Question

As an auditor, you are asked to audit a small non-profit (cash basis). Present what you would do to audit the cash records of a small non-profit audit client. Explain the steps to audit the company and why those steps are important.

Answer 1

Non profit organizations provide services to the public utilizing the funds contributed from donors. Because of their reliability on donors and their tax benefits, non profit organizations are held accountable to their donors and the federal government.

Steps to audit the non - profit company :

• Analyzing Accounting Practices - Auditors pay special attention to accounting practices of a non profit company. As these are tax exempt entities, independent auditors carefully analyze the accounting system of non profit companies.
• System of Internal Controls - An auditor will analyze the company's system of internal controls. Internal controls are those policies which are developed to protect the organization's assets and financial records from burglary, theft etc. An auditor is also empowered to review the results of internal controls by comparing relative data, such as the number of identified accounting errors, against previous periods.
• Analyzing Contributions - An auditor is bound to analyze how the contributions are used through computation of each type of income distribution. The next step is to compare these results with the results of other organizations operating at the same level . He/She will also look into the salary levels of top managers, as well as expenses for bonus pay, vacations and other incentives to ensure that money is being spent wisely. If the organization holds any type of investments, it is the responsibility of an auditor to look into its history records data and possible future returns arising out of such investments to make sure that the invested funds are spent wisely.
• Financial Reporting - Non- profit organizations regularly generate internal reports and financial statements to keep managers and other parties informed about the financial situation of the company.. An auditor will analyze an organization's management information system (it is a system that facilitates sharing of financial information and communication), and review such internal reports. An audit shall review the reporting procedures of the company to make sure that reports which are generated are highly accurate and submitted on a timely based manner.