits thus far, we have endeavored to answer these three questions in a series of articles:

  1. What are you buying?
  2. What does an auditor do?
  3. What are the Board of Directors responsibilities with respect to an audit?

While this series of articles was only expected to be two parts, the prior two articles generated such a response that it became apparent we needed to come back and speak to some additional questions.

The first of these follow-up articles will cover:

1. Does size matter when it comes to an audit?

2. Reporting Financial Information

  • Is the reporting in an audit enough/appropriate?
  • What are other alternatives to an audit?

Later this month, we will continue with:

3. Engagement letters

  • What are they?
  • Why are they important?

4. Confirmation letters

  • What are they?
  • Why are they important?

5. Management representation letters

  • What are they?
  • Why are they important?

6. Management letters

  • What are they?
  • Why are they important?
  • How does management work with the auditor to inform the board?

Does size matter when it comes to an audit?

Oftentimes board members, donors, grantors and the general public refer to an audit anytime they would like an external “look at the books”. In addition, there is often language in the by-laws indicating that an annual audit will be performed without having set parameters by which an Organization would proceed, nor instances in which it would not be necessary.

As an audit carries a specific, technical meaning, and corresponding costs, do all organizations need one? And if not, what is the measurement one would use in determining that an audit is appropriate?

From a regulatory standpoint, many states and provinces have requirements relating to when an audit is required, usually tied into the license to solicit funds from the general public. Several states have no requirement for an independent accountant’s report if revenues are less than $100,000. Often a review is required for revenues between $100,000 and $250,000, and an audit for organizations with revenues in excess of $250,000. Some states have no requirement for an audit, relying instead solely on the annual return presented to the state taxing authority.

In the case of funding from the federal government (US), it is the level of funding that determines the need for an audit. Often called a “Yellow Book” audit, Office of Management and Budget, Circular No. A-133, Audits of States, Local Governments, and Non-Profit Organizations requires Non-Federal entities that expend $300,000 ($500,000 for fiscal years ending after December 31, 2003) or more in a year in Federal awards shall have a single or program-specific audit conducted for that year in accordance with the provisions of this part. Readers from other countries will need to check local requirements, which may also vary with level and source of government funding.

From a donor or grantor standpoint, it just depends. A frank discussion with the donor/grantor will help to determine what they would like to know, in what form and how frequently. Oftentimes, the annual tax form, (Form 990 in the United States) is adequate to satisfy the donor’s/grantor’s requirements.

From standpoint of the general public, it is the demonstration of fiscal responsibility and transparency that appears to be most important. Having reports that make sense in light of what else is known about the organization, timely and readily available financial reports and a reputation for an above board and forthright manner of conducting business is often all that is required to maintain public confidence.

Many of you may not be aware that an organization is not limited to Audit reports. Later in this article, we will discuss alternatives to the audit that may be more cost effective solutions to demonstrating an external “look at the books”.

Reporting Financial Information

Is The Reporting In An Audit Enough/Appropriate? As we discussed in the prior articles, an audit is a methodical and objective examination of accounts and items that support the financial statements. In a normal audit conducted in accordance with generally accepted auditing standards, a CPA (CA in Canada) firm’s objective is to express an opinion on how fairly the financial statements present in all material respects the financial position, the results of operations, and cash flows in conformity with generally accepted accounting principles.
Sometimes information presented in conformity to generally accepted accounting principles (GAAP) just isn’t helpful to those in the best position to make decisions. It may be another basis of accounting, such as cash or modified cash. Or it may be a mixture of financial and non-financial information.

Often some of these GAAP requirements are quite challenging to fully communicate with donors or the general public. Try as we might, footnote disclosures, may fall short of fully articulating these rules, deviations, etc. to the complete comprehension of the reader of these financial statements.

In addition, the auditor’s report (letter accompanying the audited financial statements which expresses the overall opinion of these statements) would contain statements that highlight any deviations from GAAP. These statements can mislead the reader to believe this is an area of deficiency when, in fact, it is advised and an informed decision.

What Are Other Alternatives To An Audit?

There are three alternatives to an audit that involves external accountant’s reports:

  • Compilation
  • Review
  • Other Attestation Services (including “agreed upon procedures”)

A compilation is limited to presenting in the form of financial statements information that is the representation of management. The report might read:

I have compiled the accompanying statement of financial position XYZ Organization (a non profit corporation) as of September 30, 20XX, and the related statements of activity and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

A compilation is limited to presenting in the form of financial statements information that is the representation of management. I have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

In a review, the independent accountant will perform limited procedures on the management generated financial statements. The report reads:

I have reviewed the accompanying statement of financial position XYZ Organization (a non profit corporation) as of September 30, 20XX, and the related statements of activity and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of XYZ Organization.

A review consists principally of inquiries of Organization personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, I do not express such an opinion.

Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

***

Sometimes it just makes sense to focus on one or a few key areas to obtain assurances, not the entire financial statements, or financial reporting system. In cases such as these it may be wisest to consider “other attestation services.”

As an alternative to an audit, an outside accountant or auditor can be engaged to issue a report on selected activities or assertions. These reports (sometimes referred to as “agreed upon procedures”) may include assertions as to efficiency and efficacy of service delivery. They may not only report how much it cost to deliver services, but also how well. If a standard or measurement can be established and communicated, an auditor can test and report on it!

In our opinion these reports are worth your consideration. Often they prove to be most cost effective, instructive and informative alternative for certain donors, grantors and the general public. Consider discussing the value of other attestation services for your organization with your accountant. Careful planning is particularly critical to the success of these engagements.

As you can see, many factors need to be considered prior to commissioning an audit. Factors such as size, regulations, the standard by which to measure and costs are all relevant when determining when and if an audit is appropriate.

The next questions to be considered in this series are various letters that are may be significant in any engagement with a CPA/CA, the engagement, confirmation, management representation and management letters.

About the Contributor: Carolyn Sechler

Carolyn Sechler, CPA is the big honcho of the firm of Sechler CPA PC in Phoenix, Arizona. Her expertise is in tax and strategic planning, financial reporting, and management consulting, primarily to nonprofit organizations and technology entrepreneurs. She has been serving clients in this capacity for approximately 20 years.

Her fully wired practice, which she calls a “virtual accounting firm,” demonstrates her belief in the liberating power of technology and its endless opportunities. The team all work from their homes and reside in several states and Canada. Likewise the client base includes Organizations both domestic and international.

Carolyn is an animated and passionate public speaker on local and national levels, a writer/editor and avid geek. In addition, she writes for a number of professional publications and is an editorial advisor for the Journal of Accountancy.

Her topics include tax and financial issues, futurist and visioning applications, non-profit organizations, and technology integration to meet user and organizational needs. Systems design; training and strategic alliance issues have become some of her latest fun topics!

Their accounting practice is proud to have earned the recognition and featured for their “virtuality” and their work in the nonprofit community annually since 1995 in the following publications: Working Woman, Fast Company, Forbes, Business Week, Phoenix Business Journal, Arizona Republic, Journal of Accountancy, Accounting Technology, Practical Accountant, Telework AZ. They have also been featured case studies discussed in several books on best practices for accounting and telework 1996 to present.

She and her team can be found online most any time of day. They welcome your comments and questions.
Carolyn S. Sechler, CPA
Sechler CPA, P.C.
921 E. Orange Dr.
Phœnix, AZ 85014
(602) 230-2700
fax: (602) 230-2705
e-mail: [email protected]
website: www.azcpa.com

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