McGowan, Guntermann
Full-Service Accounting For Nonprofits
Nonprofit Organizations – Do I Need An Audit?
For many nonprofit organizations, the decision to incur the cost of an audit (in terms of both time and money) can be difficult. Conducting an annual audit is generally considered a best practice and perceived as convening a commitment to accuracy and transparency. Some organizations, however, may have an annual audit to comply with state law, or simply to satisfy donor requirements. Audits are not the only financial statement service that a nonprofit organization can engage a CPA to perform. There are three typical levels of service available - audits, reviews, and compilations:
Audit
In California, an audit is required for nonprofit organizations with gross revenues of $2,000,000 or more, as well as for those who receive $500,000 or more per year in direct federal funds. Organizations who are subject to the audit requirement must maintain an audit committee who is responsible for making recommendations to the Board of Directors on the hiring of an independent CPA. An audit provides reasonable, but not absolute, assurance that the organization’s financial statements are free of material misstatement and are fairly presented in accordance with generally accepted accounting principles.
During an audit, the CPA will obtain an understanding of the internal control, confirm information with third-parties, and perform substantive testing and examinations of supporting documentation. In addition, a “management letter” is often issued at the end of the engagement, which provides the Board of Directors and Management with recommendations for strengthening internal controls and improving operating efficiency.
Review
A review is substantially less in scope than an audit. During a review, inquiries of management, analytical procedures, and other techniques are used to provide limited assurance that no material modifications to the financial statements are necessary. In a review, however, the CPA does not obtain an understanding of the organizations internal control. On average, the cost of a review is one-half to two-thirds the cost of an audit.
Compilation
A compilation is the most basic level of financial statement service available. The CPA assists management in presenting the financial information of the organization in the form of financial statements, without providing any assurance that no material modifications are required. In a compilation engagement, there are no substantive tests, inquires of management, or analytical procedures performed. On average, the cost of a compilation is one-third to one-half the cost of an audit.
Whether an organization should have an audit, review, or compilation is dependent upon a number of variables that include the size of the organization, sophistication and experience of the finance department, and the overall preference of the Board of Directors, Management, and donors.
McGowan Guntermann has been providing Santa Barbara and the Central Coast with a full-range of audit, accounting, and tax services for over 65 years. They offer a great deal of attention by staffing engagements with partners and managers that result in a uniquely efficient and effective process. With a strong reputation for providing the highest level of service and strictly adhering to timelines and deadlines, McGowan Guntermann works with over 30 local nonprofit organizations, including both public charities and private foundations.