J. Scott Denlinger, CPA, Director

CBIZ MHM, LLC

Year-End Audit Preparation:

Staying Organized All Year

Program Meeting

Center for Nonprofit Advancement, Washington, D.C.

December 10, 2013

Overview• How to prepare for the year-end audit.

• How to stay prepared throughout the year.

• Make your monthly financial statements more reliable.

• DON’T HESITATE TO ASK QUESTIONS!

Audit Process• Planning Stage

• Fieldwork

• Reporting

• Post-fieldwork

Planning Stage• Meetings with Management

• Review preliminary financial statements

• Review accounting system/internal controls

• Walkthroughs

Internal Controls• Document and update your accounting

system

• Checks and balances

– Misstatement of financial statements

– Misappropriation of assets

• Segregation of duties

• Issues for small organizations

• Balancing control with efficiency

Planning for Fieldwork

• Risk assessment

• Materiality

• Selection of accounts

• Unpredictable procedures

• Fraud testing procedures

• PBC listing

Fieldwork

• Testing account balances– Substantive testing

– Analytical procedures

• Audit adjustments

• Audit findings

• Don’t be afraid to ask, “Why?”

Accrual vs. Cash Basis Accounting

• Cash – recognizing revenues as you

receive them and expenses as you pay

them

• Accrual – recognizing revenues as you

earn them and expenses as you incur

them rather than at the time of cash flow

Statement of Financial Position

• Nonprofit equivalent of the Balance

Sheet

• Tells you what you own (assets), what

you owe (liability) and what you have

leftover (net assets).

Cash• Bank reconciliations

• Bank statements/confirmations

• Write off old outstanding checks

• Do you still owe that money

–Should it become a payable?

• Review on a monthly basis

Receivables• Should always agree to an aging

• Always know who owes

• Are the balances collectible?– Just because you’re owed the money doesn’t

always mean it will be collected

– Allowance for bad debts (donor’s intent may not equal donor’s ability)

• Other issues:– Split out long-term receivables

– Record at present value

• Promises to Give (Current)

– ABC, Inc. (Year 1) $100,000

– DEF Foundation (Year 1) 100,000

– Joe and Mary Johnson 70,000

– XYZ Corp. 10,000

– Don Smith 7,987

» Subtotal 287,987

– Allowance for uncollectable promises (10,000)

»Balance $277,987

Prepaid Expenses

• Prepayments for future goods or

services (meeting space deposits, etc.)

• Useful in matching revenues with

expenses (conferences, trade shows,

etc.)

• Key issues:

– Don’t forget to expense them later

– Don’t worry about the small stuff

• Prepaid Expenses

– Deposit – meeting facility $ 20,000

– Insurance ($30,000/12mos. x 6mos.) 15,000

– Maintenance contract ($20,000/12mos. X 6mos.

10,000

– Health Insurance premium 14,379

»Balance $ 59,379

Property and Equipment

• Key Issues:

– Establish a capitalization policy ($500?, $1,000?, more?)

– Maintain fixed asset listing on Excel or other program

– Use good descriptions – could save you personal property taxes

– Keep depreciation simple – straight-line

• Fixed Asset ListingDescription Date Life Cost A/D Net

Laptop Exec. Dir. 6/21/20XX 5 Yrs. $20,000 ($8,000) $12,000

Conf Room Table 5/23/20XX 7 Yrs. 15,000 (12,000) 3,000

Hi Speed Printer 2/29/20XX 5 Yrs. 6,137 ( 5,844) 293

Totals $41,137 (25,844) $15,293

Investments

• Key Issues:

–Need an investment policy

–Don’t forget unrealized gains and

losses – especially in current

economy!

–Review performance monthly

• InvestmentsBeginning balance, cost $900,822

Interest 5,521

Dividends 6,023

Purchases 100,000

Sales (30,000)

Realized gains/losses 8,202

Ending balance, cost $990,568

Unrealized gains/losses (8,798)

Ending balance, market $981,770

FAS 157

• Level I

• Level II

• Level III

• Only refers to valuation

• Doesn’t mean “better or worse”

Other Assets

• Deposits

–Recording can help serve as a

reminder

Accounts Payable/Accrued Expenses

• Should always agree to an aging

• Keep on top of this

• Know what you owe

• Consider recording estimates if you don’t have the invoice yet (contractors, large expense reports, etc.)

• Avoid surprises

• Accounts Payable

– ABC Contractors $ 53,281

– Anderson Consulting 72,443

– Smith, Johnson & Williams 52,223

– XYZ Corp. 44,087

– Verizon 17,987

»Balance $240,021

• Accrued Expenses

– Accrued salary (12/26 – 12/31) $ 12,495

– Accrued vacation 12,253

– Estimated expense reimbursements 13,000

» Balance $37,748

Search for unrecorded liabilities

Look through checks written after year-end

Deferred Revenue

• Conference registration, etc.

• Assist in matching revenues and expenses

• Key issues:

– Maintain good schedules

– Don’t worry about the small stuff

• Deferred Event Revenue

• Assume Year Ended December 31, 2011

Attendee Event Date of Date of Amt. of

Name Name Event Payment Payment

John Smith Annual 1/21/12 12/2/11 $ 750.00

Conference

- Get Events Department involved.

- Don’t forget to recognize revenue after event.

-Remember to match revenue with expenses.

Net Assets

• Unrestricted

• Temporarily Restricted

• Permanently Restricted

• Board Designation vs. Restriction

• Temporarily Restricted Net Assets

Youth Ed. Library Totals

Beginning Balance $ 0 $200,000 $200,000

Revenue 150,000 0 150, 000

Expenses ( 50,000) (100,000) (150,000)

Ending Balance $100,000 $100,000 $200,000

• Permanently Restricted Net Assets

Donor Date of Amount of

Name Donation Donation

ABC Foundation 8/21/20XX $100,000

DEF Foundation 5/16/20XX $250,000

Don & Mary Smith 2/10/20XX $750,000

Don’t confuse a Board designation with a restriction.

Look for implied restrictions.

Understand the donor’s intent.

Statement of Activities

• Nonprofit equivalent of the Income Statement

• Shows how the organization performed during

the period

• “Change in Net Assets” is nonprofit equivalent

of “Net Income/Loss”

• Nonprofits are measured differently

• Negative change in net assets isn’t

necessarily bad

Revenue Considerations

• Contributions/Grants

• Special Events

• Investment Income

• Unrelated Business Income Tax (UBIT)

Contributions/Grants• Search for unrecorded grants and

contributions – look through cash received after year-end

• Compare actual amounts to budgets and projections

• Be sure to get year-end pledges in writing

Special Events

• Does Deferred Revenue seem unusually

high or low compared to last year?

• Is the timing of the event affecting the

deferral?

• Have you deferred all event expenses

as well?

Investment Income

• Does Interest/Dividend Revenue seem

reasonable?

• (Beg. FMV – Beg. Cost) – (End FMV –

End Cost) = Unrealized gain/loss

• Create a schedule of realized

gains/losses

Unrelated Business Income Tax

(UBIT)

• Any uncertain tax positions?

• Is expense allocation reasonable and

consistent?

• Expense Analysis– Compare major expense categories to budget

and/or projections

• Investigate anything unusual

– Perform analytical procedures

• Do you have 12 months of rent recorded?

• Does payroll expense reconcile to payroll returns?

• Do payroll taxes and benefits seem to be a

reasonable percentage of payroll expense?

Cash Flow Statement

• Equally important, but frequently ignored

• Reconciles change in net assets to change in cash

• Answers the question: “We made money - where did it go?”

Reporting

• Financial statements

–Disclosures

• SAS 114 Letter

• SAS 115 Letter

Reporting

• SAS 114 Letter

–Defines responsibilities

–Areas of focus on financial statements

–Summarizes audit findings and adjustments

Reporting

• SAS 115 Letter

–Material Weakness

–Significant Deficiency

–Other Comments

Post-Fieldwork

• Covers period since fieldwork

• Search for potential disclosure issues

• Subsequent events

• Items auditors will need

If you have questions . . .

J. Scott Denlinger, CPA

Director

(301) 951-3636 x6739

sdenlinger@cbiz.com

CBIZ MHM, LLC

3 Bethesda Metro Center, Suite 600

Bethesda, MD 20814