When it comes to financial statements, you can engage your CPA to perform varying levels of service, from a compilation, to a review, to an audit. Learn the situations when each may be appropriate for your nonprofit.
To first understand what level of service is most appropriate for your situation, you need to understand the differences among the three.
A compilation is the most basic of the three levels of financial statement services your CPA can perform. In a compilation, your CPA is required to read the financial statements and consider whether those financial statements are free of obvious material misstatements based on the reporting framework presented (for example, generally accepted accounting principles, U.S. GAAP). The CPA, however, is not required to provide any assurance on the financial statements and therefore does not verify the accuracy or completeness of the information or obtain any evidence supporting the financial statement line items.
A review, on the other hand, is a level of service where the CPA provides a limited assurance on the accuracy of the financial statements. In a review, the CPA obtains an understanding of an organization’s operations and accounting practices and principally relies on applying analytical procedures and inquiries of management to determine if any material modifications should be made to the financial statements. This ensures that the financial statements are presented in accordance with the reporting framework presented (for example, U.S. GAAP).
An audit is the highest level of independent assurance that can be obtained on an organization’s financial statements. During an audit, your CPA obtains an understanding of internal controls, assesses fraud risks and corroborates amounts and disclosures included in your financial statements. The intent is to issue an opinion to provide reasonable (but not absolute) assurance on the accuracy of the financial statements in accordance with the reporting framework presented. Additionally, as part of the audit, your CPA will communicate any deficiencies identified in internal controls.
Although an audit is the most comprehensive level of service and the highest level of independent assurance you can obtain on your financial statements, it does not mean it is always the best option for an organization. In some cases, especially for smaller organizations, an audit will likely be cost prohibitive and result in more service than what an organization needs.
In Michigan, to comply with the state’s solicitation requirements, nonprofits are required to undergo an annual audit when they receive more than $525,000 in contributions (excluding any government grants). They are required to have a review performed when contributions (excluding any government grants) are between $275,000 and $525,000. Beyond these requirements, certain grantors or donors may impose audit or review requirements as a condition of receiving their funding. This is frequently the case for organizations that receive federal grants over particular dollar thresholds.
Outside of these circumstances, there is not a one-size-fits-all answer to determine the level of assurance needed on an organization’s financial statements. Each organization’s situation, including number of funding sources, complexity of operations, level of monitoring, and accounting practices, should be taken into account when determining the level of service to have performed on the financial statements. Lastly, just because you have one level of service performed one year does not mean you can’t have a different level of service in another. It is a common practice in the association industry (where there are frequently no outside requirements to undergo an audit) to have an audit performed every three years, with a review performed in the off years.
For a more in-depth information about financial statement services, refer to Yeo & Yeo’s Guide to Financial Statement Services: Compilation, Review and Audit.
If you have questions about what level of service is right for your organization, your Yeo & Yeo advisor would be pleased to help guide you and your nonprofit board through the decision-making process.