Audit, Review, AUP, or Consultation – which service is right for my nonprofit?
By: Tricia Glidewell
As a manager or governing board member of a nonprofit, you may be asking yourself if your organization has engaged the right level of CPA services. Does it require an audit or review? And if not, are there other services, such as Agreed-Upon Procedures or consultations, to assist your organization? Let’s explore the different services and which one is right for your organization.
A financial audit provides reasonable assurance the Organization’s financial statements are presented fairly in all material aspects. As a part of the financial statement audit, auditors will ask questions of management and key personnel in order to understand your organization; assess the organization’s internal controls for the limited purpose of planning and designing audit procedures; perform analytical procedures on account balances, and perform detailed testing of account balances and transactions, and evaluation of disclosures within the financial statements themselves. An audit requires the CPA to gather sufficient and reliable evidence in order to issue an opinion and provide reasonable assurance the organization’s financial statements are free of material misstatements.
Generally, an organization will engage an independent CPA firm to perform an audit because it is required by an external funding source such as a grantor, creditor, or other contractual agreement. Other times, an independent audit is stipulated in the organization’s bylaws or by the organization’s governing body. Ideally, the funding agreement is clear when an audit is required; however, this is not always the case. Federal regulations require a special type of audit be performed in any year a nonprofit expends more than $750,000 of federal funds and regulations for state funding vary widely between states. In addition, because funds may be passed through from federal to state, or state to local agencies before reaching your organization, you may be uncertain about the original source of the funds and which regulations apply. If the funding letter does not clearly state whether your funds are federal, state or local grants, ask for clarification. We can help you navigate these agreements and determine whether your funding triggers an audit.
A review is substantially less in scope than an audit and the level of assurance provided is lower than the assurance provided in an audit. During a review, the CPA primarily performs inquiries of management and performs analytical procedures on financial accounts. If no issues are detected, the CPA provides limited assurance that they’re not aware of any material modifications that need to be made. In a review, the CPA doesn’t evaluate the organization’s internal controls, trace supporting documents to verify account balances are correct and won’t issue an opinion. As with audits, reviews may be required based on funding source agreements, state funding regulations, or stipulated in the organization’s bylaws or governing body.
If an audit or review is not required, there are other services available to assist the Governing Board members in meeting their fiduciary and legal responsibilities to the organization. Agreed-Upon Procedures (AUP) allow you to tailor the procedures performed by the CPA to meet the needs of your organization. The procedures may be financial or nonfinancial in nature. Although the possibilities are limitless, examples include the assessment of your organization’s policies, procedures, and internal controls; detailed testing of compliance with the organization’s policies and procedures such as the handling of monies and proper approval of disbursements; detailed testing of compliance with specific agreements such as a specified bidding process or proper vendor approvals; and detailed testing of specified account balances and transactions. The procedures to be performed are agreed upon prior to the start of the engagement and we can assist you in determining the most beneficial procedures for your organization. A written report with detailed findings and recommendations is provided after the procedures have been performed.
An AUP can also supplement an audit. Concerns of fraud, a cyber security breach, or transition to a new financial system – all events that impact an audit – would prompt an organization to seek AUP services before the year-end audit. In such cases, testing procedures can identify issues to be corrected early, saving the client money in the long run.
Finally, a consultation with an outside CPA may be the best avenue to take when you know you have a problem you’re trying to fix, or you’re experiencing an organizational transition and need advice on how to move forward. When a client says, “We’re really in a mess here and don’t where to start,” we can provide direction. There’s real value in knowing: “Here are the top three things you really need to focus on to get back on track.”
The information contained in this article is for informative purposes only and should not be relied on when making any business, legal, or other decisions. This information may be updated without notice and/or may not contain the most current information that is available related to this topic. Please consult with your advisor to determine how this information applies to your specific facts and circumstances.