Nonprofit Audits vs. Reviews: Key Differences Your Organization Should Know About

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Nonprofit Audits vs. Reviews: Key Differences Your Organization Should Know About

When it comes to financial statements and audit requirements, not-for-profit organizations have different legal obligations compared to for-profit organizations. Not-for-profit organizations are those that have been incorporated under the Canada Not-for-profit Corporations Act. They are also referred to as soliciting corporations. This means the organization has received over $10,000 in a single financial year in the form of donations, gifts, legacies or government grants. Since soliciting corporations receive public funds, they must meet specific financial reporting and audit requirements to ensure sufficient transparency and accountability for that income. 

The reporting requirements of not-for-profit organizations depend on the corporation’s gross annual revenues:

  • $50,000 or less annual revenue: a review engagement is required but board members may pass an ordinary resolution to require an audit instead.
  • $50,000 and up to $250,000 annual revenue: must conduct an audit, but board members can pass a special resolution to require a review engagement instead.
  • More than $250,000 annual revenue: must conduct an audit.

Grant funders, government agencies, board of directors, etc. can all request a not-for-profit audit or review, which would usually be conducted by a Chartered Professional Accountant (CPA). The Government of Canada provides a more comprehensive overview of the legal requirements of not-for-profit organizations' audited financial statements and reviews on its website

Not-For-Profit Financial Reviews 

What is a Financial Review? 

A financial review is not as formal as an audit. It does not include testing of the organization's controls, therefore it is considerably less complex than an audit. An accountant is engaged to prepare financial statements without expressing an opinion as to whether or not the financial statements are free of material misstatements. 

Qualified outsourced bookkeepers such as those at Enkel, provide accurate bookkeeping and month-end reporting services throughout the year and can help an organization get audit or review ready, reducing the time it takes to prepare for an audit when one is requested. 

Reporting and Outcomes 

A financial review will ascertain whether or not the financial statements are credible, which is considered negative assurance. In other words, a financial review will provide only limited assurance that the financial information is a fair representation of the company's financial position and conforms to generally accepted accounting principles (GAAP). On the other hand, an audit can provide positive assurance—a conclusive opinion from the auditorthat the financial statements are in accordance with Canadian accounting standards for not-for-profit organizations.

What are the Benefits of a Financial Review?

A not-for-profit review will set your organization on the path to becoming audit-ready, demonstrating accountability and transparency to the board members and key stakeholders. The financial review can also prove incredibly useful for a growing not-for-profit organization. 

A financial review, conducted by an independent CPA, can reassure prospective funders or grant providers that the organization takes its fiduciary duty seriously and that the numbers are plausible. 

Not-For-Profit Financial Audits 

What is a Financial Audit?  

A financial audit demonstrates an organization’s financial integrity and is much more thorough than a review. In most cases, the audit results in a conclusive opinion— positive assurance—on the fairness of the not-for-profit’s financial statements after an independent examination by an objective third-party auditor. The purpose of an audit is to provide “reasonable assurance” (because absolute assurance is not possible) to the Board of Directors, Canadian Revenue Agency (CRA), and other key stakeholders that the audited financial statements are free of material misstatement and are in accordance with Canadian accounting standards for not-for-profit organizations. 

First time not-for-profit audit? Not sure what to expect? Check out this article.

Reporting and Outcomes 

Not-for-profit audit reporting can be categorized into 4 different buckets:

  • Unqualified Opinion: This is the optimal, and most common audit result and means the auditor concluded that the audited financial statements fairly represent the organization’s financial position and internal control system without any identified exceptions and that they are compliant with GAAP. 
  • Qualified Opinion: This suggests that the auditors found a few instances that the not-for-profit’s financial statements were not prepared in accordance with GAAP, but overall there is not a material misstatement of any financial position(s).
  • Adverse Opinion: This is when the auditor has concluded that the financial statements are not an accurate representation of the organization's financial performance and health. A material misstatement was found, or overall the organization is not conforming to GAAP. 
  • Disclaimer of Opinion: This means something prevented the auditor from forming an opinion, therefore none was made. 

What are the Benefits of a Financial Audit?

Independent not-for-profit audits demonstrate that the organization is committed to financial transparency and accountability. The auditor's opinion allows the Board of Directors and other stakeholders to have confidence in the organization's finances and controls, and the financial integrity that results from a positive audit outcome can build donor trust, which is integral to a not-for-profit’s success. In some cases, audited financial statements, or similarly certified financial statements, are a requirement to be eligible for particular types of funding. 

Roles and Responsibilities

The Board of Directors is usually responsible for hiring an external auditor and overseeing the audit process, including helping to source required documentation and ensuring there are no corporate barriers to success (for example, allowing access to the key personnel who will provide the audit evidence). 

In larger organizations, the board will often designate or assign an Audit Committee — a task force or a standing committee appointed by the Board of Directors to provide accountability for the not-for-profit audit. Dedicated audit committees are often made up of independent, third-party members who are not employees of the organization and can provide unbiased oversight. Their only role is to oversee the independent audit process, allowing for faster decision-making and more focused attention.  

Not-For-Profit Audit and Review Costs

The cost of a not-for-profit audit varies based on the size of the organization, but even for a small nonprofit, expect to pay around the $10,000 mark as the process involves significant resources, staff time and volunteer board member time. Traditionally, audits are conducted in-house, however, they can be performed remotely which can cut costs. Reviews are typically half the cost of audits.

Unless a not-for-profit audit is mandated—and a review cannot be substituted in its stead—it would be considered a best practice to conduct a review as they come at a lower cost. Reviews provide transparency to stakeholders, funders or donors, and there is often an expectation for them to be conducted even when not mandated. In addition, reviews in between mandated audits are a best practice to provide that added level of attention, detail and transparency. 

Keep Your Books Up To Date

The key to a smooth audit or review is to have a reliable bookkeeping process that allows your organization to keep their records organized throughout the year. At Enkel, we work with not-for-profit organizations across Canada to manage their monthly bookkeeping and keep their records up to date at all times. We also support our clients with any audit enquiries or custom reporting needs.

For more information on how we can help, visit our website

Gracia Chua
About Gracia Chua
Gracia Chua is the Marketing Specialist at Enkel Backoffice Solutions, a Vancouver based accounting firm that provides day-to-day bookkeeping services for small to medium-sized businesses and non-profit organizations.