The American Institute of Certified Public Accountants (AICPA) Auditing Standards Board’s latest standards are kicking in, and many nonprofits will notice resulting changes to the format and content of auditor reports on their organizations’ financial statements. The updates are intended to make auditor reports more meaningful and transparent for the users of financial statements, including potential funding sources.
The new rules generally are effective for audits of financial statements covering periods ending on or after December 15, 2021. Here’s what you need to know about some of the changes most likely to matter to nonprofits.
Your auditor’s opinion
The Opinion section of an auditor’s report states whether an organization’s financial statements are reliable. It’s generally regarded by users as the most critical component of the report.
In the past, the auditor’s opinion didn’t have a prominent position in the report. Now, it must be placed at the beginning of the report. Also, the opinion will now be immediately followed by the Basis for Opinion section. Previously, this section was included only in reports with modified opinions. Now it’s required for all auditor reports.
Key audit matters
Perhaps one of the most significant changes to the report is the introduction of optional key audit matters (KAMs). KAMs are similar to the “critical audit matters” that auditors must include in their reports on audits of public companies. The AICPA standards define them as those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. They’re selected from matters communicated with those charged with governance (typically, the board of directors or the audit committee).
KAMs generally require significant auditor attention. For example, they include:
- Areas with a higher assessed risk of material misstatement,
- Areas involving significant management judgment (for example, accounting estimates or the information included in disclosures), and
- Significant events or transactions during the period.
Note, though, that KAMs are addressed in the context of the audit of the financial statements as a whole and in forming the auditor’s opinion about the reliability of the financial statements. The auditor won’t provide a separate opinion on these matters.
As noted above, KAMs are optional. Your nonprofit’s leadership and your auditor should discuss in advance whether to include KAMs in the auditor’s report or if the auditor should simply provide a standard report.
The new standard addresses how the KAMs must be reported. Specifically, for each KAM, the auditor should describe the primary reason for the KAM designation, how the KAM was addressed in the audit, and the financial statement accounts or disclosures related to the KAM. This will produce a more customized report, which your users of financial statements may favor over the boilerplate reports they’ve often seen in the past.
At first glance, your organization might find it preferable to skip the KAMs, but you may want to opt in. Including them won’t change the auditor’s opinion, and it might even give you a competitive advantage when pursuing grants and other funding. In time, funders may come to expect KAMs in auditor reports. It might be a good idea to get ahead of the curve now.
The new standards mean that you should expect revisions to your auditor’s standard engagement letter. Among other things, this letter should expressly address whether the auditor’s report includes KAMs. Contact us to learn if reporting KAMs in your next audit opinion is right for your organization.