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Not for Profit Audits - FAQs

We are a small not-for-profit organization and cannot afford an audit. What should we do? Do we have to get an audit every year?

Why don't firms do audits pro bono?

Can the CPA on our board perform the audit?How much should our organization pay for an audit? Is it true that we will “get what we pay for”?

How does a CPA decide how much to charge us for our audit?

What are some things we can do as an organization to reduce the cost of our audit?

How do we choose an auditor?

Where can we get referrals for an auditor?

Q: We are a small not-for-profit organization and cannot afford an audit.  What should we do?  Do we have to get an audit every year?

A: Regarding whether your organization needs to have an audit, it depends.  There are many different reasons an audit may be required, including requirements by:

• your organization’s by-laws
• loan covenants if your organization has debt
• bankers for current or future financing
• donors or granting agencies
• state attorney general (in Illinois, most charitable organizations with $300,000 or more in gross receipts, such as revenue and investment earnings, are required to have an audit)
• federal requirements (a financial statement audit and audit of federal awards is required if an organization expends $500,000 or more in federal awards in a year)

Currently, charitable organizations registered in Illinois with gross receipts more than $300,000 are required to attach audited financial statements to their annual reporting (Form AG990-IL). Although not required by Illinois law, some (smaller) organizations may choose to obtain an audit in order to submit for various corporate/foundation/governmental grant requests. For smaller organizations, an audit may not be required every year.

Undergoing an audit may help your organization develop the financial systems required to track and manage finances responsibility. In addition, potential donors or volunteers may request audited financial statements.  If you do not have an audit requirement, you may be able to request a review or compilation from a CPA, which are less comprehensive and less costly than audits, but may not always satisfy the users of the reports.

 Q: Why don’t firms do audits pro bono?

A:
CPA firms are professional firms who charge fees for their time and expertise.  Thorough audits take time, and CPAs assume professional risk when conducting an audit.  Typically, fees charged to charitable organizations for fieldwork conducted outside of “tax season” are discounted from standard hourly rates.  Occasionally a CPA may be willing to provide pro bono services related to audit preparation or other consulting matters.

 Q: Can the CPA on our board perform the audit?

A: To perform an audit, the CPA must be independent of the audited organization.  An organization’s board member would not be considered independent under AICPA independence rules.  In certain situations, exceptions may apply to non-voting honorary or advisory board members.


 Q: How much should our organization pay for an audit?  Is it true that we will “get what we pay for”?

A: Fees for audits vary depending on the size and scope of audit. The organization can help keep fees down by providing for all of the bookkeeping work so that there are few, if any, audit adjustments. 

Fees can vary, and there are some outstanding auditors who work with organizations for a reduced fee.  However, a firm may produce a lower bid the first year and then significantly raise the fee in subsequent years. Auditors who do not have the necessary experience with nonprofits may take longer to produce the audit, causing them to raise the audit fee in later years. They may also prepare a less complete report, which has less value to the board and the public. Also, they may require the organization’s personnel to do even more work in preparing for the audit. Finally, some auditors who charge a lower fee do not provide the organization with “the extras”, such as guidance on new accounting and tax developments, and advisory comments, detailing recommendations for improvement in internal controls, program effectiveness, efficiencies, best practices, etc. This expertise can be an important benefit to both the board and staff.

On the other hand, an expensive audit does not guarantee an excellent product. Your goal will be to get the reports and advice that you need and can understand for a reasonable fee.

 Q: How does a CPA decide how much to charge us for our audit?

A: In general, CPAs will typically determine their audit fees based on the risks involved, the estimated hours to be incurred, the level of expertise needed on the audit team, the expected level of the organization’s preparedness and assistance, and their determined rate per hour for the engagement.

Thorough preparation and follow-up work provided by the organization will help reduce overall audit costs. In addition, it is important to avoid any surprises. Keep communication open throughout the year with your CPA firm. Your CPA firm should be one of your organization’s must trusted business advisers.

 Q: What are some things we can do as an organization to reduce the cost of our audit?

A: Audit preparation is key to maintaining reasonable audit fees. To prepare for your audit, ask your auditor what information you will be required to provide. Many auditors prepare a list of those records which they will need to examine, forms which you will need to complete, and questions you will need to answer. Complete, accurate, and accessible records and other information prepared well in advance of the audit will help ensure that the process goes smoothly and more quickly, reducing the financial and emotional cost of an audit. 

Examples of what an organization can do to control the audit cost include:
• Preparing the confirmation letters to banks, funders, attorneys, etc.
• Maintaining documented policies and procedures, including those related to internal controls
• Maintaining detail for financial statement numbers, including accounts receivable, property and equipment, accounts payable,  deferred revenue, grants and contributions, donated goods and services, inventory, payroll.

Review all information to make sure there is support for all amounts recognized. Prepare all supporting workpapers and make sure all supporting documentation is available and organized. Prepare all information electronically.

Remember that a CPA firm cannot be both the accountant (bookkeeper) and auditor – auditors cannot audit their own work and cannot make management decisions. In addition, an organization must have proper safeguards to ensure that someone on management and/or the board is technically competent to accept responsibility for accuracy of financial data.

 Q: How do we choose an auditor?

A: In choosing a CPA to perform your audit, it is important to conduct a thoughtful proposal process to find a CPA that is a good match for the organization.  Not-for-profit organizations vary greatly in size and complexity, and different CPA firms will be a better match than others.  CPA firms will charge fees for an audit based on the level of effort involved.  However, a proposal bid process will help an organization find an appropriate CPA for a competitive fee.

An organization’s audit is addressed to its board of directors, who have ultimate financial accountability for the organization. The board (or its finance or audit committee) should engage an auditor. The request for proposal (RFP) spells out the scope of services your organization requires, as well as specific questions that management would like proposing firms to answer.

While there are many criteria you may consider when selecting an auditor, the following are usually important considerations:
• Experience in the organization’s sector
• Experience with other organizations in your area of work
• Available resources
• References for the audit firm and the auditor
• Fees

The management team, or the board (or subcommittee), usually reviews the proposals and identifies a short list of candidates for oral presentations. The board, often in conjunction with management, conducts the oral interviews and then makes the selection.

 Q: Where can we get referrals for an auditor?

A: There are several listings of CPAs firms that serve the not-for-profit industry, including the Illinois CPA Society’s Find a CPA directory at http://www.icpas.org/FindACPA.htm.  One of the best sources for referrals is from other similar not-for-profit organizations.  By contacting your peer organizations, you can find out which CPA they use, whether they are satisfied with the services and if they would recommend the CPA.  Also, consider asking your board for references.

 

 


         
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