Year- End Audit Preparation
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Transcript of Year- End Audit Preparation
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
CBIZ MHM, LLC
3 Bethesda Metro Center, Suite 600
Bethesda, MD 20814