Nonprofit organizations in the United States are sometimes required to engage a Certified Public Accountant (CPA) to prepare financial statements for presentation to state regulators and to the public. The specific requirement varies by state and depends primarily on the size of the nonprofit organization. Three levels of financial statement services offered by CPAs: Audits, Reviews, and Compilations. This article summarizes each type with an emphasis on showing the difference in service and cost.
An audit provides the highest level of assurance of an organization’s financial statements. An audit provides assurance in the form of the CPAs opinion that an organization’s financial statements are free of material misstatement and are fairly presented based upon the application of Generally Accepted Accounting Principles. The audit process includes discussions with management, confirmations with outside parties, testing selected accounting transactions, examining supporting documents, completing physical inspections, sampling inventory testing and evaluating the internal control system of the organization’s accounting systems. Audits can cost more than 4 percent of a small nonprofit organizations annual revenue.
A review provides limited assurance of an organization’s financial statements. A review consists primarily of inquiries and analytical procedures designed to conclude that the financial statements present a reasonable basis for expressing limited assurance that no material modifications are necessary and that the statements are in conformity with generally accepted accounting principles. Reviews are designed to determine whether the financial statements make sense to readers. A review is commonly used when the nonprofit organization needs some assurance about their financial statements, but not the higher and more expensive level of assurance provided by an audit. Reviews are typically priced at half the price of an audit.
A compilation provides no assurance on an organization’s financial statements. When preparing a compilation, the CPA takes financial data that is provided by the nonprofit organization and puts the financial statements in a format that complies with Generally Accepted Accounting Principles. There is no testing of data or analytical procedures performed during a compilation. Compilations may be priced at less than one percent of a nonprofit organization’s total annual budget so this is the most easily affordable CPA service.
Requirements vary from state to state and a CPA must meet the requirements established for audits, compilations and reviews in your state. Generally a CPA who practices in one state can perform these services in another state through a licensing process known as reciprocity.
Statements on Standards for Accounting and Review Services are issued by the American Institute of Certified Public Accountants Accounting and Review Services Committee.
The cost of CPA services for nonprofits is rising due to costs and requirements of a procedure called “peer review”. There are fewer CPAs willing to offer these services to small nonprofits now due to the extraordinary cost of peer review.
If your nonprofit organization is unsure of the best type of CPA service or simply wants to check its own services, I would be pleased to offer a complimentary discussion. My services typically focus on meeting legal requirements with greatest efficiency and lowest cost for small nonprofit organizations.
[contact-form-7 id=”4556″ title=”Boilerplate Contact”]