NFP - Reflecting on audit findings

As a specialised accounting firm working with not-for-profit (NFP) organisations, we understand the complexities of preparing for, undergoing, and addressing audit findings. The process can be challenging, whether ensuring compliance with regulations or aligning with specific accounting standards, mainly when unfavourable or unexpected issues arise.

In this article, we explore issues that have been observed among clients who have completed their 2024 audits including lack of supporting documentation, misclassification of income, cyber security vulnerabilities, management of annual leave balances, and assessment of bad and doubtful debts.

One of the most prevalent issues that surfaces during audits is the absence of adequate supporting documentation and well-defined internal policies. NFP organisations often deal with various income sources, such as donations, grants, and government funding. Without proper documentation and internal control policies, it becomes challenging to provide the necessary evidence to substantiate income and expenses.

We recommend and assist organisations in establishing a rigorous system for maintaining financial records, with clear policies and procedures for documenting transactions. This includes regularly reconciling bank accounts, tools for capturing receipts and invoices, and ensuring that each transaction is appropriately classified. Providing detailed internal policies that guide how documentation is managed, reviewed, and filed can significantly improve audit results.

Accurately reporting income can be complex, particularly when distinguishing between donations and grants. This distinction is critical because it determines whether revenue is recognised under AASB 15 (Revenue from Contracts with Customers) or AASB 1058 (Income of Not-for-Profit Entities).

AASB 15 applies when an organisation receives income from a contract where specific performance obligations must be fulfilled before the revenue can be recognised. For instance, grant income that requires the completion of a specific project or service is recognised under AASB 15.

AASB 1058, on the other hand, is used for donations or contributions that do not have enforceable performance obligations, allowing for revenue recognition upon receipt of the income.

Income misclassification can lead to inaccurate financial reporting and significant audit adjustments. Organisations should work closely with their accountants to ensure sufficient review, support, and documentation of decisions to recognise revenue under AASB 15 v AASB  1058.

With the increasing prevalence of cybercrime, NFPs are not immune to the threat of online fraud, data breaches, and phishing attacks. However, many organisations need to gain awareness of the risks and implement adequate policies and procedures to guard against cybercrime. This poses a significant risk when sensitive donor information or financial data is compromised.

Increasingly, we have found that auditors are looking for NFPs to provide detailed responses to queries on cyber security, business continuity and vulnerability management, identification policies and procedures, access management as well as the usual fraud protection and detection. The inability to provide clear and robust responses to these questions often leads to issues being noted on audit reports.

We strongly advise NFPs to adopt cyber security policies and procedures that protect against these risks. This includes training staff to recognise phishing attempts, implementing multi-factor authentication, and regularly reviewing IT systems for vulnerabilities. Addressing these risks proactively not only protects the organisation but also ensures compliance with legal and ethical obligations.

Another issue we often encounter is the accumulation of high annual leave balances among staff. While this might not seem directly related to financial auditing, large balances of untaken leave represent a financial liability on the organisation’s balance sheet. Failure to manage this liability properly can skew the organisation’s financial position and impact the audit outcome.

NFPs should implement clear policies that encourage employees to take annual leave regularly and proactively manage leave accruals. This can help reduce the financial burden of untaken leave and improve workforce well-being, leading to higher productivity.

For many NFPs, bad and doubtful debts can pose significant risks to financial stability. These debts arise when it becomes clear that the organisation is unlikely to receive payment for outstanding invoices or loans. While some organisations may hesitate to write off debts, an accurate assessment of bad and doubtful debts is essential for a fair representation of the financial position.

NFPs should work closely with their accounting team to regularly assess receivables and determine whether debts should be written off. This is not just a matter of regulatory compliance but also good financial practice, helping to provide a realistic view of the organisation’s cash flow and financial health.

The findings of an audit can be daunting, particularly for NFP organisations that often face unique financial challenges. Often, an NFP and its Board may interpret these findings as failings, and this can sometimes be the case if they are significant or unchanged year on year. The reality is that audit findings more often identify weaknesses that have not had a significant impact on the organisation’s financial position but can be if ignored.

By addressing these key areas— NFPs can improve their future audit readiness and ensure compliance with relevant accounting standards. Our firm specialises in helping not-for-profit organisations navigate these complexities, ensuring they meet their obligations while maintaining transparency and accountability.

Accounting For Good is a specialist accounting firm working with the Not-for-Profit sector. Our team has the necessary expertise and experience to help NFP organisations navigate ACNC compliance, manage tax concessions, and plan for sustainable growth. We’re here to help you achieve your mission.

We work with organisation with a turnover of $1M to $20M. Contact us today for a free consultation and discover how we can support your organisation’s financial health, so you can focus on what matters most—making a difference in your community.