08 Jan Independent Audits for Associations Part 3: Audit Basics
Our four-part series on associations and the value of independent audits continues here with a nuts and bolts approach to setting up an independent audit. The final post will offer guidelines for hiring the right auditor for your association.
How to Set Up an Audit Committee for Your Association
Should your association determine that an independent audit is required by law or merely beneficial to the integrity and financial good health of your organization, the first step is to establish an Audit Committee. Its responsibilities include:
-Selecting (or approving the selection of) an auditor
-Reviewing the auditor’s outputs
-Meeting with the auditor pre- and post-audit to address any issues or questions.
-Ongoing responsibility for financial oversight and internal financial controls
The Audit Committee is generally comprised of members of your governing board. It is wise to go beyond the officers when forming an audit committee, although the President and Treasurer of the association should definitely be members.
What Happens During an Independent Audit
An audit must be prepared by an independent licensed Certified Public Accountant (CPA). Independent auditors are contract workers who are retained on a temporary basis and paid for their services via a written agreement.To qualify as independent, the auditor may not be an employee of the association.
Once engaged, the auditor performs a series of tests that provide a basis for judging whether the association’s financial reporting is free of error or misrepresentation.An independent auditor examines the financial records, accounting practices, accounts, transactions, and independent controls of the association to make that determination.
The goal is to determine whether the association is adhering to GAAP (Generally Accepted Accounting Principles) created by the Financial Accounting Standards Board (FAAB). At the conclusion of an independent audit, FASB principles require that auditors issue a report to the board.
Understanding Your Independent Auditor’s Report
The independent auditor’s report expresses the auditor’s professional opinion regarding the organization’s financial practices and the accuracy of its financial statements.
Four types of opinions are possible:
1. Unqualified Opinion – an A-1 rating
2. Qualified Opinion – an indication that the auditor feels the organization is not in strict adherence to good accounting practices, but that there is not a material misstatement of any financial information
3. Adverse Opinion – an indication that the auditor has found a significant statement of the organization’s financial position and/or a lack of adherence to GAAP
4. Disclaimer of Opinion – In the event that the auditor feels he/she was prevented from forming an opinion, this type of report is issued. It says, in essence that the auditor refuses to offer an opinion due to lack of access to records or other circumstances.
In the fourth and final segment of our series of independent audits for associations, we explore “best practices” for engaging the right person for the job.