Posted on Wednesday, October 21, 2015
After your auditors have completed the audit of your organization, they will usually present the audit results to your board of directors or finance/audit committee. In addition to the audited financial statements, there are also other items that your auditors are required to communicate to the board of directors and management. Below is a list of items that your auditors will provide to you at the completion of the audit.
The most important page of the audited financial statements is the auditors’ report that includes the auditors’ opinion on the financial statements. An unmodified opinion or a clean opinion states that the financial statements present fairly, in all material respects, in accordance with generally accepted accounting principles. Other required parts of the audited financial statements are the statement of financial position, statement of activities, statement of functional expenses (for health and welfare organizations), statement of cash flows and footnotes.
Management Representation Letter
The management representation letter is a letter addressed to the auditors from the nonprofit organization, signed by management of the nonprofit. By signing this letter, management is confirming that they have provided all information and answered all questions relevant to the audit. The auditors must obtain a signed management representation letter before the audit can be finalized.
SAS 114 Letter
The SAS (Statement on Auditing Standards) 114 Letter, Communication with Those Charged with Governance, is a required communication to those charged with governance (board of directors and management) for all financial statement audits. This letter is used to communicate the auditors’ responsibility under U.S. Generally Accepted Auditing Standards, the scope and timing of the audit, significant audit findings, and any uncorrected misstatements. Significant audit findings include the use of estimates, any difficulties encountered in performing the audit, and any disagreements with management. As part of the SAS 114 Letter, a listing of both corrected and uncorrected journal entries should be provided to management.
SAS 115 Letter
The SAS 115 Letter, Communicating Internal Control Related Maters Identified in an Audit, is also a required communication to those charged with governance for any material weaknesses or significant deficiencies in controls identified during the audit. As part of the audit process, the auditors must gain an understanding of the organization’s internal controls. This letter describes any deficiencies in the implementation and operating effectiveness of controls over financial reporting that the auditors noted during their audit testing.
A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
A significant deficiency is a deficiency, or a combination of deficiencies, in internal controls that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Examples of items that may be included in the SAS 115 letter are material journal entries proposed by the auditor, inadequate segregation of duties issues, or if bank statements were not being reconciled.
The management letter is used to communicate matters that are not required to be included in the SAS 115 letter. Recommendations in this letter include items noted during the audit that would improve the organization’s policies and procedures.
Examples of items that may be included in the management letter are improvements to the organization’s cash disbursement’s procedures or the implementation of a written policy not currently in place.
Management can use both the management letter and the SAS 115 letter to improve their policies and procedures to better operate their organization.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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