Not-for-profit organizations (NPOs) have different legal obligations than for-profit organizations regarding financial statements and reporting. Not-for-profit organizations have been incorporated under the Canada Not-for-profit Corporations Act. They are also referred to as soliciting corporations. This means the NPO has received over $10,000 in a single financial year through donations, gifts, legacies or government grants. Since soliciting corporations receive public funds, they must meet specific financial reporting and audit requirements to ensure sufficient transparency and accountability for that income.
The reporting requirements of not-for-profit organizations depend on the corporation’s gross annual revenues:
- $50,000 or less annual revenue: a review engagement is required, but board members may pass an ordinary resolution to require an audit instead.
- $50,000 and up to $250,000 annual revenue: must conduct an audit, but board members can pass a special resolution to require a review engagement instead.
- More than $250,000 annual revenue: must conduct an audit.
Grant funders, government agencies, and its board of directors can all request a not-for-profit audit or review, usually conducted by a Chartered Professional Accountant (CPA). The Government of Canada provides a more comprehensive overview of the legal requirements of not-for-profit organizations' audited financial statements and reviews on its website.
In short, understanding the difference between an audit and a review is crucial for Canadian non-profit organizations (NPOs) as it impacts financial transparency, regulatory compliance, and stakeholder trust.
Not-For-Profit Financial Reviews
What is a Financial Review?
A financial review is not as formal as an audit. It does not include testing the organization's controls; therefore, it is considerably less complex than an audit. An accountant prepares financial statements without expressing an opinion as to whether or not the financial statements are free of material misstatements.
Reporting and Outcomes
A financial review will ascertain whether or not the financial statements are credible, which is considered negative assurance. In other words, a financial review will provide only limited assurance that the financial information fairly represents the company's financial position and conforms to generally accepted accounting principles (GAAP). On the other hand, an audit can provide positive assurance—a conclusive opinion from the auditor—that the financial statements are in accordance with Canadian accounting standards for not-for-profit organizations.
To summarize, a review is a less intensive examination of financial statements than an audit that provides moderate assurance. The accountant performing the review assesses whether the financial statements are plausible and in accordance with accounting standards.
- Scope of Work: Involves inquiries and analytical procedures rather than detailed testing. The accountant may ask management questions and perform ratio analysis.
- Assurance Level: Provides limited assurance, indicating that nothing has come to the accountant's attention that causes them to believe the financial statements are materially misstated.
- Report Outcome: The accountant issues a conclusion rather than an opinion, stating limited assurance.
- Cost and Time Efficiency: Generally less costly and time-consuming than an audit due to the reduced scope of work.
What are the Benefits of a Financial Review?
A not-for-profit review will set your organization on the path to becoming audit-ready, demonstrating accountability and transparency to board members and key stakeholders. Financial reviews can also be helpful for a growing not-for-profit organization: a financial review conducted by an independent CPA can reassure prospective funders or grant providers that the organization takes its fiduciary duty seriously and that its reported financials are plausible.
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Not-For-Profit Financial Audits
What is a Financial Audit?
A financial audit demonstrates an organization’s financial integrity and is much more thorough than a review. In most cases, the audit results in a conclusive opinion— positive assurance—on the fairness of the not-for-profit’s financial statements after an independent examination by an objective third-party auditor. The purpose of an audit is to provide “reasonable assurance” (because absolute assurance is not possible) to the Board of Directors, Canadian Revenue Agency (CRA), and other key stakeholders that the audited financial statements are free of material misstatement and are in accordance with Canadian accounting standards for not-for-profit organizations.
First time not-for-profit audit? Not sure what to expect? Check out this article.
To summarize, an audit of a non-profit organization is a comprehensive examination of an organization's financial statements by an independent auditor. The goal is to provide a high level of assurance that the financial statements are free from material misstatement, whether due to fraud or error.
- Scope of Work: Involves detailed testing of financial transactions, verification of account balances, assessment of internal controls, and confirmation with third parties.
- Assurance Level: Provides reasonable assurance, the highest level possible. It does not provide absolute assurance because that is not possible.
- Report Outcome: The auditor expresses an opinion on whether the financial statements present a true and fair view in accordance with the GAAP.
- Regulatory Compliance: Often required by law or funding agreements, especially for larger NPOs or those receiving significant public funds.
Reporting and Outcomes
Not-for-profit audit reporting can be categorized into four different buckets:
- Unqualified Opinion: This is the optimal and most common audit result. This means that the auditor concluded that the audited financial statements fairly represent the organization’s financial position and internal control system without any identified exceptions. The financial statements are compliant with GAAP.
- Qualified Opinion: This suggests that the auditors found a few instances in which the NPO’s financial statements were not prepared in accordance with GAAP, but overall, no material misstatement of any financial position(s) was made.
- Adverse Opinion: This is when the auditor has concluded that the financial statements do not accurately represent the organization's financial performance and health. A material misstatement was found, or the organization is not conforming to GAAP overall.
- Disclaimer of Opinion: This means something prevented the auditor from forming an opinion, and therefore none was made.
Benefits of a Financial Audit
Independent non-profit audits demonstrate that the NPO is committed to financial transparency and accountability. The auditor's opinion allows the Board of Directors and other stakeholders to have confidence in the organization's finances and controls. The financial integrity that underlies a positive audit outcome can build donor trust, which is integral to a not-for-profit’s success. In some cases, audited financial statements, or similarly certified financial statements, are a requirement to be eligible for particular types of funding.
Roles and Responsibilities
The Board of Directors is usually responsible for hiring an external auditor and overseeing the audit process, including providing required documentation and ensuring no organizational barriers to success (for example, allowing access to the key personnel who will provide the audit evidence).
In larger organizations, the board will often designate or assign an Audit Committee — a task force or a standing committee appointed by the Board of Directors to provide accountability for the not-for-profit audit. Dedicated audit committees are often made up of independent, third-party members who are not employees of the organization and can provide unbiased oversight. Their only role is to oversee the independent audit process, allowing for faster decision-making and more focused attention.
Not-For-Profit Audit and Review Costs
The cost of a not-for-profit audit varies based on the organization's size. However, even a small non-profit can expect to pay around the $10,000 mark as the process involves significant resources, staff time and volunteer board member time. Traditionally, audits are conducted in-house; however, they can be performed remotely to cut costs. Reviews are typically half the cost of audits.
Unless a not-for-profit audit is mandated, it is a best practice to conduct a review as they are less expensive. Reviews provide transparency to stakeholders, funders, or donors, and they are often expected to be undertaken even when they are not mandated. In addition, reviews between mandated audits are a best practice to provide that added level of attention, detail and transparency.
Keep Your Books Up To Date
The key to a smooth audit or review is to have a reliable bookkeeping process that allows your organization to keep their records organized throughout the year. At Enkel, we work with not-for-profit organizations across Canada to manage their monthly bookkeeping and keep their records up to date at all times. We also support our clients with any audit enquiries or custom reporting needs.
For more information on how we can help, visit our website.
