CPA's & Consultants Providing Business Insight To Churches & Ministries

Detection Risk - #4 Risk Definition Series

Detection Risk (DR) is the risk the auditor will not detect a misstatement in the financial statements. Detection risk is a function of the effectiveness audit procedures.


RMM (defined previously) X DR = Audit Risk

#4 Contributions - General Requirements

Since the beginning of the year, we have been discussing the general requirements for reporting contributions. In this post we will discuss when to record a contribution.

When is the unconditional transfer considered a contribution? When does the church record a contribution? The timing or delivery of the unconditional transfer is very important in determining how/when to record a contribution.

Let’s review the following:
a. Checks that are mailed to a church are considered “delivered” on the date the donor mails it or the date of postmark.

Risk Standards (5 of 6)

In our previous posts we have discussed the new risk standards promulgated by the AICPA affecting audits for years ending beginning on or after 12/15/06. In post #4 we briefly discussed SAS 106 and 107. Now we will discuss SAS 108 and 109.

SAS 108 –requires a more detailed audit plan than what was previously accepted. This standard will require more interaction with clients and it may take the auditor longer to generate the plan.

Are WE Closed Yet? (5 of 5)

As we learned in post #4 of 5, organizations must determine how to properly record leases, either as an operating or as a capital lease. In this post we will now assess how to determine prepaid expenses and unrecorded liabilities. To assist you in this determination print out the Church’s disbursement ledger for at least the last two months of the year. Review items that represent payments made before year end; but services or goods will not be received until after year end.

Prepaid/Other Assets Generally Consist of:

Prepaid Insurance
Prepaid TV/Radio Airtime
Prepaid Postage

#4 Basis of Accounting for Non-Profit Entities

Financial Statement Notations…OCBOA Differences

If “cash basis” financial statements are modified, the preparer should make the notation in the financial statement title that these are presented on a “modified cash basis.” For example, non-profit financial statements using the GAAP basis would say Statement of Net Assets and Statement of Activities, but under the modified cash basis would say Statement of Assets, Liabilities and Net Assets—Modified Cash Basis and Statement of Revenues and Expenses—Modified Cash Basis.

Definition of a Church

Under the Internal Revenue Code section 501(c)(3), charitable organizations, including churches and religious organizations, are exempt from federal income taxes and are generally eligible to receive tax-deductible contributions.

What is a church? What are the characteristics of a church?

According to **, "church" can be a noun or a verb. As a noun, a church can be defined as:

1. a building for public Christian worship.
2. public worship of God or a religious service in such a building: to attend church regularly.

#3 Contributions/Event - Communication to Donor is Important

In our 2 previous posts in the contribution/event series, we have discussed the common scenario of a non-profit solicitating contributions/revenues in exchange for a donor benefit. Donors often receive something in exchange for a contribution. Whether it is a meal, a book, a video, all of these items are treated similarly. Remember the criteria for financial reporting:

What has been communicated to the donor and what is the donor’s intended response?

NACBA Regional Meeting - May 29 and 30

NACBA and S&O are partnering together to provide a regional training seminar in San Antonio. This seminar invites NACBA members and guests (Texas/Louisiana/New Mexico) to attend a 2- day seminar exploring ways that churches and ministries can "Create Accountability". The seminar begins on May 29th with a kick-off luncheon led by Eric Bryan, Executive Pastor of Fellowship Bible Church, Tulsa.

First Baptist Church on the Riverwalk is hosting the seminar and it begins at noon at May 29th.

The following will be covered during the 2-day sessions:

May 29th, (noon - 5:00 p.m.)

Basis of Accounting for Non-Profit Entities - Modified Cash Basis

In our two previous posts, we have discussed the different financial statement presentations, GAAP, cash basis and now we will define modified cash basis of reporting.

There must be "substantial support" for reporting under the modified cash basis. Ordinarily, a modification would have substantial support if the method is equivalent to the accrual basis of accounting for the particular item and if the method is not illogical. The modified cash basis is more common than the "pure" cash basis.

Risk Standards (SAS 106 and 107)

In our previous posts we have discussed several of the new auditing standards that auditors are required to perform for audits with financial statements ending after December 16, 2007. Basically this impacts financial statement audits for years ending December 31, 2007. In this post, we will update you on Statements of Auditing Standard “SAS” # 106 and #107.