Non Profits Flashcards
Financial statements
A statement of financial activities – showing income and expenditure similar to a statement of profit or loss. As the organisation does not exist to make a profit, any additional income over expenditure is known as a surplus and any expenditure in excess of income is a deficit.
A balance sheet – showing assets and liabilities, the same as a statement of financial position.
A cash flow statement.
Notes to the financial statements.
Control risk
Some NFP entities, particularly small charities, may have weaker control systems due to:
• being controlled by trustees who usually only work on a part time basis and are volunteers. They may not devote sufficient time to adequately oversee the strategic direction of the organisation.
• a lack of segregation of duties, as the organisation may not employ many staff in order to keep overheads down.
• the use of volunteers, who are likely to be unqualified and have little awareness of the importance of controls.
• the use of less formalised systems and controls.
Income
With many charities, much of the income received is by way of donation. Some of these transactions will not be accompanied by invoices, orders or despatch notes. For cash donations in particular there is a greater risk of theft.
NFPs may apply for grant income which will only be provided if certain criteria are met otherwise the money may have to be repaid. There is a risk that grant income may have to be repaid if the organisation does not use the money for its intended purpose.
Restricted funds
Some donations are given with clauses stating the money must be used for a particular reason. For example, money may be donated to a hospital for them to purchase a specific piece of equipment or to be used by a specific department. These restricted funds must be shown separately in the balance sheet and the auditor must review donations to ensure that restricted funds are shown as such.
Going concern
Assessing the going concern status of a NFP entity may also be more difficult, particularly for charities who are reliant on voluntary donations. Many issues, such as the state of the economy, could impact on their ability to generate income in the short term. Trends can also have an effect. For example charities raising money for medical research such as cancer and heart disease are seeing higher numbers of donations whereas charities such as animal protection are seeing a decline in income.
Auditor reporting responsibility
If sufficient appropriate evidence is not obtained with respect to the above matters as well as the usual risks of material misstatement faced by any organisation, the auditor will have to modify the auditor’s report.
Quite often, the scope of the external audit of a NFP is much larger than that for a company.
Auditors of NFPs may be required to perform additional assignments such as:
Value for money audits – assessing whether the organisation is getting the most out of the money spent. These are discussed in more detail in the chapter ‘Internal audit’.
Regularity audits – ensuring the expenditure of the organisation is in accordance with the regulations/legislation governing it.
Performance indicators – auditing the targets of the organisation that have to be reported to stakeholders such as waiting times in an A&E department.
