This article is part of the continuing series concerning nonprofit fiscal audits.
Auditors are prepared to create what they call a “Letter of Engagement” when contracting with clients. It may be basically a form letter with changes pertinent to each client. I found the Letters of Engagement did not spell out enough details for my satisfaction. Therefore when we sent out a Request for Proposal (RFP) to auditors, I included a copy of a draft agreement that we would be using. Frequently we developed cross references to each document, our Agreement and their Letter of Engagement after working out all contradictory sections.
Here is a sample agreement and a list of resources to help you prepare for the audit agreement or letter of engagement. It is offered to provide issues for consideration. I am not suggesting that all auditors will be happy if you were to use this sample – which I do not recommend.
1. This Agreement, between NPO XXX (the Organization), 111 New Street, Anywhere NY 00000-0000 and (Name of Audit Firm, the Contractor), 222 New Street, Anywhere, NY 00001-0001, shall be effective as of the date of execution below.
2. The Contractor will audit the financial records, accounts and statements of the Organization as of July 1, 2008 and for the year ended June 30, 2009.
3. The audit will be conducted in accordance with generally accepted government auditing standards (GAGAS); the standards for financial audits contained in Government Auditing Standards (GAS) issued by the Comptroller General of the United States; the AICPA guide, Audits of State and Local Government Units; OMB Circular A-122, Cost Principles for Non-Profit Organizations; and the Office of Management and Budget (OMB) Single Audit Circular A-133 (and any other applicable standards).
4. The audit will include tests of the accounting records and such other audit procedures as necessary to express an independent opinion on the statement of financial position and the related statements of activities, and cash flows, and Reports on Compliance with Laws and Regulations and the Internal Control Structure.
5. The Contractor will plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. Under the concept of reasonable assurance, the Contractor will exercise its judgement about the number of transactions to be examined and the areas to be tested. There is, therefore, a risk that material errors, irregularities or illegal acts, including fraud or defalcations may exist and not be detected. The Contractor will, however, advise immediately the Organization’s Audit Committee of any such matters that come to its attention. The Contractor’s responsibility is limited to the period covered by the audit and does not extend to matters that might arise during any later periods.
6. The Contractor, as part of the engagement, will request written representations from the Organizations attorneys. Prior to the conclusion of the audit, the Contractor will also request certain written representations from the Organization management about the financial statements and related matters. It is understood that these financial statements are the responsibility of management. The responsibility includes the maintenance of adequate records and related internal control structure policies and procedures, the selection and application of accounting principles, and the safeguarding of assets. The Contractor will advise management about the appropriate accounting principles and their application, and will assist in the preparation of the financial statements, if necessary.
7. The Contractor understands that it has the responsibility:
- to prepare the audit reports in accordance with the requirements and standards for financial audits contained in Government Auditing Standards (GAS) issued by the Comptroller General of the United States; the AICPA guide, Audits of State and Local Government Units; OMB Circular A-122, Cost Principles for Non-Profit Organizations; and the Office of Management and Budget (OMB) Single Audit Circular A-133 (and any other applicable standards).
- to prepare and electronically submit a Summary Report Form on Noncompliance with Laws and Regulations, Questioned Costs and Reportable Conditions;
- to maintain all records that are pertinent to this Agreement retain them for a period of three years (or other amount of time) following final payment against the Agreement. The Organization will assume the duties of maintain the records after that period. The records, while maintained by the Contractor, shall be subject at all reasonable times for inspection, review and audit by any Federal or state government official as authorized by law;
- to provide a special report to the NPO XXX on noncompliance in the event that the recipient fails to do so in accordance with the requirements of the Organization’s Audit Committee and any other entity required by an audit guide for recipients and auditors; and
- to notify NPO XXX’s Audit Committee within five (5) business days of its termination or cessation of services to the Organizatio
8. The Contractor will also prepare the Federal tax return (IRS Form 990) and State and Local returns (where required) with the management of NPO XXX for the year ending June 30, 2009. Organization will file the 990 and any other returns prepared by Contractor.
9. Entrance and exit conferences will be held with the Organization management and the Audit Committee or Board of Directors.
10. The Organization management responses to draft audit reports will be delivered to the Contractor for inclusion in the final reports, where practical.
11. The Contractor will deliver to the Organization:
- Three (3) copies of the draft audit reports no later than October 15, 2009;
- the original and thirty (30) copies of the financial audit reports no later than 120 days after closing; and
- the State and Federal tax returns within a reasonable time after the acceptance of the final audit reports
12. In consideration for the satisfactory performance of the audit, the Contractor will receive $ __________, paid as follows: One half upon completion of fieldwork and balance to be paid upon completion of final audit report and delivery of the Federal tax returns. .
13. The Contractor will immediately notify the Organization’s Audit Committee of any significant and/or reportable conditions noted during the course of the audit.
14. Audit working papers will be prepared in accordance with Government Auditing Standards, and will be retained by the Contractor for at least three (3) (or other amount of time) years from the date of the final audit report. The working papers will be available for examination upon request by authorized representatives of funding and government sources
15. The certifications numbered A through H are incorporated by reference and made a part of this Agreement.
16. In the event that there is a significant change in funding from the (names of funders) and/or a change in the legal or regulatory requirements applicable to this audit, the Organization shall be allowed either to: (1) withdraw from this engagement after paying in full for any and all services rendered by the Contractor prior to the date of withdrawal; or (2) seek, without penalty, a negotiated modification of this Agreement which would result in the satisfaction of the new legal requirements through the services to be performed under the modified Agreement.
17. The fees set by the Agreement are based upon the following assumptions: management will respond promptly to all requests for basic information and/or documentation; the books will have been posted through the year; all adjustments will have been posted; management personnel will prepare cash and other confirmations; and that year-end schedules supporting the account balances will be provided.
18. The Contractor will give an oral presentation of its audit report to the Board of Directors or the Audit Committee of the Board.
19. The Consultant agrees to hold harmless and indemnify Contractor, its officers, agents and employees, from and against any and all actions, suits, damages, liability or other proceedings which may arise as a result of performing services rendered under this Agreement.
20. The Consultant agrees, at its sole cost and expense, to maintain adequate general liability insurance, workers’ compensation, professional liability and automobile liability insurance during the period of this Agreement.
21. If circumstances arise that will require additional services and time by the Contractor, the Contractor will notify the Organization and obtain its agreement prior to undertaking such activities. The hourly fee for such agreed to services will be $________ .
22. The terms of this Agreement may be modified only in writing, signed by duly authorized representatives of the parties.
23. If the parties are unable to resolve a dispute regarding the acceptability of deliverables under this Agreement, the dispute will be submitted to the (name of arbitration organization) for resolution through binding arbitration.
24. This Agreement, which includes the matter specifically incorporated by reference, constitutes the entire Agreement between the parties.
25. This Agreement has been made, and shall be construed, in accordance with the laws, rules and regulations of the Federal Government and the State of New York (your state).
Executed on the ________ day of July, 2008 for the parties by their duly authorized representatives
For NPO XXX Auditor
A. The individual signing certifies that he/she is authorized to contract on behalf of the Contractor and to make these certifications.
B. The individual signing certifies that the Contractor is not involved in any agreement to pay money or other consideration for the execution of this Agreement, other than to an employee of the Contractor.
C. The individual signing certifies that the Contractor meets the independence standards of the Government Accountability Standards (GAO) issued by the comptroller General of the United States.
D. The individual signing certifies that he/she is aware that all individuals to be assigned to the audit have met the GAO Continuing Education Requirement of 80 hours of continuing education every two years; and that 24 hours of this education have been subjects directly related to the auditing of government grants.
E. The individual signing certifies that he/she has read and understands the GAO requirement of an external quality control review at least once every three years.
F. The individual signing certifies that the Contractor, and any individuals to be assigned to the audit, do not have a record of substandard audit work and have not been debarred or suspended from doing work with any Federal, state or local government. (If the Contractor or any individual assigned to the audit has been found in violation of any state or AICPA professional standards, this information must be disclosed.)
G. The Contractor certifies that it and its employees will abide by the Organizations policies on drugs, alcohol and smoking in the workplace, recycling, anti-sexual harassment, safety in the workplace, use of equipment and equal opportunity employment.
H. The individual signing certifies that the Contractor does not discriminate against any employee or applicant for employment because of race, color, religion, sex, sexual orientation, veteran status, age, national origin, disability, or any other basis prohibited by law. The Contractor shall take affirmative action to insure that employees are treated during their employment, without regard to race, color, religion, sex, sexual orientation, veteran status, age, national origin, disability, or any other basis prohibited by law. Such action shall include, but not be limited to the following: employment, upgrading, demotion, or forms of compensation; and selection for training, including apprenticeship. The Contractor will, in all solicitations or advertisements for employees, placed by or on behalf of the Contractor, state all qualified applicants will receive consideration for employment without regard to race, color, religion, sex, sexual orientation, veteran status, national origin, disability or any other basis prohibited by law.
Dated this _______ day of July, 2009
Name of Organization’s Authorized Representative
Signature of Organization’s Authorized Representative
Signature of Contractor’s Representative
Federal ID Number or Social Security Number
NOTE: The audit report includes a Statement of Financial Position (Balance Sheet), Statement of Activities (Income Statement), Statement of Cash Flow, Notes to Statements, and possibly a Statement of Functional Expenses. In order to print the opinion letter or otherwise associate an audit firm's name with your statements, you must present the whole report.
The AICPA Audit Committee Toolkit: Not-for-Profit Organizations - http://www.aicpa.org/Audcommctr/toolkitsnpo/homepage.htm
See the Check List to Evaluate the Engagement Letter (Scroll down for a printable copy) http://www.aicpa.org/audcommctr/toolkitsnpo/Evaluation_of_Auditors_Engagement_Letter.htm
Controlling the Audit Process completely revised and expanded by Hilda S. Renteria, CPA and Edited by Catherine Barker with sample documents and forms
PowerPoint presentation about audits, Inside Your Audit: Secrets Revealed by Andrea T. Mills, MBA, CPA, CCSA
AICPA’s article Common Engagement Deficiencies in Audits Performed Under OMB Circular A-133 Noted in Peer Reviews, Ethics Investigations, and Federal Office of the Inspector General (OIG) Quality Control Reviews http://gaqc.aicpa.org/Resources/OMB+Circular+A-133/Common+Engagement+Deficiencies/
A Management Letter from CAPIN CROUSE LLP, Accountants & Consultants to the Board of Directors, Wycliffe Bible Translators International Inc. Dallas Texas
Office of Management and Budget Circulars for Nonprofits - http://www.whitehouse.gov/omb/circulars/index-education.html
Sample Audit Engagement Letter Single Audit
Auditing Services Required for MetroPool, Inc.
North Carolina Department of Health and Human Services Fiscal Nonprofit Administration, Audits for State Grants Compliance
Excellent Material about Boards and Their Legal and Fiscal Obligations - http://www.boardsource.org/
Sample Audit Agreement from the Ed. Fund, http://www.edfundwest.org/downloads/08_Fiscal_Agent_Agreement.pdf
Your Nonprofit Library Second Shelf - A Sample Nonprofit Audit RFP
Your Nonprofit Library Second Shelf - Request for Audit Proposals (RFP)
Your Nonprofit Library Second Shelf – Considering An Audit