Non-Profit Accounting and Auditing Overview

Basis of Accounting and Reporting

Non-profit organizations use the accrual basis of accounting for external reporting. The Financial Accounting Standards Board (FASB) requires six totals on balance sheets and an external report on donor-imposed restrictions. Expenses incurred should be reported as a decrease in unrestricted net assets, while revenues should be reported as an increase in one of three categories. Expenses are reported by function. An exchange transaction is a reciprocal transfer. Pledge revenue contingent upon raising a matching amount should be recognized when the matching funds have been raised.

FASB 116

Items are held for public exhibition, protected, subject to organizational policy, and require specialized skills. Services create or enhance nonfinancial assets.

Financial Ratios

• Fundraising Ratio: Measures fundraising expenses as a percentage of total related revenues.
• Program Ratio: Compares expenses devoted to mission-oriented programs to the total of fundraising and administrative costs.
• Contributions and Grants Ratio: Indicates revenues from contributions and grants as a percentage of total revenues, reflecting riskiness.
• Revenue from Services Ratio: Indicates revenues from fees and other charges for goods and services as a percentage of total revenues.

Auditing Standards and Practices

These topics are not covered in GAO sampling standards or GAGAS planning.

Cognizant Agency and Single Audit Act

A “cognizant agency” can be either an employee of a federal agency or of an independent accounting firm. The Single Audit Act of 1984 was passed to eliminate the costly practice of requiring separate audits for each federal program in which an organization participated. (True)

Performance Audits

Performance audits are sometimes referred to as “operational” audits. (True) They do not need to be conducted by independent auditors. (False)

Attestation and Audit Reports

To “attest” means to confirm that something is true, correct, or genuine. (True) An auditor of any governmental or not-for-profit organization that receives federal monies must include a report on the entity’s internal control structure within their audit report or provide a cross-reference to that report. (True) The AICPA did not originally establish auditing standards for federal single audits. (False)

GAO Guidelines and Single Audit Process

Newly installed computer programs are one indicator that a government’s participation in a federal program may be at high risk of noncompliance. (True) GAO independence guidelines do not permit CPA firms to determine the estimated useful lives of their clients’ assets. (False) Under GAO (GAGAS) standards, independent auditors are not required to report all instances of fraud or illegal acts that they discover during the course of an audit. (False) Regarding the single audit process, required supplemental information is not considered to be within the scope of the audit. (False)