External audits play a crucial role in ensuring your nonprofit’s stakeholders that your financial statements are accurately presented according to U.S. Generally Accepted Accounting Principles (GAAP). They are also instrumental in preventing occupational fraud. Audit reports often contain recommendations that organizations should act on to mitigate risks or concerns identified during the audit. Ignoring these recommendations could jeopardize your nonprofit’s future.
Discuss the Report
When auditors complete their engagement, they usually present a draft report to the audit committee, executive director, and senior financial staff of the nonprofit. This draft should be reviewed thoroughly before it is presented to the full board of directors.
Your audit committee and management should meet with the auditors prior to the board presentation. Auditors typically provide a management letter that highlights areas and controls needing improvement. Your team should outline how your organization plans to address these issues, and this plan can be included in the final management letter.
During the meeting, your audit committee should ensure the audit’s comprehensiveness. Auditors will provide a governance letter confirming staff cooperation and whether all requested documentation was received. This letter will also disclose any difficulties or limitations encountered, required accounting adjustments, and significant changes to the audit plan along with the reasons for such changes.
The auditors will list any unresolved matters. It is essential for your audit committee to identify any conflicts of interest between the auditors and your team and assess how these might have influenced the audit’s scope.
Taking Next Steps
The final audit report will indicate whether your nonprofit’s financial statements are fairly presented according to GAAP, free from material inaccuracies or misrepresentations. Additionally, auditors may identify specific concerns about internal control issues in a separate management letter. Effective internal controls are critical for preventing, detecting, and correcting misstatements that could undermine the integrity of financial statements, whether caused by error or fraud.
If your auditors find weaknesses in your internal controls, it is imperative to address these promptly. For example, you might establish new controls such as segregating financial duties or adopting new accounting practices or software. These measures can help reduce the likelihood of fraud, enhance the accuracy of your financial statements, and potentially lower future audit costs.
Make Your Audit Effective
Audit reports are only as effective as the actions taken in response to their findings.
Reach out to our Audit team for assistance in implementing new internal controls and addressing other audit-related issues to ensure your nonprofit’s financial health and compliance.
