What is an audit?

What, indeed, is an audit? Why does it make your clients so nervous? Regarding the first question, here’s a detailed answer from a massive accounting firm, Price Waterhouse Cooper, which came my way via a board treasurer (and for some reason is located on PWC’s Middle East page, proving once again that bookkeeping unites us all). In a nutshell:

An audit is the examination of the financial report of an organisation—as presented in the annual report—by someone independent of that organisation. The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.

The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organisation at a given date . . . When examining the financial report, auditors must follow auditing standards which are set by a government body. Once auditors have completed their work, they write an audit report, explaining what they have done and giving an opinion drawn from their work.

PWC adds a useful list of what auditors don’t and can’t do: for example, they don’t pass judgement on an organization’s activities or strategic decisions, and despite their air of authority they can’t predict the future.

What about that second question? Cathy Keeps Books has found that different clients have different anxieties about getting audited. In a tiny organzation, the executive director may feel that her fiscal stewardship is being judged on criteria she doesn’t fully understand (what’s the whole deal with restricted funds?). In a larger organization, the office manager may chafe at all the extra work he has to do to satisfy the auditors’ esoteric-seeming requests. Nearly everybody resents the cost. But a nonprofit, being publically funded, has an obligation to the public to keep accurate and transparent finances. And it’s your responsibility as a bookkeeper to see that that obligation is met.