This document discusses external auditing of non-profit organizations. It provides an overview of the value of audits, accounting standards, audit procedures, and trends in non-profit financial reporting. Audits are important for non-profits to assure grantors and donors that the organization is financially sound and using funds appropriately. The audit process involves assessing risk, testing internal controls, collecting evidence during fieldwork, and issuing an opinion on whether the financial statements fairly represent the non-profit's financial position.

1. EXTERNAL AUDITING WITH
A FOCUS ON NON PROFIT
ORGANIZATIONS
Emily Weary
MBA 592
April 25, 2016

2. OVERVIEW
 Introduction
 Value of an Audit
 Accounting Scandals
 Accounting Principles and Standards
 Audit Procedures
 Trends in Financial Reporting of Nonprofits
 Conclusion

3. ECONOMIC CRIME
 More organizations have been exposed to
deficiencies in accounting practices
 Fraud cases lead to:
 Collapse of entire organizations
 Significant investment losses
 Litigation
 Imprisonment of top executives
 Companies look to third parties to maintain effective
system of internal controls

4.  PwC survey – 1 in 3 organizations report
beings affected by some type of economic
crime

5. THE PURPOSE OF AN AUDIT
 Provide financial statement users with an opinion
on whether the financial statements are presented
fairly
 Financial information is complex and is
demanded in a timely manner
 Causes increased risk that information will be
misleading or fail to meet the company’s business
objectives
 Important that policies are routinely reviewed
and improved in order to increase proficiency

6. NON PROFIT ORGANIZATIONS
 Many are required to have independent audit due to
nature of funding sources
 CPA will review financial records, accounts, internal
controls, and ordinary business operations
 Grantors will request audited financial statements to
reassure that the organization is in a sound financial
position
 Conducting an audit is a good business practice for
companies to adopt

7. NON PROFIT ORGANIZATIONS
 Situations when a nonprofit organization is required to
conduct an audit:
 Governments request a copy of audited financial statements
 Spend more than $750,000 each year with federal funds
 Contract with state and local governments to provide certain
types of services within the community
 Want to apply for state funding
 Banks use it has a provision to receiving a loan

8. VALUE OF AN AUDIT
 Gives some insight into how well the organization is
being managed
 Makes companies aware of potential risks
 Helps solve complex accounting issues
 Must be planned and economically efficient

9. FRAUD
 Intentionally falsifying amounts of disclosures to mislead
financial statement users
 Feel some type of pressure or incentive from sources
both in and out of the company
 Fraudsters have no ethical values when it comes to
knowingly committing an act that is dishonest
 Usually employees but can be management – have the
most access to information and better able to conceal it

10. EVIDENCE
 Information collected to help the auditor reach a conclusion about
the accuracy of the financial statements
 Examples of evidence include:
 Checks written
 Invoices
 General ledgers
 Journal entries
 Spreadsheets
 Reconciliations
 Minutes of meetings
 Confirmations from 3rd parties
 Control manuals

12. EVIDENCE
 All unusual trends need to be investigated
 All documentation needs to be checked for authenticity
 Unapproved transactions raise suspicion in management’s
operations
 Must come from a dependable source
 Inquiry, observation, and inspection
 Help them gain a basic understanding day-to-day operations of the
company

13. NONPROFIT RISK ASSESSMENT
 Typical nonprofit organization is subject to rapid change
 Should make note of any changes in personnel, procedures,
funding sources, controls, and any pending litigations
 Increase in errors due to money being spent on mission
instead of administrative costs
 Level of risk associated with misstatements is higher
 Terms of grants can change
 Could reduce the monetary amount of funding

14. NONPROFIT RISK ASSESSMENT
 Many rely heavily on contributions from one donor
 May have a few employees recording entries, some of which
have no type of accounting background
 High employee turnover
 No training for replacements
 Heavy reliance on volunteers
 Should consider investing more funds into admin costs to
reduce risk of error and save time & money

15. SARBANES-OXLEY ACT OF 2002
(SOX)
 U.S. Senate and the House of Representations passed SOX to improve
quality and reliability of financial reporting after result of fraud scandals
 Improved guidelines for reporting
 Indicated penalties and longer prison sentences
 Requires at least one member of the audit committee to have a financial
background to help make sound financial decisions
 Many argue on its effectiveness, but it has helped internal controls become
more valuable
 Passed after WorldCom scandal

16. ACCOUNTING SCANDALS
 CEO, Bernie Ebbers, overstated their assets by nearly $11 billion
 Capitalized line costs rather than expensing them
 Inflated Revenue through fake accounting entries
 Focused on achieving rapid growth through acquisitions
 Capitalizing these costs would have allowed the company to spread their current
year expenses into future years
 Appeared to be improving – encouraged stock purchases
 Ebbers was sentenced to 25 years for conspiracy and filing false documents with
regulators

18. ACCOUNTING SCANDALS IN
NONPROFITS
 Focused on doing good for those in need, many people want to
think they are made up of hard-working and honest individuals
 2013 Washington Post found that from 2008 – 2012 over 1,000
nonprofits had seen a “significant diversion” of their assets
 Attributed to theft, investment fraud, embezzlement, and other
unauthorized uses of funds
 Tend to have more faith in employees – more lenient with controls
 Easier for fraud and embezzlement to occur due to lack of strict
guidelines

19. ACCOUNTING SCANDALS
 Tried to look as if they were more successful with the money they
were receiving from donors
 Made up of many different offices – each has different principles
and practices
 Counting some of their contributions twice
 Would portray their revenue to be greater and their expenses lower
 Occurred when 2 or more would count the same contribution as
their own

20. EFFECTS OF FRAUD ON
EMPLOYEES
 Many management teams involved in covering up fraud tend to bully their
employees
 Try to get rid of anyone who asks too many questions
 Stakeholders should be more informed on a monthly basis through
documentation showing:
 All balances in cash accounts
 Bills that are owed to vendors
 Lists of outstanding receivables
 Salaries and benefits paid for key employees
 All transactions should require proper approval

21. PRINCIPLES AND STANDARDS
“In today’s regulatory
environment, it is
virtually impossible to
violate rules.”
– Bernie Madoff

22. PRINCIPLES AND STANDARDS
 Provide a way for auditors to measure quality and the objectives
intended to be achieved
 Standard framework of guidelines used for financial accounting
purposes are generally accepted accounting principles (GAAP)
 Would be very difficult to fully evaluate the financial condition of the
organization without GAAP
 Issued by the Financial Accounting Standards Board (FASB)
 FASB requires auditors to issue a report asserting an opinion about the
financial practices of the organization
 Whether the financial statements are presented fairly

23. PRINCIPLES AND STANDARDS
 Generally Accepted Auditing Standards (GAAS) are a set of criteria used
to direct the process of the audit
 Made up of General Standards, Standards of Field Work, and Reporting
Standards
 Address the general responsibilities of the auditor
 Responsible for being competent and obtaining the necessary
capabilities to perform an audit through experience and education
 Must be planned and supervised
 Must have sufficient understanding of the entity and its environment

24. PROCEDURES
 Most engagements typically consist of four stages:
 Planning
 Preliminary Review
 Fieldwork
 Reporting
 Main objective: develop a strategy and plan that will aid in search for
evidence to form an opinion on whether the financial statements are fairly
presented
 Must review the company’s process of recording and summarizing
transactions
 If the auditors are able to determine that the company’s controls are
effective, then they can accept the fact that the balances in each account are

25. ENGAGEMENT PLANNING AND RISK
ASSESSMENT
 Must arrange a meeting with clients to go over intentions and
responsibilities regarding the scope of the audit
 Arrangements should be agreed upon before any fieldwork begins
 Auditors issue arrangement letter – terms and requirements
 Topics to be included:
 Objectives of engagement
 Management’s responsibilities
 Auditor’s responsibilities
 Limitations

26. ENGAGEMENT PLANNING AND RISK
ASSESSMENT
 Most important step - establish and document a plan that lists all
procedures that need to be performed to assess risk of material
misstatement
 Misstatements can occur as a result of errors or fraud – Difference is
intention
 Involves gaining an understanding of the entity and its environment
 Collecting information regarding the client’s industry
 Regulations or other external factors affecting the entity
 Application of accounting policies
 Related business risks
 Can determine if any risks are present and where to look to see if those

27. ENGAGEMENT PLANNING AND RISK
ASSESSMENT
 Must direct their attention to areas that are subject to higher
amounts of risk
 Determine materiality limit - amount of a transaction that would
make a difference and influence the decision of financial statement
users
 Calculate a certain dollar amount based off a predetermined
benchmark of either total revenue or total assets
 Use this amount to select a sample of transactions to test or
invoices to review
 Validate that amount of undetected misstatements is immaterial

28. FIELDWORK
 Collect, analyze, interpret, and document evidence to support the
basis of the opinion
 Gain a better understanding of how fraud might be committed and
hidden within the company’s accounts
 Examine journal entries and any adjustments that were made at
year end
 2 Main types of procedures:
 Test of controls
 Substantive procedures

29. TEST OF CONTROLS
 Testing the company’s system to determine whether the controls
are reliable
 Can be done through:
 Vouching
 Tracing
 Scanning documentation
 Inspecting tangible items
 Observing control procedures
 Confirming account balances from outside parties
 Recalculating or re-performing controls

30. SUBSTANTIVE PROCEDURES
 Performed to obtain sufficient and appropriate evidence
 Some key indicators of the pervasiveness of fraud include:
 Inconsistencies in accounting records
 Conflicting or missing information
 Problematic relationships between auditors and management
 Unclear or varying responses to inquiries
 Examine the company’s assets and business records to ensure that the
information collected is useful and relevant
 Typically performed at the client’s location to facilitate open
communication and keep the client up-to-date with any observations or
developments

31. COMPLETING THE AUDIT
 Any misstatements that have been identified should be discussed
with the client
 Should be given the opportunity to adjust them if they will have a
substantial influence on the financial statements
 Issues of going concern and subsequent events should be
addressed
 Occur during the time between the date of the financial statements and
the date of the auditor’s report
 Legal letters sent - requesting information about any pending or
threatening litigations that they were engaged in
 Many nonprofits have administrative protests and lawsuits occur

32. REPORTING FINDINGS
 The auditors will determine the nature of their opinion
 4 types of opinions that an auditor can express:
 Unqualified – In conformity with GAAP
 Qualified – In conformity with GAAP except for limited items
 Adverse opinion – Not in compliance with GAAP
 Disclaimer – No opinion is expressed
 Issue a report – specifying overall perception of the company
from a financial perspective

33. REPORTING FINDINGS
 Discussion of
recommendations
 Main objective: offer
constructive feedback to modify
and improve procedures
 Examples of recommendations:
 Reconcile all bank statements on a
monthly basis to ensure that they
agree to the GL
 Reconcile all AR and AP Aging reports
to GL
 Keep track of billings on a weekly
basis to ensure accurate and timely
billings
 Use excel spreadsheet to avoid
mathematical errors
 Allocate gross wages and payroll

34. NONPROFIT TRENDS
 Extremely diverse internal operations - different missions,
processes, and objectives
 Faced with the same external forces - changes in the economy, user
demographics, and technology
 Trends should be analyzed by management and BOD to address
potential threats
 Top 3 trends:
 Resource limitations
 Increased demand
 Increase in awareness of devotion to mission

35. NONPROFIT CHALLENGES
 Biggest challenges:
 Lack of time to deliver quality services
 Insufficient budget for direct program expenses
 Inability to measure effectiveness
 Economy is most influential factor – unstable government grant
situation
 Use their resources to fulfill their mission rather than generate
income
 Must meet the terms indicated in grants and agreements in order
to receive adequate funding

36. SOLUTIONS
 Advocacy – aids in the process of educating policy makers
about the needs of the people within the communities that
nonprofits serve
 Helps eliminate some of the barriers that prevent nonprofits
from promoting their visions

37. TECHNOLOGY
 As the business environment continues to evolve, so too does the
development of technology
 Has allowed many individuals and foundations to donate more
money via the internet
 Can experience an extreme competitive
disadvantage if they do not have the means
to accept online donations
 Stay up-to-date with the latest developments

38. TECHNOLOGY
 People who see benefit of their offerings are more motivated
to spread the word
 Will easily establish an immediate epidemic through the use
of social media
 Use of technology has shown positive results
 Enables nonprofits to focus on their missions rather than
insignificant matters

39. IMPACT OF SOCIAL MEDIA
 ALS Ice Bucket Challenge

41. ETHICS
 Every company should take necessary steps to make ethical
business decisions
 People perform better when they believe that their workplace is
treating them with dignity and is rewarding ethical conduct
 Should develop a code of professional ethics
 Provide guidance to employees about how to address certain
situations that may require an ethical decision.

42. CONCLUSION
 More than half of organizations within the United States have been
subjected to some type of fraud
 Increase may be due to the fact that more companies have been
implementing stronger internal control procedures
 Has led to an increase in the number of frauds actually being
detected
 Have been able to detect and address more fraud related issues
through the work of external auditors

43. CONCLUSION
 Economic crime has and will continue to be a threat to every type of
organization
 How companies confront these threats will determine how
sustainable they will be
 Whether or not their company will be in the position financially
where they will be able to operate well into the future
 By reviewing a company’s accounting policies and procedures,
auditors can confirm that the company is following the necessary
steps to prevent fraud from occurring