What’s The Difference?

Posted on Wednesday, May 09, 2012

As a nonprofit, you may be required by your board of directors or funders to have financial statements reported on by a CPA. There are three types of reports issued by CPAs – audited, reviewed and compiled financial statements. The type of report depends on the level of service provided by the CPA.

Compilations provide no assurance. The accountant takes the information from the client’s general ledger and presents it in the form of financial statements. Any obvious errors from generally accepted accounting principles are corrected. For example, if the organization had fixed assets but no depreciation has been recorded for the year, the accountant will make a journal entry to record depreciation. The accountant is required to have an understanding of the organization’s industry, obtain knowledge of the client and consider whether the financial statements are in an appropriate form and free from obvious material errors. Compilations involve the least amount of work which results in a lower fee compared to an audit or a review. The compilation report reads:

“We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with generally accepted accounting principles.”

Reviews are one step up from a compilation and provide limited assurance. Reviews include inquiries of management and staff as well as analytical procedures (looking at numbers to make sure they make sense) performed by the accountant. The review report reads:

“Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.”

Audits involve inquiry and analytical procedures, similar to reviews, but also require the auditor to gain an understanding of the organization’s internal controls and include confirmations of balances by outside sources. The goal of an audit is to provide reasonable but not absolute assurance that the financial statements are fairly presented in accordance with general accepted accounting principles. Audits require the most amount of work of the three and therefore cost the most. The audit report reads:

“In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nonprofit Organization as of June 30, 2011, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.”

It is up to each organization to determine which type of service will meet their needs. The level of service required by a nonprofit organization often depends on funding requirements. Many funders will require organizations to have an audit in order to obtain grants. Sometimes a review will satisfy a funder’s request but rarely will a compilation due to the level of assurance provided. If the organization is an Indiana entity that receives state and government assistance, the state of Indiana may require an audit. The organization should also review its bylaws to see if there is a requirement for a specified level service included in the organization’s governing documents.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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