You have your nonprofit audit report. Now what?

Understand who is responsible for what when the audit arrives.

The dust has settled and, after much back and forth, your auditor’s report is now in your hands. But what exactly are you looking at and what are you supposed to do with it? That’s what this article attempts to help you understand. And if you’d like to read our guide, How to Keep Your Nonprofit Audit Clean, we invite you to download it here.

Re-read the engagement letter before you do a review.

Reading through the original engagement letter again is a great opportunity to refresh your memory and make sure you understand the exact scope and framework of what the audit was intended to accomplish. You can use this document as a sort of “roadmap” to help you know what to expect in the audit report.

If you don’t have an engagement letter from your auditor, their audit proposal can serve the same purpose, spelling out the scope of the audit and who was responsible for doing what.

The engagement letter (or audit proposal) usually contains the following key information:

• Detailed description of services to be performed by the audit firm
• What the organization’s staff is responsible for doing
• What fees will be charged for the audit and related work

• Start date and completion date

Now you should have a good idea of what you should expect when you read the audit package prepared by the audit firm.

Start with the draft version of the auditor’s report.

You and your finance and accounting team will need to carefully review the results of the auditor’s report. It’s an opportunity for your leadership to review draft versions of all financial statements and letters before the auditor presents to your Board of Directors.

Here’s what you’ll receive:

• Financial statements (including footnotes)
• Management letter

• Audit grouping reports, also known as the classified trial balance (if not already provided)
• Adjusting journal entries  

Reading the independent auditor’s report.

This document articulates if the financial statements your organization submitted are deemed fair and it delivers an opinion as to whether they conform to accepted accounting principles. The report will also address any other issues such as any material weaknesses in your organization’s financial statements.

You will receive one of four possible opinions:

1. Unmodified. This is a clean audit that the organization should use to establish a continuing goal.

2. Modified. This is where the auditors discovered situations where the organization isn’t following generally accepted accounting principles but there is no overall material misstatement of any financial position(s). This opinion may not be ideal but it is definitely preferable to an adverse opinion or disclaimer opinion.

3. Adverse. Auditors found a material misstatement or evidence that the organization isn’t conforming to generally accepted accounting principles.

4. Disclaimer of Opinion. The auditors refuse to offer an opinion because for some reason they were prevented from doing so. For example, the auditor believes they received insufficient or unreliable information.

Now let’s get to the specifics. Financial Statements

The auditor’s opinion report is complemented by auditor prepared financial statements, including:

Statements of Financial Position (balance sheet) and Statements of Activities (revenue and expenses).

Make sure your accounting team reviews the Audit Grouping Report (see below) to check the financial statements to tie to the trial balance in your organization’s accounting system.

Statements of Functional Expenses

This report should accurately segregate and report programmatic, management, and fundraising expenditures. If something doesn’t appear to be correct, ask questions or request support on how the groupings were determined.

Statements of Cash Flow

This provides a detailed look at what happened to your organization’s cash during the fiscal year that’s being audited. It will reconcile other reports, similar to the statements of functional expenses. Always ask questions or request support on amounts or categorizations that are unclear.

Footnotes

Review the footnotes in detail to ensure that they accurately reflect the organization’s financials and the nature of your operations.

What about the other documents?

Letter to Management

This identifies areas of operations or procedures that your nonprofit may want to improve or change. It also acknowledges any challenges encountered while doing the audit including level of cooperation by the staff, missing documents, etc.. And it points out what are called material internal control issues such as process, system or procedural weaknesses that would help ensure that all financial transactions are recorded properly along with any operating inefficiencies that are currently or could become red flags for auditors. The letter will also propose potential improvements to help resolve problems and strengthen operations.

Make sure you request a draft of the Letter to Management to make sure that it is accurate before it is submitted to the Board of Directors for review.

Audit Client Representation Letter

An audit letter of representation is simply a form letter prepared by the auditor and signed by appropriate members of the organization’s senior/executive management. This is where management assures the auditor that the information provided to the auditors for analysis is accurate and complete.

The next two documents can be sent directly to your CFO and the accounting team for review.

The following reports are quite granular and are meant to support the overall report. As an executive leader of your organization, you more than likely won’t need to read them. However, you should understand the goal of each document. These reports are best sent to your accounting experts for review.

Audit Grouping Report (also known as the classified trial balance report)

Also known as the classified trial balance report, this report should show your chart of general ledger accounts in this order: assets, liabilities, equity, dividends (if applicable), revenues, and expenses. This is the detailed “bridge” between the auditor’s prepared statements and your interim financial statements and accounting system.

Make sure you request that your accounting team reviews and reconciles the report with the trial balance in your accounting system. Discuss any variances or misalignments with the audit firms. Your accounting system’s trial balance will be one of the first things that the audit team looks at during the next audit to ensure that you’re in alignment and haven’t changed from what was reported in the audit.

Adjusting Journal Entries Report

All journal entries prepared by your staff, entries prepared by the auditor, and reclassification entries during the course of the audit process are included here. The journal entries should be clearly identified in the audit grouping report and your accounting team should be allowed to review and reconcile the report with your reporting system. Discuss any entries you don’t recognize or unknown amounts with the audit team. This will also help you prepare your accounting system for the new fiscal year.

Make sure you ask your auditor some key questions.

Before the draft report and client representation letter to management are finalized, the audit committee should meet with the auditors one last time before the report and letter are dated and released to the board of directors. Here are several questions we suggest you ask before moving forward.

1. Did our team deliver requested information and documentation?

2. Do our accounting policies and procedures compare favorably with other similar nonprofits?

3. Are there any items that might be disputed by the IRS? If yes, what documentation should be provided?

4. Did our management team follow auditor suggestions and corrective actions from previous years to correct material weaknesses or significant deficiencies identified in previous audits (if applicable)?  

5. Is there anything regarding our financial statements or internal financial management that should be brought to the attention of the Board of Directors?

6. Based on your audit of our financials, do you have any suggestions for improvements?

To learn more, talk with Veracity Pros.

From choosing the right independent auditor to preparing for an audit to understanding the results, we can help you make the right decisions for your nonprofit.

If you still have questions about nonprofit audits or any other financial issues, please contact us at hello@veracitypros.com

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