23 Jun Common Assurance Engagements for Not-For-Profits

Not-for-profits have a wide range of financial statement users who make decisions based on the information provided. CPA firms are often engaged to provide assurance services not only to meet requirements of lenders and grantors, but also to lend credibility to their financial reporting.

Although the pandemic has affected all not-for-profit organizations, we are seeing two extremes in our client base

At one end of the spectrum, we have organizations who have experienced increased funding from various government initiatives and supports, key donors stepping up in time of need, and the lifting of external restrictions by funders who recognize the difficulties in meeting restrictions. These organizations are now trying to ramp up staffing and other service provisions, working in an environment where many staff are still under significant stress and where hiring and training of new staff is extremely difficult. With surpluses on hand, boards are trying to navigate good stewardship of the assets while balancing concerns over availability of future funding with the needs of the community and membership.

On the other spectrum, we have organizations who were heavily reliant on individual and corporate donations, of both money and time, both of which have declined significantly. We are now headed into the second operating cycle where the services provided have been significantly restricted or even banned under health and safety requirements. With limited reserves and significant declines in revenue and program activities, the focus is on conservation and starting up operations when permitted.

During this time, boards and management are re-evaluating their needs for independent assurance over external financial reporting. To a large degree, an organization’s assurance requirements will depend on the requirements of its financial statement users. Where some may need to now move into an audit engagement to meet funding requirements, others are looking to reduce administrative costs and burdens. Our only caution during this time is to ensure you consider future needs as moving between engagements can at times be more costly than just staying the course.

Below we have provided you with a few considerations for the most common assurance engagements. If you would like to discuss what the most appropriate engagement may be for your organization, please contact us. 

To assist all not-for-profit organizations, we have also provided a template that you are welcome to use and tailor to your needs.

Audit

A financial statement audit provides management and those charged with governance with an independent auditor’s report stating whether, in their opinion, the financial statements fairly present the not-for-profit’s financial position, changes in net assets, and cash flows in accordance with the Canadian not-for-profit organizations accounting standards. In an audit, the firm will obtain reasonable assurance (defined as high but not absolute) about whether the financial statements are free from material misstatement, whether caused by error or fraud.

Audit Engagement Considerations

• Compared to other types of assurance engagements, the audit provides the highest level of assurance as it is designed to examine, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
• As part of a financial statement audit, the firm is required to gain an understanding of internal controls and assess whether any identified control deficiencies will need to be communicated with management and/or the board of directors.
• Although not required, auditors may offer additional input based on their evaluations of operations and controls that can help management and the board understand risks and make improvements in their processes and controls.
• A financial statement audit places a significant preparatory burden on the not-for-profit’s accounting staff, so taking availability of resources into account is critical when deciding to engage a CPA for this service.
• Audits tend to be the most expensive of the assurance engagements, as they require significant time to execute the required procedures to complete.

Review

A financial statement review provides limited assurance about the financial statements of the not-for-profit. In this type of engagement, the firm indicates whether any material changes are necessary for the financial statements to be in accordance with the Canadian not-for-profit organizations accounting standards. The firm is not required to obtain an understanding of the internal controls, assess fraud risk, or test accounting records through inspection, observation, outside confirmation, or the examination of evidence. Review procedures consist primarily of inquiry and analytical procedures to identify unusual items or trends that may need further explanation by management.

Review Engagement Considerations

• Because a review is much narrower in scope than an audit, a review is typically a less costly option.
• A review engagement, like an audit, assesses the financial statements for material misstatements in accordance with the accounting standards for not-for-profit organizations. This includes all related note disclosures.
• The assurance level provided by a review is much lower than that of an audit.
• Internal controls are not considered in a review, and as such, management and the board of directors typically do not receive a formal communication of deficiencies unless they are considered significant.
• Lenders and other financial statement users might not be willing to accept a review engagement report as a substitution for an audit engagement report, so it is important to communicate with the intended users and understand their requirements.

Compilation

A compilation does not provide a basis for obtaining or providing any assurance regarding the financial statements. In a compilation engagement, the firm is required to read the financial statements considering the financial framework being used, as defined by management, and let management know whether they are appropriate in form and free from obvious material errors.

Compilation Engagement Considerations

• Compilations can provide a not-for-profit with a second set of eyes and advice on presentation matters.
• They can be especially helpful for smaller organizations whose financial statement users do not require an audit or a review but appreciate the association with a firm.
• No opinion is issued as to whether the financial statements are fairly presented in accordance with a prescribed accounting framework.
• No detailed testing or analytical procedures are performed.

Agreed-upon procedures

In an agreed-upon procedures (AUP) engagement, the firm performs specific procedures agreed upon by the interested parties. The final reporting package provides findings in a specific area of interest. Although they are often performed for internal purposes, AUPs can be requested and relied upon by third parties.

Agreed-upon-procedures

• AUPs can enable a not-for-profit to dive deeper into an area of concern that might not be covered in such detail by an audit, review or compilation.
• Depending on the subject matter, AUPs can offer timing flexibility, thus reducing the burden on staff.
• Because the procedures are typically more limited in scale than an audit, AUPs offer more cost flexibility for not-for-profits (that is, to pick and choose which procedures are performed), yet rely on techniques similar to those used during an audit.
• In an AUP engagement, the firm does not perform an examination or review and does not provide an opinion or negative assurance.
• Because the report does not provide an opinion, it would be the recipient’s responsibility to draw conclusions based on AUP engagement findings.

If you have any questions or would like to know more about common assurance engagements for not-for-profits, please get in touch.