Audit Approach For NPO

Question 1

Audit Approach

Answer 1

Auditing not-for-profit organizations (NFPOs) requires recognizing their unique features while maintaining the overall structure of a standard audit. Here are the main points to consider:

1. Planning:
   
   • Objectives and Scope: Define the audit’s objectives and scope.
   • Local Regulations: Consider any applicable local regulations.
   • Operating Environment: Understand the environment in which the NFPO operates.
   • Financial Statements and Audit Opinion: Determine the form and content of the final financial statements and the audit opinion.
   • Key Audit Areas and Risk: Identify key audit areas and assess risks.
2. Risk Analysis:
   
   • Inherent Risk: Reflects the nature of the entity’s activities and environment.
   • Control Risk: Assess internal controls, especially over cash collection and payments, which are critical for NFPOs like charities.
   • Detection Risk: The risk that the auditor will fail to identify material errors or misstatements.
3. Internal Control:
   
   • Segregation of Duties: Important but may be challenging in small NFPOs.
   • Authorization of Spending: Ensure proper authorization processes.
   • Cash Controls: Implement strong controls over cash handling.
   • Income Controls: Monitor donations, cash collections, membership fees, and grants.
   • Use of Funds: Ensure funds are used only for authorized purposes.
4. Audit Evidence:
   
   • Substantive Testing: Often necessary in small NFPOs due to weak internal controls.
   • Key Areas: Focus on the completeness of transactions, assets, liabilities, and the possibility of fund misuse.
   • Analytical Procedures: Use to understand reported figures.
   • Review of Financial Statements: Assess the appropriateness of accounting policies.
5. Reporting:
   
   • Legal Requirements: Follow standard external audit report formats if required by law.
   • Voluntary Audits: Tailor the report to reflect the agreed audit objectives, following ISA 700 guidelines.

1. Cash Handling: Significant in small NFPOs with limited controls.
2. Income Risk: High risk where money is donated or raised informally.
3. Scope Limitations: Potential limitations if obtaining audit evidence is challenging.
4. Unpredictable Income: Lack of predictable income or clear relationships between expenditure and income can complicate analytical reviews.
5. Restricted Funds: Ensure funds are used for their intended purposes.
6. Key Statistics Sensitivity: Pay attention to statistics like the proportion of revenue used for administration, especially for charities.

Scenario: A small charity organization that provides educational services to underprivileged children.

Audit Focus:
1. Planning: Define the audit scope, considering local regulations and the charity’s operating environment.
2. Risk Analysis: Assess inherent, control, and detection risks, focusing on cash handling and donations.
3. Internal Control: Evaluate controls over cash, donations, and spending authorization.
4. Audit Evidence: Use substantive testing to verify the completeness of transactions and the proper use of funds.
5. Reporting: Prepare a report that meets legal requirements or reflects the agreed audit objectives.

By understanding these principles, auditors can effectively tailor their approach to the unique needs of NFPOs, ensuring a thorough and effective audit process. If you have any further questions or need more detailed examples, feel free to ask!