Nonprofits are not required to provide audited financial statements. However, audited statements are more likely to reassure large donors and grant makers about your financial stability, and they are typically required if your organization applies for a bank loan. When you hire a CPA to audit your financial statements, the auditor is responsible for providing an opinion and reasonable assurance that there are no major misstatements. Here are three ideas to make the audit process go as smoothly as possible.
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Understand the Roles
You’ll need to prepare estimates (such as an allowance for bad debt), implement appropriate accounting practices, and set up, manage, and monitor internal controls. Auditors may make feedback about these items, but it is not their job to implement procedures.
Your auditor must determine if internal controls, accounting methods, and estimates are sufficient to prevent or detect mistakes or fraud that could result in material misstatements. However, keep in mind that your organization is solely responsible for all decision-making.
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Involve the Board
Nonprofits may overlook the board’s responsibility in preparing annual financial statements. That is a mistake. As part of its overall fiduciary responsibility, your board should play a strategic and oversight role in the audit process. The board can also be a valuable resource for specific technical issues, depending on the members’ professional backgrounds.
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Understand Statement Formats
Financial statement ratios such as debt ratios, program vs. administrative expense ratios, and restricted vs. unrestricted resources can help you determine how well your nonprofit is performing. So, when your organization’s financial team prepares statements, make sure they are as user-friendly as possible.
One of the most effective ways to understand the big financial picture is to compare your budget, year-end internally generated financial statements, and the financial statements generated during an annual audit. This process is easier to accomplish if your annual audited statements follow the same format as your internal financial statements and budgets. If the format of audited financial statements differs from that of internally generated reports, you may need to create a bridge between them, such as an internal memo.
When comparing internal and audited statements, check for any significant changes in individual accounts that come from audit correcting adjustments. These frequently indicate an internal accounting issue. You’ll also be able to identify any substantial differences between what was budgeted for the year and the actual outcome.
Audit First Timers
If you’re engaging an auditor to prepare financial statements for the first time, don’t be anxious. Simply supply your auditor with all requested documents and keep the lines of communication open. Your auditor will let you know if there is anything to be concerned about. Contact us to learn more.
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