The Auditor is on the agenda for today’s board meeting to present on the most recent audit results. What are the crucial components to pay attention to? What questions should you be asking? Coming prepared to the meeting is a great start. This can be as simple as a quick review of each of the financial statements as well as the footnotes. As a member of the Board of Directors, you are ultimately responsible for oversight of the nonprofit audit and it is important to engage in the process. Interacting with the auditor during/following their presentation and asking questions is a great way of gaining knowledge about the organization’s financial information, financial health, and the nonprofit audit process.
The Audited Financial Statements contain several pieces that all work together.
Most nonprofit audit reports include the following:
- Audit Opinion
- Statement of Financial Position (aka Balance Sheet)
- Statement of Activities (aka Income Statement)
- Statement of Functional Expenses
- Statement of Cash Flows
The audit opinion letter provides a summary of the nonprofit audit process and outlines the components which were subject to nonprofit audit and for which years.
The opinion clearly calls out management’s responsibility for the financial statements, which includes the preparation and fair presentation of the financial statements in accordance with generally accepted accounting principles (GAAP). Management is also responsible for the design, implementation, and maintenance of an internal control structure relevant to the financial statements.
The opinion also clarifies the auditor’s responsibility:
- Express an opinion on the financial statements based on the nonprofit audit;
- Conduct the nonprofit audit in accordance with generally accepted auditing standards (GAAS);
- Plan and perform the nonprofit audit to obtain reasonable assurance about whether the financial statements are free from material misstatement;
- Obtain audit evidence to support the amounts and disclosures in the financial statements
- Select procedures based on auditor’s judgment, risk assessment, and consideration of internal controls;
- Evaluate the appropriateness of accounting policies used;
- Assess the reasonableness of significant accounting estimates made by management;
- Evaluate the overall presentation of the financial statements; and
- Obtain sufficient audit evidence to support the audit opinion.
The auditor is not expressing an opinion on internal controls, which is commonly misunderstood.
Finally, the letter concludes with the audit opinion. There are four types of audit opinions. The clean/unmodified opinion offers the highest assurance and states that the financial statements referred to are presented fairly, in all material respects.
As a board member you should know what type of opinion is being given. Is it a clean/unmodified opinion? If not, why?
The financial statements tell external readers a story about your organization and the board should understand what story they tell.
The financials also portray the financial health of the organization. The numbers provide key insights into financial activities that have occurred and highlight financial trends when analyzed over a period of several years.
Do the financials paint a positive picture? Do they highlight issues? How can we be prepared to talk about our financials with funders or lenders?
How do the audited financials compare to our internal financial statements?
Don’t forget that the footnotes to the financial statements are an integral part of the nonprofit audit. The footnotes provide context, details, and additional information that is not in the actual financial statements. For example, debt is often summarized on the balance sheet, but the footnotes show loan terms, collateral, future payment timing, and debt covenants. If the organization is involved in litigation, the footnotes may be the only place where that is disclosed.
Keep in mind that current and prospective donors and lenders are also reading your footnotes. How does the discussion in the footnotes portray our organization? Are we using the footnotes as a marketing tool? Can lenders get the information they require from our footnotes?
Click here for a cheat sheet on how to Speed Read Nonprofit Financial Statements.