Could your association save money by undergoing a financial statement review instead of a full-scope audit? The answer depends on the complexity of your association's financial streams and the level of assurance you are comfortable with.
Nonprofit organizations may have an opportunity to save money in asking their auditor to perform a financial statement review instead of a financial statement audit. This savings could be in the range of 35 to 45 percent of the cost of a full audit, depending on the nature and complexity of operations.
Data extracted from more than 10,000 Form 990 returns (2010) by ASAE indicates that organizations with revenues over $10 million are less likely to have their financial statements reviewed (3 percent) and more likely to have them audited (95 percent).
Smaller organizations, with revenues of less than $500,000, are more likely to have their financial statements reviewed or compiled by an independent accountant (26 percent), while 18 percent undergo an audit. Thus, the majority of organizations this size do not pay for an independent review or audit of their financial statements. Smaller organizations are being required to obtain audits as states look for additional revenue, states' attorney generals seek to mitigate fraud and abuse, and boards look for a higher level of assurance.
If your organization is in a position to choose, below are key facts that will assist in the decision process.
Audit Versus Review
What does an audit provide and how is it different from a review?
- The audit is a certified public accountant's highest level of assurance that an organization is fair in its presentation of its financial position and its financial statements as a whole. A review report will state that the review is "substantially less in scope than an audit."
- An audit includes a tailored process that reviews the internal controls and assesses fraud risk of an organization, whereas a review does not.
- An audit includes testing accounting records and obtaining "sufficient audit evidence," which includes independent verification of original documents secured directly from the source, among other procedures, while a review does not.
In summary, a review includes primarily applying analytical procedures to an organization's financial data and making inquiries of the entity's management. This provides the ability to provide "limited assurance" that the financial statements do not require any material modifications to be considered to be fairly stated. For these reasons an auditor is unable to provide the same level of assurance in a review that is provided with an audit.
- Financial institutions may require an audit as a part of the documentation associated with a line of credit or loan. The limited scope of a review may not satisfy financial institution requirements.
- Check your organization's bylaws to verify that a review is acceptable.
- Your state may require a full audit as a condition of your tax-exempt status or as part of the charitable registration process. For example, if your organization's gross revenue is greater than or equal to $500,000, a full audit is required in certain states, including the State of Maryland.
- If your organization is a charitable organization, ensure that your largest stakeholders are comfortable with a review. Many donors use online tools such as Guidestar to compare charities, and audit assurance may serve as a critical selling point for the organization.
- If your organization expends more than $500,000 in federal grant funding in a year, an audit in accordance with Office of Management and Budget Circular A-133 is required, which consists of a financial statement audit and a compliance audit of federal requirements. In certain cases, an organization may obtain an audit of the federal program itself and bypass a full-scope financial statement audit.
A review is not for everyone, but it may save the organization substantial time and resources. Generally smaller nonprofits with less complex funding sources may welcome a review instead of an audit.
Robert Duke, CAE is director of finance and administration for the International Association of Fire Chiefs in Fairfax, Virginia. Email: firstname.lastname@example.org
Audrey Newton, CPA, is a partner with Johnson Lambert & Co. LLP in Falls Church, Viriginia, and co-leads the nonprofit practice. Email: email@example.com
Do you have a financial question you want answered? Please email DJ Johnson, IOM, CAE, at firstname.lastname@example.org with "CAE Newsletter Financial Expert" in the subject line."