Practical Guidance for Accountants Who Audit Nonprofit Organizations
Grippo, Frank, Siegel, Joel, The National Public Accountant
When auditing a nonprofit entity, auditors must consider the limitations placed on the audit by donors and other funding sources. These include:
* Audit restrictions imposed by funding sources that may affect GAAP and GAAS.
* Risks associated with the use of volunteer personnel, in-kind services and volunteer board of trustees.
* Problems associated with comparison of budgets to actual results.
* Problems associated with accounting for multiple programs, grants or contracts that have year-ends different from the fiscal year-end of the nonprofit organization.
* Risks caused by a detailed chart of accounts.
* Tax considerations resulting from unrelated business income.
The audit strategy should be reevaluated each year because resource inflow and outflow can change significantly from year to year due to marked changes in business conditions. Audit procedures should be designed to detect noncompliance with the restrictions or requirements imposed by the funding source. All areas of noncompliance (no matter how small) should be summarized by the auditors, evaluated for adjustment purposes, and brought to the attention of management.
Accounting and auditing considerations for a nonprofit organization are similar to those of a profit-making entity. However, there are a number of special challenges that face auditors of nonprofit organizations. Auditing considerations for some of the key areas of the statement of financial position and statement of activity are discussed below.
Auditing of cash for nonprofits is similar to auditing cash for business enterprises. The difference is that nonprofit organizations have many more cash accounts.
Sometimes, accounts are set up for each program, some of which are temporary. In many cases, the funding sources require a separate bank account. In addition, accounts are closed more frequently than in the case of for-profit entities. Further, many nonprofits (in an effort to save bank fees) will allow the bank to keep canceled checks. Some merely receive the monthly bank statement with a photocopy of each check.
Auditors need to modify their audit program to make sure the cash is fairly presented. Moreover, auditors should be aware of the possibility of restricted cash, cash overdrafts, and held checks. The latter is a common practice in many nonprofits, due to funding constraints.
Receivables for nonprofit entities usually are two types, namely (1) contributions and promises to give and (2) receivables, such as tuition and fees for services performed.
Contributions and promises to give refer to unconditional, voluntary, and nonreciprocal transfers of assets or settlement of liabilities. Assets transferred can be cash, property, securities, services, pledges (unconditional promises to give in the future), etc. Usually, nonprofit organizations have a separate development office. Of course, it is necessary to reconcile the records between the development office and the accounting office.
Cash contributions present a major problem for nonprofit managers and auditors, as the objective is to make sure that all cash contributions have been received and recorded. The key control element is to separate access to the cash that the entity collected from the accounting for the cash.
Contributions by check present a lesser problem--auditors have to be sure that the amount of the gift was recorded properly, determine if there were any restrictions, the period in which the gift may be used, payments during the period of audit, and any amounts receivable.
In most instances, auditors use confirmation procedures to verify both cash and check contributions, In the case of pledges, estimation techniques have to be employed by the nonprofit and verified by the auditors. That is, allocation of pledges over time has to be determined. …