Not for Profit Organizations
Examples: charities, housing associations, clubs. local authorities/councils, government bodies.
Charities
Unlike publicly traded companies, charities are not required by the Securities and Exchange Commission
to undergo annual audits. Many not-for-profit organizations, however, are required to receive an audit
if they accept certain types of funding or earn a large amount of revenue. A positive audit opinion can
increase donor and board member confidence in the non-profit's operations. An audit may also be
required by the regulators (the charity commission for example).
The auditor should clarify who the addresses of the report will be along with the scope of the
engagement
Important features to remember:
There are no external shareholders therefore no dividends
Income likely to be from donations/grants.
Likely additional reporting/accounting rules.
Their activities may be restricted by regulators
They are NOT forbidden from engaging in commercial activities
3Es very important for them.
Normally managed by a council made up entirely of volunteers (like NEDs)
- Inherent risk can be high in not-for-profit organizations that must report certain results to continue
receiving grants.
- Non-profits that pay low wages may have trouble attracting qualified accountants
- Higher level of cash transactions.
- Income – completeness problem.
- Lack of predictability regarding future income/expenditure. (Analytical procedures aren’t very useful
here!)
- Potential restrictions regarding activities/use of income.
- Restricted number of employees so segregation of duties difficult
- Auditors should evaluate not only the number of people involved in the accounting process but the
level of supervision. If no one is approving junior-level accounting staff entries, mistakes are less
likely to be caught.
- Volunteer staff: Risks regarding their competence, training, lack of trust
- Informal environment
- Trustees (the time they give to the org, skills, qualifications, frequency of meetings, independence
from each other)
Page | 198
, - Auditors typically test a variety of accounts and transactions. They should pay special attention to
revenue accounts when auditing a nonprofit. Nonprofit entities have different sources of revenue
than their for-profit counterparts, and all employees may not be familiar with the revenue
recognition rules for donations and grants. Auditors should check to see if the nonprofit has
adequate supporting documentation and determine the correct timing of revenue recognition for
grants that have strings attached. The auditors should give special attention to:
- Completeness of income
- Misuse of funds/ misappropriation of assets
Planning the audit
The planning procedures undertaken for not-for-profit organisations will differ very little from those for
profit making organisations.
However, the auditor should have specific regard to any laws, regulations or guidelines imposed on the
entity by any regulatory body.
The scope of the auditor's work will be detailed in the engagement letter.
Risk assessment
The auditor should, during the planning stage, fully assess the risks associated with the not-for-profit
organisation.
INHERENT RISK
Key factors to consider include:
- The complexity and extent of regulation
- The significance of donations and cash receipts
- Restrictions imposed by the objectives and powers given by the entity’s governing documents
- The sensitivity of certain key statistics such as proportion of resources used in administration
- The need to maintain adequate resources whilst avoiding the buildup of resources which could
appear excessive
CONTROL RISK
Key factors to consider include:
- Competence, training and qualification of paid staff and volunteers
- Segregation of duties
- Reliability of accounting systems / computer systems
- Controls over compliance with laws and regulations
- Power of trustees
Page | 199
Examples: charities, housing associations, clubs. local authorities/councils, government bodies.
Charities
Unlike publicly traded companies, charities are not required by the Securities and Exchange Commission
to undergo annual audits. Many not-for-profit organizations, however, are required to receive an audit
if they accept certain types of funding or earn a large amount of revenue. A positive audit opinion can
increase donor and board member confidence in the non-profit's operations. An audit may also be
required by the regulators (the charity commission for example).
The auditor should clarify who the addresses of the report will be along with the scope of the
engagement
Important features to remember:
There are no external shareholders therefore no dividends
Income likely to be from donations/grants.
Likely additional reporting/accounting rules.
Their activities may be restricted by regulators
They are NOT forbidden from engaging in commercial activities
3Es very important for them.
Normally managed by a council made up entirely of volunteers (like NEDs)
- Inherent risk can be high in not-for-profit organizations that must report certain results to continue
receiving grants.
- Non-profits that pay low wages may have trouble attracting qualified accountants
- Higher level of cash transactions.
- Income – completeness problem.
- Lack of predictability regarding future income/expenditure. (Analytical procedures aren’t very useful
here!)
- Potential restrictions regarding activities/use of income.
- Restricted number of employees so segregation of duties difficult
- Auditors should evaluate not only the number of people involved in the accounting process but the
level of supervision. If no one is approving junior-level accounting staff entries, mistakes are less
likely to be caught.
- Volunteer staff: Risks regarding their competence, training, lack of trust
- Informal environment
- Trustees (the time they give to the org, skills, qualifications, frequency of meetings, independence
from each other)
Page | 198
, - Auditors typically test a variety of accounts and transactions. They should pay special attention to
revenue accounts when auditing a nonprofit. Nonprofit entities have different sources of revenue
than their for-profit counterparts, and all employees may not be familiar with the revenue
recognition rules for donations and grants. Auditors should check to see if the nonprofit has
adequate supporting documentation and determine the correct timing of revenue recognition for
grants that have strings attached. The auditors should give special attention to:
- Completeness of income
- Misuse of funds/ misappropriation of assets
Planning the audit
The planning procedures undertaken for not-for-profit organisations will differ very little from those for
profit making organisations.
However, the auditor should have specific regard to any laws, regulations or guidelines imposed on the
entity by any regulatory body.
The scope of the auditor's work will be detailed in the engagement letter.
Risk assessment
The auditor should, during the planning stage, fully assess the risks associated with the not-for-profit
organisation.
INHERENT RISK
Key factors to consider include:
- The complexity and extent of regulation
- The significance of donations and cash receipts
- Restrictions imposed by the objectives and powers given by the entity’s governing documents
- The sensitivity of certain key statistics such as proportion of resources used in administration
- The need to maintain adequate resources whilst avoiding the buildup of resources which could
appear excessive
CONTROL RISK
Key factors to consider include:
- Competence, training and qualification of paid staff and volunteers
- Segregation of duties
- Reliability of accounting systems / computer systems
- Controls over compliance with laws and regulations
- Power of trustees
Page | 199
