Nonprofits: Act thoroughly on audit findings

External audits can help assure your not-for-profit’s stakeholders that your financial statements are fairly presented according to U.S. Generally Accepted Accounting Principles. They can also help prevent occupational fraud. Often, audit reports contain recommendations for organizations to act on. And if you fail to make changes that respond to risks or concerns discovered in an audit, it could threaten your nonprofit’s future.

Discuss the report

When auditors complete an engagement, they typically present a draft report to their subject’s audit committee, executive director and senior financial staff. Those individuals need to review the draft before it’s presented to their full board of directors.

Your audit committee and management should meet with auditors before their board presentation. Often auditors provide a management letter highlighting operational areas and controls that need improvement. Your team should explain how your organization plans to improve operations and controls, and this explanation can be included in the report’s final management letter.

Your audit committee also can use the meeting to ensure the audit is properly comprehensive. Auditors will provide a governance letter, which should confirm cooperation from your nonprofit’s staff and whether the auditors received all requested documentation. The letter also will disclose any difficulties or limitations encountered during the process, accounting adjustments required, and significant audit plan changes (and the reasons for such changes).

Finally, the auditors will list any unresolved matters. Your audit committee should determine whether there were any conflicts of interest between the auditors and your team and how they might have affected the audit’s scope.

Taking next steps

The final audit report will state whether your organization’s financial statements are fairly presented in accordance with U.S. Generally Accepted Accounting Principles. The statements must be presented without any material — meaning significant — inaccuracies or misrepresentation.

As noted above, the auditors also may identify, in a separate management letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements, whether due to error or fraud.

If the auditors find your internal controls weak, your organization must promptly shore them up. You could, for instance, set up new controls, such as segregating financial duties or implementing new accounting practices or software. These measures can reduce the odds of fraud, improve the accuracy of your financial statements and help reduce future audit costs.

Make your audit effective

Audit reports are only as effective as their reception — and the action subject organizations take in response to their findings. Contact us for help implementing new internal controls and addressing other issues.

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