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.