Dan Montgomery, a CPA and Senior Assurance Associate at TD&T, explains what an audit entails and why audits are important. With more than ten years of experience, Dan specializes in audits of nonprofits, governmental entities and employee benefit plans. Dan is a member of the American Institute of Certified Public Accountants and the Iowa Society of CPAs, and serves nonprofit clients across all ten TD&T office locations.
The Purpose of an Audit
Throughout my time as an auditor, I have often been approached with the question, “Have you ever uncovered fraud because of your audit?” My standard reply is that an audit is not designed to detect fraud; rather, an audit’s purpose is to form an opinion on whether the financial statements, taken as a whole, reflect the financial position of the organization at a given date. Granted, fraud is a major consideration in any audit; however, the overall purpose of the audit is to provide reliance to the users of the financial statements that the information they are reviewing is materially accurate.
When performing an audit, auditors must follow specific auditing standards, which may vary depending on the type of organization. For instance, a nonprofit organization without governmental funding sources would typically be audited using “Generally Accepted Auditing Standards (GAAS)” and a governmental agency would be audited using “Generally Accepted Governmental Auditing Standards (GAGAS).”
The end result of an audit comes in the form of an audit opinion with respect to the organization’s financial statements. The audit opinion can provide users of the financial statements assurance that the financial statements are free from material misstatement. According to Generally Accepted Accounting Principles (GAAP), an item is considered to be “material” if it could influence the economic decisions of financial statement users. The audit report can present opinions in four different types:
- Unmodified – The highest level of assurance that can be provided, which is that the financial statements are free from material misstatement.
- Qualified – This opinion indicates that the auditors found one or two situations where the organization was not following GAAP.
- Adverse – In this case, auditors found material misstatements or that overall, the organization was not following GAAP.
- Disclaimer – This category states that the auditors could not form an opinion.
Reasons Why You Might Need or Want an Audit
Audits are required of some nonprofit organizations (NPOs) for various reasons, some of which are listed below. In other instances, an audit may not be required by an outside party, but the board of directors may want more assurance that the information they are receiving is materially correct.
- Federal, state, and local governments may request a copy of a NPO’s audit.
- NPOs that expend $750,000 or more in federal awards in a year are subject to special audit requirements.
- Some states require submitting an audit to register for fundraising.
- Private foundations (and similar types of organizations) may request an audit as part of a grant application.
- Banks may require an audit for a loan application or for loan covenant compliance.
Benefits of An Audit
An audit can provide many benefits for NPOs. It demonstrates a commitment to fiscal responsibility and transparency, which can build the confidence of donors, customers, lenders, and others. Audits promote accounting discipline throughout the year and tend to improve internal controls due to the fact that evaluating internal controls is an integral part of an audit. Auditors can also provide knowledge of best practices in accounting, reporting, financial management, and internal controls. In summary, conducting regular audits can help to maintain the financial health of NPOs.
Conducting an audit requires the assistance of CPA professionals who know the needs of nonprofit organizations. TD&T can deliver that assistance and provide you with confidence in the audit for your organization.