Reviewing Financial Statements
Okay, so you are a director on the board of a non-profit organisation considering whether to sign off the accounts, or you may be a member at the AGM, and you are looking at the financial statements of the organisation and not sure what they mean. What questions should you ask of the auditor?
The Audit Report
Is the Audit Report “unqualified”?
This means the auditor has not placed any qualifications, or disclaimers, in the audit report, such as “except for etc. Being unqualified means the audit report is ‘clean’. It means in the opinion of the auditor the information in the financial statements fairly reflects the financial performance and position of the organisation.
Was there a Management Letter issued?
A management letter provides the Board of Directors with a listing of issues the auditor felt necessary to bring to the attention of the Board. If there are no issues the management letter should state, there are no issues.
Obviously, a member of the Board is privy to this correspondence. However, there is no reason why a member of the organisation can’t ask if a management letter was received and what, if any, issues were raised. It is then up to the Board whether they wish to respond.
The financial position of the organisation is given in the Balance Sheet, sometimes entitled Statement of Financial Position. The balance sheet is a statement of the financial worth of all that is owned and owed by the organisation on the date of the statement (typically the date of the end of the financial year, say 30 June or 31 December).
Is there enough cash to cover the immediate debts?
Compare the value of cash and bank to the current liabilities.
Are there enough assets to cover all the liabilities?
Compare the current assets and the total assets to the total liabilities.
How self-sufficient are we?
Compare the value of cash to operating costs. The auditor should be able to work out in terms or weeks how long your cash would last if no income were to come in.
Are all tax liabilities paid up to-date?
Review the balance sheet to see what, if any, tax liabilities (GST, PAYG), are owing.
Are the provisions sufficient to cover employee entitlements?
Review the balance sheet to see how much, if any, provisions have been raised for employee entitlements such as annual leave, holiday leave, redundancy leave and maternity leave. If so, are the amounts reasonable. The auditor should have a good idea.
Have any contingencies been brought to account?
These may not necessarily have been brought to account in the balance sheet, however there may be a Note in the financial statements discussing this point. A contingency may be noted due to a legal issue, or a matter which may or may not affect the organisation in the future. Ask the Auditor. In this case the Auditor may refer to the Board who should be more conversant with the issue.
The financial performance of the organisation is detailed in the Profit & Loss Statement, sometimes called the Income & Expenditure Statement, or the Statement of Financial Performance. This statement reflects the income earned, not necessarily received, and the expenditure incurred, not necessarily paid, during the course of the year.
The Income & Expenditure Statement will also show if a Surplus (Profit) or Deficit (Loss) was made during the year.
Review the various line items in the Income & Expenditure Statement for reasonableness. If they don’t appear reasonable ask the question.
It should be noted that the organisation should be wanting to make a Surplus. A Surplus, or Profit, is not a dirty word. It allows for the organisation to grow and to allow a flexibility within the organisation to explore efficiency, productivity options, and alternative avenues of success.
So, if an organisation were to make a loss, ask whether this is sustainable. If a profit, what will the organisation be doing with the additional funds.