By: Omid Mohebbi, CPA | Audit Supervisor
As members of a nonprofit board of directors, you and your board colleagues are charged with considering a variety of matters as part of your fiduciary duty to safeguard the organization. Even if you are not part of a designated audit or finance committee, as a member of the board of directors, you should have a basic understanding of the financial statement audit and the responsibilities of all stakeholders involved. Board members with at least a fundamental background are able to help the organization reach its goals, advance its mission and make strategic decisions about its future.
Requirements of a Financial Statement Audit
A financial statement audit is essentially a stamp of approval from an independent CPA firm. It attests to the fact that management’s financial statements and the notes to the financial statements present fairly, in all material respects, the financial position of the entity at its year-end, and the revenues, expenses and cash flows of the entity over the course of the period being audited, typically a year.
Stakeholders and Responsibilities
Stakeholders include the management and Board of Directors of the entity being audited, the CPA firm performing the audit, the client’s outsourced accounting firm (if applicable), and the various potential users of the audited financial statements, such as donors, lenders and governmental bodies.
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. Although the auditor may provide non-attest services approved by management, the financial statements are those of management who is responsible for their fair presentation.
As part of the Board of Director’s fiduciary responsibility, the Board Treasurer or Chair of the Audit Committee will typically liaise with the auditor during the course of the audit to keep abreast of the audit’s progress. The auditor will also communicate with the Board point of contact and make inquiries as to whether the Board is aware of any actual or suspect fraud, litigation, or any other concerns the Board may have that they wish to communicate to the auditor in advance of the audit and in confidence.
The Role of the Auditor
The auditor is responsible for expressing an opinion on the financial statements based on the audit. The audit must be conducted in accordance with auditing standards generally accepted in the United States, which requires that the auditor plan and perform the audit to obtain audit evidence and reasonable assurance about whether the financial statements are free from material misstatement. Unless the client has specifically asked the auditor to express an opinion on the effectiveness of the entity’s internal control, the auditor only considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design appropriate audit procedures. The auditor is also required to evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management.
The ideal outcome will be that, upon the conclusion of the audit, the auditor expresses a clean unmodified opinion on the fair presentation of the financial statements. In other circumstances, an audit may result in an adverse, modified, or disclaimer of opinion.
Due to the nature of the services provided by the auditor, it is imperative that he or she is perceived as independent in both fact and appearance per the accounting industry’s code of conduct. Because they must maintain their independence and avoid any conflict of interest, auditors are very restricted in any additional services they can provide to the entity whose financial statements they are auditing. As a result, the auditor cannot make any decision or perform any function that would be the responsibility of the organization’s management. Following these guidelines reinforces the auditor’s independence in performing the audit and increases confidence in the audit opinion among those who rely on the audited financial statements in making decisions.
Take Advantage of the Benefits
With a fundamental understanding of the audit’s components and the role of each stakeholder in the process, board members can focus on the many benefits derived from having an annual audit performed by a CPA firm. An independent audit opinion significantly increases the level of confidence in the organization’s financial information and has the potential to elevate its status and competitiveness. This typically leads to an increase in revenue from grants, contributions and/or membership dues, which in turn helps the board and management guide the organization toward achieving its goals and furthering its mission. Furthermore, the audit informs management of any significant deficiencies and/or material weaknesses identified within the internal controls that are identified during the audit process. Also, best practice recommendations are discussed with management to achieve significant operational improvements over time. Indeed, the financial statement audit is a useful tool that pays dividends, far outweighing the cost of professional services.
For more information on the financial statement audit or the role of the board of directors, contact Omid Mohebbi, CPA, Audit Supervisor. More resources on financial statement audits are available on GRF’s website at www.grfcpa.com/resources.