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Why Audited Financial Statements
10-07-2015
Management, donors, lenders and regulators all rely on not-for-profit entities’ financial statements to tell the organizations’ stories. While many individuals come face-to-face with financial information daily, much of it, when presented in financial statement format, is not intuitive or self-explanatory.
Not-for-profit organizations may have requirements in their Articles of Incorporation or bylaws that obligate them to have their financial statements audited. Certain grants or provincial regulations may also necessitate the services of an auditor. In other cases, organizational leadership may seek an audit to obtain the comfort provided by outside verification.
If all the facts concerning financial transactions were properly and accurately recorded and if the owners and managers of business enterprises were entirely honest and sufficiently skilled in matters of accounting and recording, there would be little need for independent auditing. However, human nature being as it is, there probably will always be a need for the auditor. Many businesses, depending on size and nature, employ internal auditors. Their responsibilities and functions, while similar to those of an independent auditor, are vitally different in a major respect having to do with impartiality and independence.
A financial statement audit is the examination of an entity's financial statements and accompanying disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures. The auditor's report must accompany the financial statements when they are issued to the intended recipients.
The purpose of a financial statement audit is to add credibility to the reported financial position and performance of an organization. The Securities and Exchange Commission requires that all entities that are publicly held must file annual reports with it that are audited. Similarly, lenders typically require an audit of the financial statements of any entity to which they lend funds. Suppliers may also require audited financial statements before they will be willing to extend trade credit (though usually only when the amount of requested credit is substantial).
Two of the most common misconceptions about the audit process are that:
1. Auditors examine every transaction during the period under audit.
2. Auditors are involved with the day-to-day management of the organization.
In fact, auditors use sampling methods to examine a limited number of transactions. And, while a good auditor can lend valuable suggestions to an organization’s management, it is imperative that the auditor remain independent of an organization and its daily administration.
Auditing standards also require auditors to maintain professional scepticism—an attitude that includes a questioning mind and a critical assessment of audit evidence. The ability to think in a critical manner about how the current economic environment may affect the company’s financial statements, to identify significant risks of material misstatement, to develop appropriate audit responses, to obtain and assess the sufficiency and appropriateness of audit evidence and to reach well-informed professional judgments is integral to performing a quality audit.
Inherent limitations of an audit
An opinion is not a guarantee of an outcome, but rather a statement of professional judgement. The auditor cannot obtain absolute assurance that financial statements are free from material misstatement because of the inherent limitations of an audit. These are caused by a number of factors. For example, many financial statement items involve subjective decisions or a degree of uncertainty (e.g., accounting estimates). Consequently, such items are subject to an inherent level of uncertainty which cannot be eliminated by the application of auditing procedures.
Post-audit review
Once your audit is complete, it is a good practice to evaluate the results of the audit and goals for the future. This evaluation is completed by a conversation with the auditor, management and the Board of Directors. Discussion should focus on important issues such as:
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Matters raised in the auditor’s management letter, including internals control issues;
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Any substantial financial statement reporting issues;
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Changes in the financial statements and notes to the financial statements from the previous year;
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Significant variances on the financial statement from year to year and to current budget;
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New accounting standards that affected the financial statements;
New accounting standards which may affect future financial statements;
The effectiveness of the audit staff and the organization’s staff in completing the audit
Footnotes: Footnotes: This column is presented as a general source of information only and is not intended as a solicitation for business. It is always recommended that you consult a qualified tax professional beforeembarking on any of the suggestions outlined above. Mohammed Yasin, CGA, is the principal of M. Yasin & Co. Inc., Certified General Accountants and has offices in Vancouver & Surrey,B.C. For more information on this topic or any other taxation matters, please contact taxes@alameen.ca.
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