Nonprofit Year-End Financial Statement Audit (or Review) Process In A Nutshell (Part 1 or 5)
The Year-End Financial Statement Process:
A Practical Guide for Small Nonprofit Organizations having a CPA Audit (or Review)
(Part 1 of 5)
Part I: Introduction
This article is an overview of the financial statement audit process for a small non-profit organization. The objective is to help the governing board, management and other interested parties understand the annual financial statement audit process. The information provided here could be used as a guide for a review engagement as well.
Although all types of nonprofits could receive an annual audit, smaller organizations that have an audit are most likely a 501(C)(3) organization. 501(C)(3) organizations are often required to have an annual financial statement audit by the state charity regulatory body. Also, charitable organizations may be required to have an audit in order to qualify for grants or other funding. The Internal Revenue Service (IRS) does not require financial statement audits. Although they will do compliance audits.
Having an audit is a major endeavor for smaller 501(C)(3) organizations. Firstly, the cost could be prohibitive. Another factor is finding an accounting firm servicing this segment. Optimally, an accountant would need to be a peer reviewed CPA, provide audits to small organizations and specialized in not-for-profit organizations. The same audit standards apply to small nonprofits as they do for large corporations. Accounting firms need to tailor their approach to efficiently serve these smaller organizations at a reasonable cost while complying with professional standards.
The “audits” we are dealing with in this overview are “financial statement” audits. Most people know the term audit as it relates to an IRS audit of business or personal taxes. Financial statement audits are quite different from an IRS audit. Although there will be testing and evidence support needed to substantiate the amount on your financial statements, the CPA will not look at every transaction or every receipt. Also, it is important to realize the financial statements being audited are prepared by the organization, not the auditor. In order to effectively audit the financial statements and provide assurance on them the auditor needs to obtain an understanding of the organization and its environment, including internal controls and governance. Deficiencies in internal controls and other matters will be communicated to the organization at the conclusion of the audit.
Not-For-Profit Accounting & Auditing Info in New York
Not-For-Profit Accounting & Auditing
Specialized Industry Accounting and Reporting
Not-for-Profit Organizations: Registration and Reporting Requirements: Generally speaking, not-for-profits (NFPs) conducting activities in New York fall under the jurisdiction of the New York State Attorney General (AG) and all NFPs must register with the AG's office. In addition, most must file annual reports with the AG. (Note: this section does not cover trusts and other forms of organizations.) Virtually all New York nonprofits must register under the Estates Powers and Trusts Law. However, hospitals and educational institutions incorporated under the Education Law and several other specialized groups are exempted. .
The Attorney General’s website posts all forms and instructions for registration and annual filing with the Charities Bureau, links to other web sites that provide resources for not-for-profit boards and publications of interest to not-for-profit organizations.
FASB ISSUE A NEW STANDARD ON NOT-FOR-PROFIT FINANCIAL REPORTING
On August 18, 2016, the FASB issued a standard intended to simplify and improve how a not-for-profit organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows.
On August 18, 2016, the FASB completed Phase I of its Presentation of Financial Statements of Not-for-Profit Entities project by issuing ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The new guidance simplifies and improves how not-for-profit entities classify net assets as well as the information presented in financial statements and notes about liquidity, financial performance, and cash flows.
A future Phase 2 of FASB's project is slated to address additional issues, including:
- Operating measure: All other elements of the proposal not addressed in Phase 1, including:
- Whether to require intermediate measure(s)
- Whether and how to define such measure(s) and what items should be included
- Alignment of measures of operations in the statement of activities with measures of operations in the statement of cash flows.
FASB has not indicated a time frame from the completion of phase II. We will post more information about phase II as it happens.
Exempt Organizations - How to change your year end with the IRS
Exempt Organizations Annual Reporting Requirements - Filing Procedures: Change in Accounting Period
How do I change my accounting period, and how does it affect when my returns are due?
An organization may change its accounting period by filing a return for the short tax period that results from the change. A “short tax period” is an accounting period of less than 12 months, and usually occurs when an organization starts operations, changes its accounting period or terminates.
For example: In the year it was created, “Organization EO” adopts a calendar year accounting period. In Year 4, it decides to change its accounting period to a fiscal year ending September 30. It may change its accounting period by filing a short tax period return for the year beginning January 1 and ending September 30, Year 4. It must write “Change in Accounting Period” at the top of this short Year 4 return. Organization EO’s next return would cover the period beginning October 1, Year 4 and ending September 30, Year 5.
If the organization has already changed its accounting period within the last 10 calendar years, it must use Form 1128, Application to Adopt, Change, or Retain a Tax Year, to change its accounting period. Form 1128 instructions explain how to complete and submit the request. A user fee applies to the request.
Please note that an organization may not change its accounting period by filing a Form 990-N for the short tax period. The organization must either file a Form 990-EZ or Form 990, or use Form 1128.
https://www.irs.gov/charities-non-profits/exempt-organizations-annual-reporting-requirements-filing-procedures-change-in-accounting-period