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Nonprofit Genie (FAQs) | Funds Management
| What is an audit? | |
| 01-17-2006 | |
| An audit is a process for testing the accuracy and
completeness of information presented in an organization's financial
statements. This testing process enables an independent certified public
accountant (CPA) to issue what is referred to as an opinion on how fairly the
agency's financial statements represent its financial position and whether they
comply with generally accepted accounting principles (GAAP). Board members,
staff, and their relatives cannot perform audits because their relationship
with the organization compromises their independence.
The Board of Directors is responsible for hiring the auditor and the auditor reports to them. As such, the audit report is addressed to the board of directors as the trustees of the organization. The report usually includes the following: A cover letter, signed by the auditor, stating the opinion, as described above. The financial statements, including the statement of financial position (balance sheet), statement of financial activity (income statement), and statement of cash flows. Health and social service organizations also have a statement of functional expenses. Many audits show comparative information between fiscal years. Notes to the financial statements, as required by GAAP, which might include a description of the company, information about functional expenses, a schedule showing future debt and lease commitments of the organization, further information about contributions, volunteer services, and other significant information not obvious in the financial statements. In addition to the materials included in the audit report, the auditor often prepares what is called a management letter or report to the board of directors. This report cites areas in the organization's internal accounting control system which the auditor evaluates as weak.
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