By Brittany Cassell
As a business owner or director of a nonprofit organization, you may be thinking “do I really need an audit?” The answer depends on your entity’s needs and the users of your financial statements.
The first step in determining whether you need an audit is to identify the users of your financial statements. If your financial statements are widely distributed to investors, financial institutions, grantors, or board members, these users may desire a high level of assurance regarding the statements’ reliability. Once you determine your user group and assess their expectations, the next step is to contact your CPA or financial advisor, who can provide you with some insight into your entity’s legal requirements in your state.
As a preview, you may need an audit if any of the following situations apply to you:
- You have a bank loan with a covenant requiring an audit,
- You received or expended state or federal grant funds this year,
- Your gross receipts exceed your state’s threshold for requiring an audit,
- Your organization’s by-laws require an audit.
If you determine that an audit is not legally (or otherwise) required, there are still several services that your CPA can perform to provide varying levels of assurance regarding the reliability of your financial statements. These services, such as a review, compilation, or other agreed-upon procedures, provide a lower level of assurance than an audit and can usually be performed for a lower fee. In addition, these services generally require less involvement from your staff, therefore saving time as well.
While an audit certainly provides a high level of scrutiny and assurance, there are other alternative services that should be explored before making your decision. You will want to analyze your needs from a cost / benefit perspective in light of the size of your entity, users of your financial statements, and your plans for future financing (if any), to determine the best service for your business or organization.