Financial audits are among the most effective tools for revealing risks in not-for-profit organizations. Independent audits help assure donors and other stakeholders about an organization’s stability — so long as the audit results are responded to appropriately. In fact, failing to act on issues identified in an audit could threaten the organization’s long-term viability.
Working with the draft
Once external auditors complete the audit procedures, a draft report is provided to an organization’s audit committee, executive director and senior financial staff. These individuals should take the time to review the draft before it is presented to the board of directors.
An organization’s audit committee and management also should meet with the auditors prior to the report being presented to the board. Often auditors will provide a management letter, highlighting operational areas and controls that are recommended for improvement. The nonprofit’s management team can respond to these comments, indicating ways they plan to improve the organization’s operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is comprehensive.
Executive director’s role
One important audit committee task is to obtain the executive director’s impression of the audit firm and audit process and take this input into consideration for future audits.
The committee also might want to seek feedback from employees who worked most closely with auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit.
No material misrepresentation
The final audit report will state whether your organization’s financial statements present its financial position in accordance with U.S. accounting principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.
The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements. The auditors’ suggestions regarding such concerns, as presented in the management letter, should include your organization’s responses.
If the auditors find your internal controls weak, promptly shore them up. You could, for example, implement new controls or new accounting practices.
Contact us if you have questions about audits and post-audit procedures.