One of the decisions an organization faces during its annual budget process is whether or not to engage an external CPA firm to conduct an audit of its financial statements. Some organizations are required to have an audit due to external regulations (compliance with a grant agreement and/or state regulatory authority) while others decide to have an audit conducted for overall “good practice.”
Regardless of the reasoning, an audit of your organization’s financial statements can prove to be a valuable tool for the organization, both internally and externally.
What an audit includes
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in an organization’s financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. Further, an audit also includes obtaining an understanding of an organization’s internal control structure as it relates to the overall financial statements. While that may sound like an audit is a “necessary evil,” there is a lot of value to be had in the assurance provided in an audit.
Funders and potential donors
For organizations that have federal or state funding and are required to have an audit, there is value in having an audit conducted as your funder can see that you are using your funds as intended (assuming a “clean” audit opinion). For other organizations, having an audited financial statement can be a useful tool in presenting “clean” financial statements to external funders, as well as help provide assurance to key stakeholders within their market.
Evaluating internal controls
As previously mentioned, an audit also includes auditors gaining an understanding of an entity’s internal control as it relates to financial statement reporting. This is arguably the most important part of an audit and where many organizations can find a significant amount of value from having an audit conducted. While performing walkthroughs of internal controls and testing account balances, auditors gain an understanding of the “ins and outs” of a specific organization and identify key areas of internal control and where something could “go wrong” within an organization’s financial process. While no opinion is placed on the effectiveness of internal controls by the auditors, they can help identify areas where the organization may be susceptible to fraud or malfeasance. Further, an audit can help organizational staff identify areas where efficiencies may be realized as auditors typically work with a variety of organizations and are aware of best practices and trends in the industry.
An audit is an investment
Overall an audit can be a very useful tool for the organization, both externally to funders and potential donors, as well as internally to find ways to safeguard assets and streamline processes related to financial reporting. While there may be a cost involved on an annual basis for an audit, the cost can also be viewed as an investment in the organization to help ensure that best practices are being followed and to ensure an accurate financial picture of the organization is being presented to the users of the financial statements.