Why Are NPOs Audited Every Year? [Video]

Our financial literacy series helps teach both non-profit leaders and Executive Directors the basics on various financial scenarios they may encounter. Today, we discuss non-profit audits, from what they are, to how they are conducted, and why. Watch today’s Monday Money Moments video for more (and skim the transcript below).

Dana Miller (00:01): Hello, and welcome to Monday Money Moments with myself, your host, from Executive Financial Insights. Today, we are talking about financial literacy and the audit.

(00:17): So most of us have a fiscal year, which is also a calendar year, which means our year ended at December 31st. And now we are into the following year, but we are also into the audit of the prior year, but let’s talk about what is an audit and why do we do these things and who does them and how are they done? And what’s the purpose, right?

(00:40): So first of all:

An audit is an independent examination and evaluation of your financial statement.

It is something that you pay for, but it is to an independent third party. And this report, it’s a report that attests to the public that the financial statements are fairly presented, fairly stated, no material misstatements, and that they follow generally accepted accounting principles (GAAP; learn how this applies to your situation here).

(01:12): For the most part, the audit opinion (the first piece of paper that you see in an audit) is just that: it says that the financials are fairly presented, right? And there’s a lot of language on there as to how they’ve conducted their audit and so forth, which is wonderful.

But what you’re really looking for is that one sentence that says that the financials are fairly presented. There are other opinions, and we won’t go into all of that right here. We’re just going to go over the high level. What is an audit and all the details of it.

(01:47): So who performs the audit?

Well, it is only performed by an independent certified public accountant and a CPA (certified public accountant), they are regulated at the state level and they have to have certain levels of education and training and experience and continuing education. Plus, they have to pass an examination to be declared a certified public accountant, which then gives them the qualifications to perform an audit.

And an audit is called an attestation. They are attesting to the validity of the numbers on the financials.

Audits are generally performed on an annual basis. They are not required to be performed on an annual basis. There’s no law that says they have to be done. However, they are generally done annually because your investors will want them or your donors, your board may require it, and sometimes your bankers may require an audit. So that’s when they are done.

(02:58): Now, how are audits done?

Generally, the auditors will come in and they have software that helps them identify the whole universe of your financials and then they will go through and do some sampling and they will take a look at the total number of transactions and the dollar volume, and they will pick certain transactions. Then they will deep dive into those transactions and verify all the pieces of that transaction. So, they certainly verify your bank statements and they verify some of your receipts and they verify your expenses and they verify your internal processes.

So not every single transaction is tested. What they do is they, the auditors, get a level of comfort that the numbers that they’re looking at are what they state that they are. Your revenues are what you are stating they are, and your expenses are what you’re stating they are. And once they get that level of comfort, then they move on to the next category.

(04:09): Now, why do we even do audits?

Like I mentioned, we do them to confirm to the public and to our donors, to our investors, to our bankers, to our boards, that the financial statements are as stated.

(04:23): Now, one thing the audits will NOT do necessarily is find or determine if fraud has occurred.

So even though the financial statements may be fairly presented, if there’s fraud happening, the auditors may, or may not, discover that. And that is stated in their opinion letter as to their procedures that they’re following, because that is not the focus of their audit.

(04:52): Unless you’re hiring them to do a specific fraud audit, they may or may not [find potential fraud]. Now, of course, if they find something they’re going to bring it up to the board, they’ll bring it up to management and they’ll have discussions with you about what it is they’re finding and so forth, but just be aware that they don’t always detect fraud.

(05:13): What they do, however, is take a look at your internal controls and how things are happening inside your company to ensure that your statements are fairly presented, that your transactions are correctly recorded according to generally accepted accounting principles (GAAP).

(05:32): So internal controls, that’s something I’ve been talking about for a while. And if you would like more information about that, please visit me at www.executivefinancialinsights.com.

And we can talk about internal controls and how to help your audit go smoothly this year. Thank you; until next time!

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