Audits, Compilations and Reviews

What is an Independent Audit or “Audited Financial Statements?”

An independent audit of financial statements is an examination of the financial records, accounts, business transactions, accounting practices, and internal controls of an organization by a licensed certified public accountant who is not an employee of the organization.

The auditor will review the organization’s financial statements to determine whether they adhere to “generally accepted accounting principles” (“GAAP”), created by the “Financial Accounting Standards Board” (“FASB”).

The FASB principles require the auditors to issue one of four types of reports to the organization’s board of directors expressing a professional opinion about the organization’s financial practices:

“Unmodified Opinion” (this is the best an organization can receive)
“Qualified Opinion” (the auditors found one or two situations where the nonprofit is not following GAAP)
“Adverse Opinion” (the auditors found a material misstatement or non-compliance with GAAP)
“Disclaimer of Opinion” (the auditor refused to express an opinion)

The results of the audited financial statements can have a significant impact on an organization’s ability to obtain funding.

Requirements and Costs of Audited Financial Statements

Auditors can provide an independent audit, a financial statement review, or a compilation, but neither a review nor a compilation is a substitute for independently audited financial statements:

Compiled Financial Statements represent the most basic level of service CPAs provide with respect to financial statements.

Reviewed Financial Statements require that the CPA perform inquiry and analytical procedures in addition to the procedures described above for a compilation.

Audited Financial Statements are the product of a CPA’s highest level of assurance services. In an audit, the CPA performs all of the steps indicated above regarding compiled or reviewed statements, but also performs verification and substantiation procedures.

Audited Financial Statements May Be Required Under Certain Conditions

Some organizations do not conduct an audit annually, unless a third party has strict audit requirements. Instead, they conduct one every few years or whenever there is a significant change in the organization’s operations. Audited financial statements may be required under certain conditions by:

Federal, state, and local governments providing funding to the organization

Banks issuing a loan to the organization

State governments managing a contract with the organization

State laws requiring registration of charitable fundraising by the organization

Private foundations processing a grant proposal from the organization

Charitable nonprofits expending $750,000 or more in federal funds

Why Conduct an Audit When the Law Doesn’t Require It?

There are many reasons why an organization may choose to conduct an independent audit, even if it is not required by law or a third party:

Demonstrate the organization’s commitment to financial transparency

Build a reputation for integrity, accountability, and professionalism

Meet eligibility requirements for external funding

Establish good standing with charity watchdog groups

Ensure that the financial statements are free of material misstatements