As a follow-up to our recent Not-for-Profit Symposium, we’re looking at the new auditor’s report changes and why these matter for not-for-profits. To synchronize and better align with international reporting standards, the AICPA Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) 134, which is part of a full suite of new auditing standards that will now serve as the standard across the board. Due to delays from the pandemic, these changes went into effect for audits of financial statements and periods ending on or after December 15, 2021.
How Does This Affect My Not-for-Profit?
You might be wondering, why do I need to be aware of these changes? It’s important for executive directors, board members and fiscal and development staff to understand the annual auditor’s report and financial statements and be able to articulate the results of the audit to the organization’s constituents. Grantors and funding agencies may ask about some of the new language in the auditor’s report or certain disclosures in the financials. Understanding the changes and why they were made will equip you with tools that will lead to a smoother conversation.
What’s Different? – Key Changes You Can Expect To See
Auditor’s Opinion First
While there are no changes to this paragraph, this section will now be the first part of all reports. This will provide added transparency for both the auditor and organization management. The Basis of the Opinion section, formerly only included in reports with modified opinions, will now be in all reports and will follow the auditor’s opinion. This section will serve as a way for auditors to provide an affirmative statement that they are required to be independent of the organization and have an ethical responsibility in accordance with the relevant ethical requirements relating to the audit.
Responsibilities of Management and Auditors
These sections will clarify the responsibilities of management and auditors. The report will now include clearly laid out wording that it is the management of the organization’s responsibility to include all financial reporting in accordance with standard accounting principles in order to conduct a transparent audit. The new report will also include a bulleted list highlighting the auditor’s key responsibilities related to professional judgment, identifying and assessing risks of misstatement and skepticism and communicating significant risks identified with those charged with governance over the organization.
Going Concern
When an organization is struggling with recurring losses, too much liability and not enough assets, or is having to dip into restricted funds to maintain operating needs, then there might be doubt about the organization’s ability to continue operating. Under generally accepted accounting principles, while management is preparing financial statements, they are responsible for determining whether substantial doubt is present about the organization’s ability to continue as a going concern one year after the date that the financial statements are available. A separate section under the heading “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern” is required in the report when this issue does arise. The new reports will also contain some new language about the Organization’s assertions about Going Concern.
Other Noticeable Changes
- Additional work on related party transactions – The revisions to this section will put procedures in place to reduce the risk of undisclosed related-party transactions. Auditors will be looking into compliance with policies, identifying related parties, deciding if they need to be consolidated and what the controls in place are.
- Additional work on annual reports – Many not-for-profits are issuing annual reports to their constituents that are referring to the audited financial statements. Auditors are required to review it to make sure it is consistent with your financial statements for any misstatements.
- Emphasis on disclosures in financial statements – One of the key takeaways from the report changes is the added layer of additional transparency. Auditors will be looking closer at and advising you on what is being disclosed, where it’s being disclosed and does it tie into the basic financial statements.
Anders has a team of Not-for-Profit advisors that can help you through audit report changes. To discuss how we can best assist your organization and the associated fees, contact an Anders advisor below.
