Are You Audit Ready? Part 2
As we began to discuss on Tuesday (Read Part 1 of this series), once you have identified that you are required to, or that you would voluntarily like to conduct an audit, you will want to understand the following key questions and critical next steps:
- Do I need an audit or will a financial review suffice?
- When should I conduct my audit?
- What are the most critical criteria in selecting an audit firm?
- What do I need to do to prepare for my audit?
Let’s spend some time looking at each of the steps above in more detail.
What’s a financial review and how is that different from an audit?
According the American Institute of CPA’s (AICPA), a financial review differs from an audit primarily in the:
- level of assurance from the accountant / auditor that financial statements are not materially misstated.
With an audit, the objective is to provide a ‘high level of assurance’ and ends with the auditor’s opinion 'that the financial statements were presented fairly'. While with a review, the objective is to provide ‘limited assurance’ and ends with a statement that 'the accountant is not aware of any material modifications'.
- level of scrutiny and inquiry into the organizations books and procedures.
For example with an audit the auditor is required to obtain an understanding of the organization’s internal controls and fraud risk.
Not surprisingly, a financial review is significantly cheaper than an audit. So if it is not required for your organization, it is a nice lower cost alternative, that can give peace of mind to your donor and member community.
For a great 2 page overview of a financial review vs an audit written by AICPA, please click here.
When should I conduct my audit?
The timing of your audit will be heavily influenced by the audit deadlines imposed by the agency, organization, or individual requiring your audit.
What is less understood is the amount of time involved to prepare, conduct, and incorporate recommended adjustments that come out of the audit process, and how this can put pressure on the date you will want to begin the audit process in order to meet your deadlines.
Below are a potential timelines for each step of the audit process:
- Selecting an Auditor 4 - 12 weeks
- Audit Preparation 2 - 4 weeks
- Conduct Audit 2 - 4 weeks
- Incorporate Recommendations immediately after audit
Best Practice Tip: For our clients, we prepare their 990 filings after (not before) their audit is complete, this is because nonprofits need to include any adjustments that come out of their audit in the financials section of the 990 form.
If our client's audit will not be completed by the time their filing is due (15th of the fifth month after your fiscal year end date), we request a 990 filing extension on their behalf. To request an extension, submit IRS Form 8868 before your filing deadline. The IRS will give up to two extensions (three months each) per fiscal year.
So, how do I select an audit firm?
As with many things in life, referrals whether it is from other nonprofits or your bookkeeping / accounting firm are always a good place to start. Once you have a list of referrals, another best practice is to have a short list of auditors go through a formal RFP process.
Here are a few questions to ask your potential auditors:
- What percentage of their business is with nonprofits? How many nonprofit audits has the auditor on conducted in the last 2 years?
As nonprofit accounting has different requirements than for profit accounting, your audit firm should have depth of experience in auditing nonprofits.
- How long will the entire audit process take? Can they give specific timelines by activity?
You will want know the timelines for each phase of the audit process to ensure that the audit firm can meet your deadline(s).
- What is their fee structure? Are their fees reasonable?
Their fee structure should be consistent with the scope of the audit activity required and the geographical area where the audit will be conducted. The best way to make a comparison would be to go through a formal RFP process with several audit firms, and to talk to other nonprofit firms of comparable size and complexity.
Please join us on Monday for part 3 of our 'Are You Audit Ready' series as we discuss best practices for the final question / next, preparation for the audit.
Mary Soper, Jitasa - Director of People Development, CPA