Advice, Preparation . . . Results™

non profit

Audit opinions: How your financial statements measure up


Audit opinions differ depending on the information available, financial viability, errors discovered during audit procedures and other limiting factors. The type of opinion your auditor issues tells stakeholders whether you’re in compliance with accounting rules and likely to continue operating as a going concern.

The basics

To find out what type of audit opinion you’ve received, scan the first page of your financial statements. Known as the “audit opinion letter,” this is where your auditor states whether the financial statements are fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement. But the opinion doesn’t constitute an endorsement or evaluation of the company’s financial results.

Most audit opinion letters consist of three paragraphs. The introductory paragraph identifies the company, accounting period and auditor’s responsibilities. The second discusses the scope of work performed. The third paragraph contains the audit opinion.

In general, there are four types of audit opinions, ranked from most to least desirable.

1. Unqualified. A clean “unqualified” opinion is the most common (and desirable). Here the auditor states that the company’s financial condition, position and operations are fairly presented in the financial statements.

2. Qualified. The auditor expresses a qualified opinion if the financial statements appear to contain a small deviation from GAAP, but are otherwise fairly presented. To illustrate: An auditor will “qualify” his or her opinion if a borrower incorrectly estimates warranty expense, but the exception doesn’t affect the rest of the financial statements.

Qualified opinions are also given if the company’s management limits the scope of audit procedures. For example, a qualified opinion may result if you deny the auditor access to a warehouse to observe year-end inventory counts.

3. Adverse. When an auditor issues an adverse opinion, there are material exceptions to GAAP that affect the financial statements as a whole. Here the auditor indicates that the financial statements aren’t presented fairly. Typically, an adverse opinion letter contains a fourth paragraph that outlines these exceptions.

4. Disclaimer. Even more alarming to lenders and investors is a disclaimer opinion. Disclaimers occur when an auditor gives up midaudit. Reasons for disclaimers may include significant scope limitations, material doubt about the company’s going-concern status and uncertainties within the subject company itself. A disclaimer opinion letter briefly outlines the auditor’s reasons for throwing in the towel.

Ready, set, audit

Before fieldwork starts for the audit of your 2018 financial statements, let’s discuss any foreseeable scope limitations and possible deviations from GAAP. Depending on the situation, we may be able to recommend corrective actions and help you proactively communicate with stakeholders about the reasons for a less-than-perfect audit opinion. Reach us at Office@CPAsite.com or 904-396-5400.

© 2018

How auditors assess risk when preparing financial statements


Every year, your audit firm will conduct a fresh risk assessment before the start of fieldwork. Why? Because your auditor wants to mitigate the risk of expressing an incorrect opinion regarding the accuracy and integrity of the company’s financial statements. Inadvertently signing off on financial statements that contain material misstatements can open a Pandora’s box of risks — from shareholder lawsuits to increased regulatory oversight.

3-prong assessment

Audit risk is a combination of three components:

1. Control risk. Sometimes a company’s internal controls are inadequate to prevent or detect material misstatements. Control risk increases when the company fails to deploy and enforce effective internal controls, or when employees or third parties override them without the company discovering their actions.

2. Inherent risk. This term refers to susceptibility to a material misstatement, regardless of whether the company has strong internal controls. Certain transactions and industries present greater inherent risk than others.

For example, companies operating in developing countries face a greater threat of bribery and corruption by government officials, regardless of the internal controls they put in place. Inherent risk is also greater when accounting transactions are complex or involve a high degree of judgment.

3. Detection risk. Audit procedures are designed to uncover material misstatements. Detection risk is high when there’s a high probability that substantive audit procedures will fail to detect a material misstatement. When detection risk is elevated, the auditor might, for example, test a larger sample of transactions to mitigate audit risk.

Control risk and inherent risk stem from a company’s industry and actions. Conversely, detection risk is typically managed by the audit team.

Customized audit procedures

The auditor’s role is to attest to your company’s financial statements. Specifically, your audit firm assures that your financial statements are “fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement.”

Unqualified (or clean) audit opinions require detailed substantive procedures, such as confirming accounts receivable balances with customers and conducting test counts of inventory in the company’s warehouse. Generally, the more rigorous the auditor’s substantive procedures, the lower the likelihood of the audit team failing to detect a material misstatement.

Collaborative effort

Audit season is coming soon for calendar year-end entities. Before the start of fieldwork, let’s discuss changes in your business operations, accounting methods and industry conditions, along with other factors, that could create audit risk. We’ll adjust our audit programs accordingly to ensure that your financial statements are prepared with the highest level of quality and efficiency.  Contact us at 904-396-5400 or Office@CPAsite.com. 

© 2018

Nonprofit board members might want to revisit the Donor Bill of Rights


We get so busy we sometimes get off track.  Getting back to basics once in a while helps us to refocus.

The Donor Bill of Rights was designed about 25 years ago as a blueprint of best practices for not-for-profits. Some critics have since asserted that the rights are out of date or not comprehensive enough. However, revisiting the list’s basic principles can help you build solid relationships with donors — and even boost fundraising.

10 rights

Here are the rights and what they might mean for your nonprofit:

1. To be informed of the organization’s mission, how it intends to use donated resources and its capacity to use donations effectively for their intended purposes. This information is the bedrock of your outreach efforts and should be clear to your board, staff and anyone reading your organization’s materials.

2. To be informed of who’s serving on the organization’s governing board, and to expect the board to exercise prudent judgment in its stewardship responsibilities. You must be transparent about who serves on your board, their responsibilities and the decisions they’re making.

3. To have access to the organization’s most recent financial statements. Make your nonprofit’s financial data easily accessible to constituents, potential donors and charitable watchdog groups.

4. To be assured gifts will be used for the purposes for which they were given. Donors expect that you’ll minimize administrative expenses so their funds are available for programming and that you’ll honor any restrictions they’ve placed on gifts.

5. To receive appropriate acknowledgment and recognition. In addition to thanking donors, provide them with the substantiation required for a federal tax deduction and information about the charitable deduction rules and limits.

6. To be assured that donation information is handled with respect and confidentiality to the extent provided by law. Post your organization’s privacy policy on your website and be clear about what information you’re gathering about donors and how that information will be used.

7. To expect that relationships between individuals representing organizations and donors will be professional. Staff and board members should be trained in proper donor interaction — both off- and online.

8. To be informed whether fundraisers are volunteers, employees of the organization or hired solicitors. Again, transparency about your operations is critical.

9. To have the opportunity for donors’ names to be deleted from mailing lists that an organization may intend to share. Donors, not your nonprofit, get to decide whether their information can be shared. Make it easy for donors to opt out of email and other lists.

10. To feel free to ask questions and receive prompt, truthful and forthright answers. Open dialogue between your nonprofit and your donors fosters respect and deepens relationships.
Contact us for help implementing these 10 tenets or developing a customized donor bill of rights.

© 2018

What Our Clients Are Saying

I am pleased to recommend Mark and his firm. He has helped us to become a better organization and better people as well. He has the gift of being able to know in depth matters financial, including …
Rev. Louis R. Lothman, Th.D.

Frequently Asked Questions

Q.

Should I consult a CPA if I’m starting a new business?

A.

Yes. You’ll need to discuss the best organization for your company for tax purposes as well as numerous other issues relating to operations, including pricing, inventory, payroll, liability and profit...

Read more...

Locations

4029 Atlantic Boulevard, Jacksonville, Florida 32207
6000-A Sawgrass Village Circle, Suite 1, Ponte Vedra Beach, Florida 32082

 

Copyright © 2019 Patrick & Raines CPAs, LLC.
All rights reserved. Privacy Policy | Terms of Use