Board Member Perspective – Questions to Ask When Reviewing an Audit

Question of an Audit

You are presented with the financial statements prepared by auditors.  Do you know what questions to ask? What will the auditors tell you only if you ask?  The process of auditing the financial statements of an organization is quite invasive not only on the transactions and balances that make up the financial statements, but also on the processes and controls of the organization. Asking a few questions can give you valuable insight on the audit report, and on how the audit was conducted. Of course, we begin with reviewing if there is an unqualified or “clean” opinion.  Otherwise, most of your discussion with the auditors will revolve around the reason for the qualification.

On the Statement of Financial Position – Is there a liability amount that the auditors believe the board should discuss further or about which they should ask for more information?  Are there suggestions for containing or reducing some of the liabilities that management and the board should consider? Is the make up of net assets a healthy mix?  Should the organization increase the net assets without donor restrictions? Does the organization have sufficient reserves?

On the Statement of Activities – Explain the results of each column and what it tells about the operations of the organization.  Does the organization have sufficient restricted net assets for future funding based on the type of funding that the organization is reliant on?

On the Statement of Cash Flows – What does this statement tell us about the organization’s cash flow situation?  Does it appear to be generating sufficient cash flow for its operations or are there issues with collecting receivables?

On the Statement of Functional Expenses – What method is used for allocating expenses and is this a reasonable method used by other organizations?  Is the organization recovering its indirect expenses? Is the management and fundraising expense reasonable for an organization this size?  What are the programs that have the highest expenses and are these in line with the board-set priorities? If the statement does not break out the individual programs, ask why.

On the Footnotes – Are there any footnotes that are most worrisome to a reader?  Explain the footnotes that may have financial implications that are not reflected in the financial statements themselves (such as pending litigation).

On the Management Letter (even if none is presented) – Was there an item discussed with management that could have made it to the management letter, but did not?  If there is no management letter, are there areas of improvement that the auditors can suggest?

On the overall audit process – What audit adjustments did you make and did their nature and amount concern you in any way? Were there any management practices that you found unusual, but not worthy of noting in the reports?   Were there any delays in the audit caused by management?

Use these questions to guide you through the review of the audit report and you will walk away with a better understanding of the organization on which you serve.  

Board Member Perspective – Financial Information to Review

Financial Information

If you belong to more than one nonprofit board you may have noticed that each one may present a somewhat different set of financial information at board meetings.  Do you know what is the appropriate information to present and examine? In order to comply with your fiduciary duty, you should be presented with complete, accurate, and timely financial information.  But how do you know that is what you are receiving?

Timeliness – Propose to the board secretary that meetings are set after the closing of each fiscal quarter. This allows sufficient time for management to prepare a set of financial statements that reflect the activity and position through that fiscal quarter.  The board should be reviewing financial statements at least quarterly and it makes most sense to review three months at a time.

Accuracy – Are the financial statements prepared on the accrual basis of accounting?  You should request that they are since that is the most accurate representation of the organization’s activities and financial position.  Are there closings and reconciliations done for each major account in the financial statements?

Completeness – Accounting has two sides and each side needs to be presented for a complete picture.  The Statement of Financial Position (equivalent to the Balance Sheet) presents the position of assets, liabilities and net assets (equivalent to equity) of the organization.  The Statement of Activities with columns for each net assets with donor restrictions and net assets without donor restrictions should present the results of activities for the year-to-date.  Beware of Profit & Loss reports without columns for each class of net assets since it does not present a full picture. For organizations that do not have donor restrictions, the statement can contain only one column but make sure it states that it only represents net assets without donor restrictions.  If you are presented with only one of these statements, you may not have important information to discern problems present on the other side. If you are presented a Profit & Loss without these columns, you may be given a skewed view of the results of operations. For example, if the organization just booked a multi-year grant this year, the statement shows a healthy profit as a result, hiding an operational deficit.

Accountability – Insist on reviewing a budget to actual report and on having explanations for the line items with variances of over 10%.  The budget approved by the Board is the roadmap for the organization’s management and you want to monitor that this is properly followed.  

Dashboards – Dashboards can be presented, but should not be considered as replacements for the basic financial reports listed above.  They can enhance the presentation, but do not replace the breadth of information provided by a full set of financial reports.

Even if you do not fully understand the financial statements, receiving a complete set at each meeting promotes accountability and if necessary, allows you to consult with a professional for an opinion on potential issues or the general financial health of the organization for which you have a fiduciary duty. More Pros & Cons of Part 2 – Specifics is a cloud-based accounting application our firm has been using for several years. In Part 1, I covered some general pros and cons of This blog post will delve into some of the specifics, especially with regards to the accounts payable (AP) and accounts receivable (AR) functionality of Like the first, keep an eye out for the insider notes! 

Continue reading “ More Pros & Cons of Part 2 – Specifics” » Pros & Cons – Part 1 – General Overview

What is – is a cloud-based financial solution that helps manage your payables (APs) and receivables (ARs). Our firm has been using it for the past few years and has consistently found it to be an asset to our clients. Read on for an insider’s list of pros and cons (with a few tips scattered along the way)! We’ve split this article into two parts—the first is regarding in general while the second will delve into more specifics, especially regarding the APs and ARs.

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Happy auditors= good audit

We just finished the financial statement audit of one of our clients. The auditor, with whom we’ve worked for many years, came to see me after he finished filed work to discuss how the audit went and what to expect.  I was surprised by how much he had to say about the credit card and bill payment system we had implemented last year for this client.

The client being audited is a not-for-profit organization that operates in a virtual environment.  They have staff in practically every state and we operate their entire Finance Department.  Last year, we implemented for their bills and Expensify for their credit card bills.  There are 13 credit cards, since each program director has one.  In addition, employees can request reimbursement of expenses through Expensify.

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