The Audit Explained

by Mark Potts, CPA, PFS

The term "audit" is often used by not-for-profit agencies, government funded businesses, and the financial community in a generic sense. However, as it applies to work performed by an independent public accounting firm, the term is specific with a defined level of accountability. In an audit, the accounting firm opines as to whether an entity's financial statements are free of material misstatement.    

Attest and assurance services encompass audits, reviews, and compilations. These three services form a continuum with an audit providing the highest level of assurance and compilations with the lowest level. A basic definition of each service helps to explain the differences.

• Audit - an examination of evidence supporting the amounts and disclosures in the financial statements as a whole conducted in accordance with auditing standards generally accepted in the United States of America.
• Review - inquiries of an entity's personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit.
• Compilation - a presentation, in the form of financial statements, of information that is provided by management, without an audit or review.

An example of procedures performed in an audit, but not other assurance services, include: reviewing, understanding and assessing internal controls; assessing potential for fraud; test of transactions and accounting records; observation of physical assets; and, direct confirmation with financial institutions, customers, creditors, and other supporting third party documentation.

Whether an entity is required to have an audit can be specified by a loan document from a financial institution, a government grant contract, the State of Wisconsin based on the level of annual public support, or governing documents of the organization. In other cases it can be a discretionary decision based on management and board's governance styles, volume or types of transactions, concern over lack of controls on bookkeeping and financial reporting, or potential fraud or misrepresentation.

An audit's purpose is not to search for or uncover fraudulent activity, although it may be uncovered during the course of the audit procedures. If there are concerns about bookkeeping and accounting controls or potential fraud, it may be better served by having an Internal Controls review or alternative procedures performed rather than an audit.  

Since each of the services discussed has different specified objectives, an accounting firm will use different procedures for each type of engagement. As the level of service increases so does the amount of work involved and the corresponding cost. An entity's discussion with the accounting firm prior to the start of any engagement will help match the user's need with the most cost beneficial service.

For more information on WKMR Attest and Assurance services, give us a call.

At Winter, Kloman, Moter & Repp S.C., our not-for-profit team provides quality audit, accounting, tax, and consulting services to a variety of not-for-profit agencies, government funded businesses, private foundations, and assorted charitable organizations. Our experienced team has helped many not-for-profit organizations throughout Southeastern Wisconsin grow and thrive including:

• Human Service Agencies
• Cultural & Arts Organizations
• Charitable & Religious Organizations
• Educational & Day Care Institutions
• Professional & Trade Associations
• Assisted Living Facilities
• HUD/WHEDA Housing Projects
• Government-funded For-Profit Businesses

We concentrate on helping you best manage public or donated funds, analyzing how to get the most from your resources and helping you implement your plans to stretch every dollar. Our team of professionals understands your complex financial reporting needs, and will help you to accurately report your finances in an understandable way. We provide the independent audit and accounting services required by many of your funding sources by taking a value-added approach, implementing ever-changing tax reporting requirements, providing information technology consulting, and working with every aspect of your organization to support your success.