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Articles From Lumsden McCormick

The Value of Audited Financial Statements

Audited statements are crucial for instilling confidence in potential big donors and grant makers, as they provide reassurance about your organization's financial stability. In fact, audited statements may even be required if you plan to apply for a bank loan. When you hire a certified public accountant (CPA) to conduct an audit of your financial statements, their main responsibility is to express an opinion on the statements and ensure that they are free from any significant errors or misstatements. To make the auditing process as smooth as possible, here are three tips to keep in mind:

1. Understand Roles

As the organization, you will need to prepare estimates, such as an allowance for bad debts, adopt sound accounting policies, and establish and maintain effective internal controls. While auditors may offer suggestions regarding these matters, the ultimate decision-making authority lies with your nonprofit. The auditor's role is to evaluate whether your internal controls, accounting policies, and estimates are sufficient in preventing or detecting errors or fraud that could lead to significant misstatements.

2. Involve Your Board

It is important not to overlook the role of your organization's board in the preparation of annual financial statements. The board should play a strategic and oversight role in the process, as part of their fiduciary duty. Additionally, depending on their professional backgrounds, board members can provide valuable insights and expertise on certain technical matters.

3. Understand Statement Formats

Financial statement items, such as debt ratios, program versus administrative expense ratios, and the allocation of restricted versus unrestricted resources, offer valuable insights into the financial health of your nonprofit. Therefore, when your financial team is preparing these statements, ensure that they are user-friendly and easy to understand.

To gain a comprehensive view of your organization's financial situation, it is beneficial to compare your budget, year-end internally generated financial statements, and the financial statements generated during the annual audit. This task becomes easier if the format of your audited statements is consistent with your internal financial statements and budgets. If there are differences in formatting, it may be necessary to create a bridge between the two using an internal memo, for example.

During the review of internal versus audited statements, pay attention to any significant discrepancies resulting from audit correcting adjustments. These discrepancies often indicate internal accounting deficiencies. Additionally, you will be able to identify any notable variances between the budgeted amounts and the actual outcomes for the year.

For first-time engagements with an auditor for financial statement preparation, there is no need to be anxious. Simply provide the auditor with all requested documents and maintain open lines of communication. If there are any concerns or issues, your auditor will inform you accordingly.

The Value of Audited Financial Statements

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Sarah started her career with Lumsden McCormick as a tax intern and now works in the audit and assurance department, where her primary focus is accounting, auditing, and tax matters related to nonprofit organizations and governmental entities. She has significant expertise working with exempt organizations including private and public foundations, primary, secondary, and higher educational institutions, auxiliary organizations, and community colleges in the areas of accounting for and compliance with diversified investment portfolios, tax compliance, and consulting, including unrelated business income and sales tax, information returns, financial reporting, and compliance with Yellow Book and Uniform Guidance.  

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