Audited financial statements are becoming a standard best practice among charitable organizations seeking to provide reassurance of financial integrity to stakeholders. The government, donors, suppliers, board members and other volunteers often look to this annual examination of an organization’s financial records as evidence of financial transparency and accountability.
As well, the Canada Revenue Agency recommends that charities with gross revenue of more than $250,000 should file audited financial statements. Many charitable corporations are also required by law to have such statements. Under the Corporations Act (Ontario), for example, all non-share capital corporations, including charitable corporations, with an annual revenue of $100,000 or greater require an audit. This was amended from the previous annual revenue level of $10,000 in order for nonprofit and charitable organizations to save on audit fees due to limited funds within these smaller organizations. Since requirements vary among provinces, contact the respective provincial corporations department to determine whether audited statements are required in your respective locale.
In order to provide stakeholders with timely audited financial statements, while also avoiding a strain on precious financial and human resources, following are some suggestions that can help to ensure an awesome audit experience for your board of directors, management and staff.
First, some background regarding what’s involved in auditing the financial statements of a charitable organization. Audited statements are normally prepared after an organization’s year end based on guidelines established by the board of directors. The board usually contracts with an independent qualified accountant or accounting firm to examine balance sheets, cash flow statements, income statements and statements of changes in net assets prepared by staff, along with supporting documents. The auditor also examines a selection of typical transactions and reviews accounting and financial reporting procedures and internal controls.
Once the audit is completed, the auditor presents an opinion as to whether the organization's financial statements fairly reflect its financial position, changes in net assets and cash flow. This opinion is stated in a management letter that accompanies the audited financial statements.
An unqualified audit report indicates that the auditor's opinion of the financial statements is provided without reservations. Essentially, this means the auditor feels the organization followed Generally Accepted Accounting Standards and the financial reports are a fair representation of its financial position.
A qualified opinion reflects some uncertainty or disagreement. This suggests the information provided by the organization is limited or the organization did not maintain Generally Accepted Accounting Standards.
A denial of opinion or an adverse audit opinion suggests the organization’s financial statements are misstated or misrepresented, and do not accurately reflect its financial performance. This could happen if the auditor feels the organization failed to maintain adequate accounts or failed to provide adequate records to support transactions. While the organization's treasurer is required to review and sign audited financial statements, in order to meet its fiduciary duty, the board of directors should also review and discuss the audited statements with the treasurer and management. If these documents are accompanied by a qualified opinion, a denial of opinion or an adverse audit opinion, they need to immediately address these issues.
Often, the management letter will also include suggestions for improving the organization’s financial systems and procedures. The board should discuss any recommendations and ask management to report back regarding how the auditor’s recommendations are being addressed.
In order to eliminate unwelcome surprises and to make the audit experience, as well as monthly or quarterly reporting, easy and straightforward, management and the board of directors can implement some simple steps.
Board of directors and treasurer responsibilities
- Review the auditor’s recommendations from the prior year to ensure recommendations have been implemented and are working effectively.
- Request preparation checklists from the auditor in order to streamline the collection of documents for review. This will also help staff to properly prepare general ledger accounts and will provide a benchmark to assess progress.
- Stay ahead of expectations; if you have donors or other stakeholders who want to see audited statements within a certain period of time, establish timelines to meet these goals.
- If your organization has encountered legal suits or other unforeseen circumstances (such as labour issues, fraud or suspected fraud or negative media publicity), provide the auditor with sufficient advance notice to address these issues and meet crucial deadlines.
- Build routines (such as bank reconciliations, invoice requirements, accruing liabilities, producing schedules) into monthly or quarterly reporting to make year-end preparation easier.
- When reviewing financial statements each month or quarter, compare results with actual and prior year budgets. Have explanations and appropriate supporting documentation ready for the auditor for any areas where there are significant fluctuations.
- Since part of the audit process may require obtaining written confirmations regarding account balances from lenders, creditors or other parties, coordinate the audit schedule with the auditor to ensure he or she has sufficient time to acquire the necessary confirmations.
- When the auditor is on the premises to gather and review information, allocate time for staff to answer questions and secure the necessary documents.
- Maintain up-to-date sub-ledgers reconciled with the general ledger. This will streamline the auditor’s requirements for invoice confirmations for accounts receivable and payable.
- A cut-off of cash receipts and cash payments at the end of the year is required to accurately reflect cash at the balance sheet date. In order to distinguish transactions from one period with those of another, complete cut-off procedures on a monthly or at least quarterly basis by recording transactions in the appropriate period. This will help to ensure that records are current and correct at year end.
- Reconcile supporting documents for all balance sheet accounts.
- Have all financial statements and relevant supporting documents available including journals, cancelled cheques, cheque stubs, receipts and invoices.
Ongoing communication is perhaps the single most important element necessary for an awesome audit. The board of directors, management and auditor should communicate regularly through the year to anticipate issues, resolve problems and plan schedules. The end result will be well worth the investment — timely, cost-effective audited financial statements that provide stakeholders with valued information reflecting your organization’s financial integrity.
Craig De Pratto, CA, is a manager with BDO Canada LLP. He provides auditing, accounting and advisory services to nonprofit and charitable organizations as well as businesses. You can reach Craig in the Mississauga office at (905) 270-7700 or email@example.com.