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Year-end audits for nonprofit organizations are an independent examination of their financial statements and records. They are there to ensure that the organization’s financial statements accurately reflect its financial position and performance, in accordance with generally accepted accounting principles. Year-end audits can also be required by funders, lenders, or regulatory bodies, and are believed to be a best practice for good governance.

During the audit process, auditors review the organization’s financial records, internal controls, and compliance with laws and regulations. Auditors also assess the accuracy of the financial statements and provide an opinion on their reliability. Audit results are usually communicated in a report that is made available to stakeholders including members, donors, and government agencies.

Why does your organization need a year-end audit?

In Canada, most nonprofit organizations are required to have a year-end audit if they meet certain criteria including annual revenues above a certain threshold, or if funders and/or governing legislation make it mandatory. Along with ensuring compliance with the relevant accounting standards, the audit also helps to ensure that the organization’s resources are being effectively used, and that the organization is adhering to its mission and goals. Often, the audited financials are made available on an organization’s website where a wide variety of stakeholders can access them.    

Current audit trends

At Enkel, we’ve identified four audit trends that are emerging this year:

• Audit fees are increasing due to the rising costs of doing business and changes in auditing standards that are impacting the scope of work,
• Personnel shortages that are leading to delays in getting the audit started and completed,
• Unexpected and additional billing due to organizations’ lack of preparedness for the audit,
• A limited tolerance from auditors for changes once the audit process begins.

How can you better prepare for audits?

It all begins with good bookkeeping and record keeping. When an organization has been diligent and consistent in managing its finances, there is far greater trust in the numbers, which means less “adjusting”, scrutiny and testing by the auditors. On top of that, accurate reporting translates into lower audit fees and less time required to complete the process, and significantly reduces common surprises including management and board members having to adjust plans and expectations due to inaccurate assumptions along the way.

The importance of year-end reporting

Not only is year-end reporting a GAAP requirement, but it’s important because stakeholders and funders often require it, and Board members need “actual” results for the next year’s forecasting and budgeting process. On top of that, donors need tax receipts and the reporting is required for tax filing purposes. Below is a year-end checklist for nonprofits that should be considered so that critical steps aren’t missed:

• Develop deadlines for closing the year
• Compile all documents: digital and/or hard copy
• Keep transactions up-to-date in accounting software
• Issue tax receipts to donors
• Know if you are getting audited, review engagement or notice to reader
• Confirm your audit plan and timeline with your accounting firm
• Brief the team on the audit including their responsibilities
• Share draft audit financials with leadership team and Board
• Finalize financial statements to prepare required filings
• Prepare financial summaries to be included in the annual report

Board reporting and governance

Board reporting is an important part of nonprofit governance. It gives the board of directors regular, timely, and relevant information about the organization’s operations, financial performance, and risk management. This information enables the board to fulfill its fiduciary responsibilities, make informed decisions, and provide oversight to the organization’s management.

With proper reporting, there is better transparency amongst stakeholders, decision-making is easier, governance is more accountable, and it’s easier to manage risk. Important Board reports include:

• Annual Financial Statements
• Auditor Reports (Audit plan and results)
• Budget Report
• Cash Flow Forecast
• Financial Forecast

Changes in 2023

The good news is that in 2023, there haven’t been too many changes to accounting standards so your year-end audit process may look very similar to last year. This year, the changes to the Canadian accounting standards for nonprofit organizations include:

• New Section 4449, Combinations by Not-For-Profit Organizations, effective for fiscal years beginning on or after January 1, 2022.
• Scope of Section 4434, Intangible Assets Held by Not-For-Profit Organizations has been amended to include new AcG-20, Customer’s Accounting for Cloud Computing Arrangements in Part II of the CPA Canada Handbook, effective for fiscal years beginning on or after January 1, 2024.

Why does your organization need a year-end audit?

Simply put, audits are often required by jurisdiction (Canadian Not-for-Profit Corporations Act), bylaws, or contractual arrangements (e.g., funding or lending agreements). Audits help nonprofits demonstrate integrity in the numbers used for decision-making, and highlight appropriate stewardship of funds – proving to donors and funders that funds were spent as intended.

What to expect during your audit

Before your audit begins, there are a number of things you should do to better prepare for the process. From setting up a finance committee or BoD meeting, to meeting the auditors for a pre-audit meeting to set and review expectations, communication to stakeholders is paramount. Beyond that, it’s important to make sure your books are accurate and up-to-date, gather all the required documentation, and clearly document the organization’s policies, processes and internal controls.

During your audit, you want to frequently check-in and communicate with the audit field staff, staying on top of updates, outstanding items, and audit findings. You should also communicate regularly with your finance committee on any notable issues/matters.

When the audit is complete, it is always best practice to meet with both your finance committee and/or Board of Directors to review the findings, and to document everything in a “Management Recommendation” letter.

Conclusion

The audit process required for most Canadian nonprofits doesn’t have to hurt. With accurate, timely bookkeeping, clear communication between all stakeholders, and proper document preparation, the process can run smoothly, with no surprises or hiccups. For more detailed information, including a dedicated Q&A session, don’t forget to register for the webinar here.

Omar Visram is the CEO and Co-Founder of Enkel, a Canadian bookkeeping and accounting service provider. He is a qualified Chartered Professional Accountant and spent several years in audit and tax with a Big Four accounting firm prior to starting Enkel. He is passionate about supporting the Not-for-Profit community and works closely with the NPO client-base at Enkel.