Do You Need an Audit?  Maybe or Maybe Not.

Posted on Wednesday, July 06, 2022

The term “audit” sometimes gets thrown around by individuals that may not fully understand what a financial audit is or whether their organization really needs one. One of the most common misconceptions of an audit is that its main purpose is to find fraud or prevent fraud from occurring within the organization. The truth is that audits rarely detect fraud. An audit can still be beneficial to an organization, although not all organizations are required to have an audit.

First, let’s discuss what an audit is and is not.

A financial audit must be performed by an independent auditor. In order for the auditor to be independent, they cannot have a relationship with the organization’s board or management. They cannot be a board member of the organization. Nor can they make any management decisions for the organization.

The purpose of an audit is for the auditor to form an opinion whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework by concluding whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free of material misstatement. This means that the auditor is going to perform tests to determine whether the financial activity has been properly recorded in accordance with the organization’s basis of accounting (i.e. Generally Accepted Accounting Principles, cash basis, or modified cash basis). The auditor is not going to review every single transaction. The auditor is not going to obtain absolute assurance, only reasonable assurance.

An audit’s purpose is not to find fraud. The auditor is responsible for obtaining reasonable (not absolute) assurance that the financial statements as a whole are free from material misstatement whether caused by fraud or error. This requires the auditor to identify and assess risks that may result in material misstatement of the financial statements due to fraud and to respond to the results of the assessment when gathering and evaluating audit evidence.

Some nonprofits are required to have an audit performed while others are not. An audit may be required for the following purposes.

• Bylaw requirement. Do your bylaws require an audit to be performed?

• Bank requirement to obtain a loan.

• State charities registration requirement (Indiana does not require an audit).

• Requirement of national organization. Affiliates may be required to submit an audit to the national organization.

• Grantor requirement to obtain funding.

• Requirement of government agencies. If a nonprofit receives funding from a state, local or federal government, part of the funding agreement may require an audit.

• In Indiana, the State Board of Accounts requires an audit if a nonprofit organization receives government funding and meets certain requirements.

• If an organization spends $750,000 or more of federal funds during a fiscal the Office of Management and Budget requires a Single Audit to test for compliance with federal grants management standards.

If your organization does not meet any of the above requirements, then why would you choose to have an audit done? Audits take work to prepare for and are expensive so what is the benefit to have one?

Transparency. An audit shows that your organization takes your financial management seriously and is dedicated to increased transparency. This builds trust with donors and the public. It also increases confidence that your financial statements are accurate. Many organizations will share their audited financial statements on their website. The IRS also asks a question on Form 990 as to whether the organization received an independent audit for the year.

Accountability. A regular audit requires your organization to remain accountable to current accounting standards and reporting on an ongoing basis.

Improvement. An audit also provides an opportunity for improvement by the organization. At the end of the audit, the auditor should provide recommendations for improvements on policies and procedures and suggestions on best practices of nonprofits.

Even with these benefits, an audit may not be the best use of funds for some smaller organizations that do not meet any of the audit requirements but still think they need to have an “audit” done. For example, if an organization is concerned about their current processes that are in place or how checks are being issued, an agreed upon procedure engagement can focus on what matters to the organization, as opposed to an audit that takes a broader view of the whole organization. The results can then provide ways to improve on that specific area of concern.

If you are not sure as to whether your organization needs an audit or not, contact your accountant or our Nonprofit Team to discuss.

Contributed by Carrie Minnich, MAcct, CPA | Partner | DWD CPAs & Advisors

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.