Fiscal Non-Profit Administration

A. SELECTION OF AN AUDITOR

B. AUDIT AND REPORTING REQUIREMENTS

VI. AUDIT

Selection of an Auditor

Effective Date: January 1, 1999

A. SELECTION OF AN AUDITOR

Regardless of the size or type of a not-for-profit organization an annual audit can help to improve operations and provide proper accountability for public and private resources. Therefore, it is important that a qualified auditor be selected to perform the audit.

Planning the procurement of a quality audit requires time and effort on the part of the organization; however, resources spent on planning are likely to be rewarded by a smoother, more timely, and often less expensive audit. There must be an accurate determination of the nature and scope of the audit, what auditing standards are applicable, and whether the organization is subject to any special federal or state audit requirements, such as the Single Audit Act.

Full and open competition is basic to an effective procurement process. Encouraging as many qualified firms as possible to submit auditing proposals increases the likelihood that the organization will receive a quality audit at a fair price. Therefore, it is important to clearly communicate the organization's audit needs to potential bidders because firms that do not fully understand the scope of services may not submit a proposal for consideration. Obtaining a list of potential auditors may be difficult for small entities in rural areas. It may be helpful under these circumstances to solicit firm names from larger organizations and from CPAs in the area who have extensive experience auditing governmental and not-for-profit entities.

The auditor should be selected on the basis of professional competence and experience. Criteria to be used in the selection process include:

1. Auditor's understanding of the not-for-profit organization's needs and the environment in which it operates. The auditor should be able to identify existing problems and recommend appropriate corrective action.
2. Auditors proposed approach and methodology should be comprehensive and tailored to the needs of the not-for-profit entity.
3. Auditor's staff who are to be assigned to the audit engagement should have specialized training in the area of not-for-profit audits as well as experience auditing other entities. Also, experience in governmental audits should prove beneficial since not-for-profit organizations often receive numerous funding sources from governmental units.
4. The proposed fee should obviously be a consideration; however, studies have shown that the use of audit fee as the primary selection criteria greatly increases the likelihood of a substandard audit.

After carefully considering the various proposals and making a decision as to the auditor of choice, a formal engagement letter should be signed by the board's designee. This letter, which is usually prepared by the auditor, should clearly set forth the nature and terms of the engagement and includes, at a minimum:

1. Audit scope, objective, and purpose;
2. Deadline for work to be performed;
3. Anticipated cost of audit, with a stated amount not to exceed;
4. Report format;
5. Type and timing of support to be provided to the auditor by your organization;
6. Professional auditing standards to be followed by the auditor in performing the audit; and
7. List of parties, specifically funding agencies, which receive copy of audit report.

B. AUDIT AND REPORTING REQUIREMENTS

The 1997 Session of the General Assembly revised General Statute 143-6.1 which established audit requirements for nongovernmental entities which receive, use, or expend $300,000 or more annually in state funds, except when the funds are for the purchase of goods or services. The law was adopted to ensure that entities utilize state funds for the purpose for which the funds were appropriated.

For purposes of implementing G. S. 143 -6. 1, "state" funds are intended to include any and all monies appropriated by the General Assembly, monies collected by or for the State of any agency thereof, as well as all federal funds which flow through the State of North Carolina to private organizations.

The basic financial statements of the nongovernmental entity are to be audited in accordance with generally accepted auditing standards (GAAS) and the government auditing standards. Audit reports should conform to the following format.

1. Independent auditor's opinion on the basic financial statements.
2. Basic financial statements presented in accordance with either generally accepted accounting (GAAP) principles or other comprehensive basis of accounting (OCBOA) per SAS 62, SPECIAL REPORTS.
3. Independent auditor's opinion on the schedule of state/federal awards and other supplemental data, if applicable. It should be noted that this opinion can be combined with the opinion on the basic financial statements.
4. A schedule of state and federal awards
5. Independent auditor's report on compliance based on audit of basic financial statements performed in accordance with government auditing standards.
6. Independent auditor's report on the internal control structure based on audit performed in accordance with government auditing standards.
7. Schedule of findings and questioned costs with detail description of noted instances of noncompliance as well as internal control reportable conditions and/or material weaknesses. The schedule should include recipient's comments to audit findings and recommendations. Also, the auditor should reflect on the schedule the status of material, unresolved prior period(s) findings and recommendations.

Nongovernmental entities which receive federal financial awards (FFA) may be subject to the following federal audit requirements as specified by OMB Circular A- 133:

1. Nonprofit entity which receives $300,000 in federal financial awards (FFA) is subject to an organization-wide audit.
2. An entity which receives federal financial awards under only one program can have either a program-specific audit of the program or an organization-wide audit.
3. An entity can have either an organization-wide audit in accordance with Circular A- 133 or separate audits of each FFA program when the total federal awards is $300,000 or more.
4. Nonprofit entities which receive less than $300,000 in federal awards are usually exempt from compliance with OMB Circular A- 133 as well as other federal audit requirements.

Federal financial awards (FFA) are broadly defined to include both cash and noncash assistance provided by a federal agency to a nonprofit entity in the form of grants, contracts, cooperative agreements, loans and loan guarantees, property, interest subsidies, insurance, direct appropriations, etc. The federal awards include funds provided direct from a federal agency or awards received indirectly from other recipients or subrecipients of federal awards. However, it should be noted that federal awards do not include direct federal cash assistance to individuals ("entitlements").

Audits conducted in accordance with OMB Circular A-133 are intended to provide the federal government with certain assurances.

1. Financial statements of the nonprofit organization present fairly its financial position and the result of its financial operations in accordance with generally accepted accounting principles.
2. The nonprofit entity has internal accounting and administrative control systems in place to provide reasonable assurance that the entity is managing federal financial award programs in compliance with applicable laws and regulations.
3. The entity has complied with laws and regulations that may have a material effect on its financial statements and on each major federal financial award (FFA) program.

Reporting requirements for an organization-wide audit conducted in accordance with generally accepted auditing standards, government auditing standards, and OMB Circular A-133 would consist of the following format.

1. Independent auditor's opinion on the basic financial statements.
2. Basic financial statements presented in accordance with either generally accepted accounting principles (GAAP) or other comprehensive basis of accounting (OCBOA) per SAS 62, SPECIAL REPORTS.
3. Independent auditor's opinion on the schedule of state/federal awards and other supplemental data, if applicable. This opinion can be combined with the opinion on the basic financial statements.
4. A schedule of federal and state financial awards.
5. Independent auditor's report on compliance based on audit of basic financial statements performed in accordance with government auditing standards.
6. Independent auditor's report on the internal control structure based on audit performed in accordance with government auditing standards.
7. Independent auditor's report on internal control structure used in administering federal programs based on audit performed in accordance with OMB Circular A-133.
8. Independent auditor's report on compliance with general requirements applicable to federal financial awards based on audit performed in accordance with OMB Circular A-133.
9. Independent auditor's opinion on compliance with specific requirements applicable to each major program based on audit performed in accordance with OMB Circular A-133.
10. Independent auditor's report on compliance with requirements applicable to nonmajor programs based on audit performed in accordance with OMB Circular A-133.
11. Schedule of findings and questioned costs with detail description of noted instances of noncompliance as well as internal control reportable conditions and/or material weaknesses. The schedule should include recipient's comments to audit findings and recommendations. Also, the auditor should reflect on the schedule the status of material, unresolved prior period(s) findings and recommendations.

An entity that receives, uses, or expends between fifteen thousand dollars ($15,000) and three hundred thousand dollars ($300,000) in State funds annually, except when the funds are for the purchase of goods or services, must file annually with the State agency that disbursed the funds a sworn accounting of receipts and expenditures of the State funds. This accounting must be attested to by the treasurer of the grantee and one other authorizing officer of the grantee. The accounting must be filed within six months after the end of the grantee's fiscal year in which the State funds were received.

A standard reporting format has been developed and should be used for meeting the requirements of the sworn accounting. The standard format includes:

1. a certification and sworn statement by the Treasurer and a second authorizing officer on the entity's letterhead;
2. the Schedule of Grantee Receipts and Expenditures (Cash Basis); and
3. supplementary information on the organization, the paid preparer, and the program(s).

The required formats are available on electronic form and may be obtained through the Internet at the following address: www.osa.state.nc.us/nongov/.

There are no reporting requirements for State funds received, used or expended during a fiscal year that are less than $15,000.

The audit and reporting requirements provided in OMB Circular A-133 and G.S. 143.6.1 are summarized in Audit Advisory #2, first published May 1997 and revised October 1997. Copies of Audit Advisory #2 were made available to the N. C. Association of CPA's and N.C. Center for Nonprofits. For a complete copy of Audit Advisory #2 contact the N.C. Office of the State Auditor via the Internet or phone at 733-3217.