The Importance of Independent Audits for Nonprofits

By Jon Shoemaker, CPA – Principal Gumbiner Savett Inc.

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Nonprofits and Transparency

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An independent audit can provide accuracy in numbers and proper reporting to:

Granting agencies

Donors

Other Stakeholders

Independent Audits

Many states require Section 501(c)(3) organizations to complete independent audits.

Revenue thresholds can range from $100,000 to $2 million.

Organizations not exceeding state limits may still be required an audit by grantor or funder.

Why an Independent Audit?

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The Audit Opinion

The audit opinion of the statements: Letter of internal control

deficiencies Your auditors are required

to understand your internal controls design and use.

They can suggest ways to improve controls and specific measures to implement.

Responsibility – the NFP is responsible to act on recommendations.

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CPA Performed Independent Audits

CPA Performed Independent Audits

Two types of independent audits:

Generally Accepted Auditing Standards (GAAS)

Generally Accepted Government Auditing Standards (GAGAS)

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Generally Accepted Auditing Standards (GAAS)

The rules for GAAS audits:

The testing of account balances such as cash, payables, revenues and expenses,

Require a consideration of fraud risk and an understanding of internal controls.

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Government Funded Organizations

Government funded organizations might require a compliance audit:

Performed under Generally Accepted Government Auditing Standards (GAGAS)

OMB Circular A-133 or a “Yellow Book Audit.”

This is required when the organization expends more than $500,000 in federal awards.

Generally Accepted Government Auditing Standards (GAGAS)

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Alternatives:

If you do not have an audit requirement, consider:

A Review of the Financial Statement

A Compilation

Both reviews and compilations allow for input from an outside CPA firm at a lower cost.

Suggestions for improvement in controls usually not provided.

Other Potential Alternatives

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A Review

Review Process

Independent CPA firm will: Obtain nonprofit’s financial

statements. Asks questions of management Performs certain analyses -

tests of revenue and expense change

functional expense percentages and liquidity

The financial statements are provided along with the accountant’s review report.

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A Compilation

Compilation Process

In a compilation, the CPA: Provides no tests or analysis

Ensures that the financial statements are prepared consistent with GAAP - Generally Accepted Accounting Principles.

A report attached to the financial statements explains that they were compiled from client records but not audited.

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Consult with granting agencies to determine which level of service they require.

For help in determining what type of audit you’ll need, ask your accounting professional.

Make Sure You are Compliant with Your Granting Agencies

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Jon Shoemaker, CPAPrincipalAudit & Accounting – Not for Profit Practice

Gumbiner Savett Inc.

1725 Cloverfield Blvd.

Santa Monica, CA 90404

www.gscpa.com

310-828-9798

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