Why You May Need an Audit – and What You Should Get Instead

Does the idea of a financial audit on your nonprofit leave you feeling nervous? For many nonprofits, a full financial audit can help ensure the accuracy of their financial recordkeeping. However, it can also feel invasive and overwhelming. Just the word itself can sound scary.

Luckily, not all financial situations require an audit. A reduced scope of attestation (or reduced scope of work) could be a better option for your organization. In this article, we’ll look at when you might need an audit and why an attestation service might make more sense.

Reasons Your Nonprofit May Need an Audit

Regulatory Compliance

One of the most common reasons for a nonprofit audit is to comply with state or federal regulations. Each state has a different threshold for nonprofits incorporated and registered within their states. In some cases, a state may have no requirement for an audit. In other cases, a state may require an audit for budgets as small as a few hundred thousand dollars per year. Here is a great resource to see if/when your nonprofit will need an audit.

Grant Requirements

Some grant programs require an audit before awarding funds. Both government and private grants could require an audit, so it’s important to understand the funding requirements when applying.

Stakeholder Trust and Confidence

Regular independent financial audits of your organization can help keep your financial statements transparent. In turn, this helps maintain stakeholder trust in your organization.

Internal Governance and Oversight

Inaccurate records are one of the most common problems found in a nonprofit audit. Auditing your financial records regularly helps cut down on potential issues by catching inaccuracies before they become a problem.

Fraud Prevention and Detection

No one wants to consider fraud in their organization, but it could happen to anyone. Regular audits can help catch fraud–and potentially prevent fraud in the first place–by verifying transactions.

Is There an Alternative? Can a Reduced Scope of Attestation?

An audit is a deep dive into the financials of a business or organization. A reduced scope of work, on the other hand, works sort of like a slimmed-down version of an audit. There are two ways this is typically handled, and in some cases, they serve as an alternative to an audit: 

• Review of Financial Statements:

1. • This provides a limited level of assurance on the financial statements.
   • Your accountant will follow the necessary steps to obtain a reasonable basis for showing limited assurance.
   • This is a great choice when stakeholders require some level of assurance but don’t need the depth of a full audit.

• Compilation of Financial Statements:

• A compilation collects financial data and presents it in the form of financial statements without expressing any assurance on the accuracy of the information.
• It is the most basic level of service and is used when there is no need for an independent third party to verify the information and internal management or stakeholders already have a good understanding of the organization’s financial activities.

Can a Reduced Scope of Work Replace an Audit?

If your board or organization shies away from an audit, you might be wondering if you can replace an audit with a reduced scope of attestation (or reduced scope of work). After all, wouldn’t it be easier to hire an outside accountant to simply look over a few areas of the books rather than digging through every financial record?

Whether you can replace an audit with a reduced scope of work depends on your organization’s needs and several factors, including:

• How much detail and accuracy you need from the examination
• The requirements of stakeholders or regulatory bodies
• Budget and time constraints
• Objective of the audit or inspection

1. Level of Assurance

An audit is a comprehensive examination of an organization’s financial statements and relevant financial information. Audits provide the highest level of assurance for your organization. If you need the utmost assurance of accuracy throughout your financials, an audit is likely the better choice.

Attestation provides a limited level of assurance for your organization. As a reduced attestation focuses on specific areas of your financials, you won’t get the comprehensive look offered by an audit. However, this hyper-focused approach might be the right option if you’re concerned about only a section of your records.

2. Regulatory and Stakeholder Requirements

When choosing between a full audit or reduced attestation, one thing to consider is your regulatory requirements. Many regulatory bodies may require one or the other specifically to stay in compliance.

Likewise, your board of directors or other stakeholders may require a full audit. In situations where it isn’t required, however, a reduced scope of work can be a cost-saving alternative.

3. Cost and Resource Considerations

In general, audits are more resource-intensive and expensive than a reduced scope of work. As a comprehensive look at your financials, they require more time and resources to complete, leading to a higher cost.

A reduced scope of work might be a good alternative if your organization lacks the financial, administrative, or time resources for a full audit.

4. Specific Objectives

Audits provide a broad and thorough examination of an organization’s financial health and operations. While this can be helpful if you need to see the overall health of your finances, you may not need all the information it provides.

Reduced scopes of work can be suitable if your organization has specific areas of concern within your financials. For example, you may want to verify the accuracy of donations for the last quarter.

The Charity CFO Can Give You Peace of Mind

A reduced scope of work can’t completely replace an audit. In some cases, your organization may need one to secure funding, stay in regulatory compliance, or maintain accurate records.

However, an attestation service can be a great alternative for many organizational functions, including:

• Analyzing specific financial areas for fraud or inaccuracies
• Cost savings for regular financial checkups
• Meeting grant, financing, or regulatory requirements that don’t require a full audit

In fact, attestation could help you avoid the fear of an audit–especially when presenting financial needs to your board or other stakeholders.

Do you need an audit or attestation? In some cases, simply having an outside firm handling your financial management can provide the peace of mind your organization needs. Get in touch with The Charity CFO to see how we can help maintain accurate records for your nonprofit today.