Audit Guide for Small Nonprofit Organizations
Financial Statement Assertion
|Existence or occurrence||Inventories included in the balance sheet physically exist|
|Completeness||Inventory quantities include all products, materials and supplies on hand |
Inventory quantities include all products, materials and supplies owned by the client that are in transit or stored at outside locations
Inventory listings are accurately compiled in the inventory accounts
|Rights and obligations||The entity has legal title or similar rights of ownership to the inventory|
|Valuation or allocation||Inventories are properly stated at cost (except when market is lower)|
|Presentation & disclosure||Inventories are properly classified in the balance sheet as current assets|
The adequacy of internal controls should be of primary concern to the audit team. Lack or inadequacy of internal controls can make the task of even the CPA auditor extremely difficult and, in some cases, almost impossible. Volunteers often are so dedicated to the mission of the NPO that they feel that running the organization in a businesslike fashion may not be compatible with this mission.
Regarding the hypothetical Goodworks, Inc., we were told that the organization employed one part-time social worker. Imagine this individual collecting the funds, disbursing the funds, recording the financial transactions, signing the checks, recording the minutes of the board meetings and preparing financial reports.
This would be an example of a complete lack of internal control. To correct this, each one of these functions really should be performed by a different volunteer.
Common sense must be applied in considering internal controls as well as the other areas being reviewed by the audit team.
If Goodworks, Inc., received all of its funds from one source, internal control of receipts would be a simple matter. A review of receipts would involve verification with the sole source of these funds. If the only expenses were rent and the social worker's salary, internal control and a review of these items would not present any difficulty. But if funds were received from hundreds of donors, then internal control of receipts becomes critical. Whatever the situation, internal control must be examined and improved if found lacking.
Some Reasons For a Good System of Internal Control | Top
- To prevent loss through errors, misappropriation of funds or theft
- To prevent an "honest" employee from making a mistake that can ruin his or her life
- Responsibility of the board to safeguard the assets of the NPO
- To assure that all transactions are properly authorized and recorded (See appendix for examples of internal control for cash receipts and cash disbursements.)
The Proper Authorization of Activities and Expenditures | Top
The budget and the board of directors' minutes are the usual source of verification of NPOs' activities in a broad sense. Additionally, the corporate charter and bylaws should be reviewed to determine that all activities comply and that the designated individuals are performing their proper functions. A review or test of specific transactions should be included in the audit program.
Determination of the Physical Existence of Assets | Top
Verification of bank balances, an actual count of securities owned and a count of merchandise are some of these procedures. An examination of deeds and tax assessments is another procedure applicable when real property is owned by an NPO. Securing appraisals of art owned might be appropriate in the case of a museum or art organization.
Ascertaining That Returns and Reports are Filed in a Timely Fashion | Top
An NPO has the same obligation to file tax returns and corporate reports as a for-profit organization. Failure to comply with these requirements will expose the NPO to possible fines or penalties. At its planning meeting, the audit team should prepare a list of these taxes and reports. This might include the following:
- Payroll taxes if wages are paid
- Sales taxes and licenses
- Form 990, Return of Organization Exempt From Income Tax, if gross receipts each year are normally more than $25,000
- Annual corporate report to be filed with the state
Conclusion | Top
The preceding material is only a limited discussion of the complex requirements to perform an audit of an NPO. For example, insurance and bonding should be reviewed by a professional in the field.
But it is hoped that this guide will aid the audit team to perform its review of the organization's financial statements and operations in a relevant manner. The team should satisfy itself that income and expenditures are being classified in a consistent manner; otherwise comparisons of financial reports over the years will have limited significance.
Appendix | Top
Some suggested controls for cash disbursements:
- Checks should be prenumbered, used in sequence with adequate controls over supplies of blank checks.
- Checks should be prepared by persons other than those who approve invoices.
- Checks should be prepared from original vendor invoices with attached copies of purchase orders, invoices and receiving reports and presented for signature with these attached.
- Checks should be entered in the disbursement journal exactly as they have been prepared.
- The governing board should authorize all check signers.
- Signing of blank checks should not be permitted.
An officer or executive director should receive the unopened bank statement before turning it over to a person, other than one who handles the receipt and disbursement of cash, for reconciliation. This officer should review the bank reconciliation, then date and initial it.
Some suggested controls for cash receipts:
- Incoming mail should be opened and listed by persons other than those with access to cash receipts journals and accounts receivable records.
- A person with no access to cash should compare cash receipts records and authenticate deposit slips with mail listing.
- Checks should be stamped "For Deposit Only" by the person opening the mail.
- Prenumbered receipts should be given for contributions, gifts, etc.
- Cash receipts should be entered in journals by persons other than those opening mail and listing receipts.
- Receipts of checks and cash should be deposited each day intact.
- Individuals handling cash should not make entries to the general ledger or subsidiary ledgers.
- The NPO board should authorize bank accounts and the signers of checks annually.
- Individuals handling cash should be bonded.
This guide was last updated in September 2007. Permission to duplicate this guide may be obtained from the VSCPA, P.O. Box 4620, Glen Allen, VA 23058-4620, (804) 270-5344 or firstname.lastname@example.org.