Audit Issues

Management Representation Letter - (1 of 3)

Why is my external auditor asking me to sign a Management Representation Letter?

If you are a member of senior management and your financial statements are being audited, your external (independent) auditor will ask you to sign a management representation letter or “rep” letter before they release the audited reports to you.

So what is this “rep” letter? In format, it is a letter from management to the auditors but is typically written by the auditors.

Who's Responsible? - (1 of 2)

Under Statement on Auditing Standard #112, the auditors are required to communite certain information to those charged with governance. Who are these individuals? What are the auditors required to communicate? These and other issues will be explored as we determine who is responsible for financial information and who are responsible for guiding the mission of the church or ministry.

IRS Pursuing 501(c)(3)s

According to John Pomeranz, partner in the Washington D.C. law firm of Harmon, Curran, Spielberg & Elsenberg, LLP,

the IRS is beginning to agressively pursue 501(c)(3)s if there is any indication of electioneering.

What is electioneering?

Electionneering includes the following:
1. Participating in or intervening in any political campaign on behalf of (or in opposition to) any candidate for public office or
2. Supporting or opposing a candidate for publich office.


Straight from the AICPA Not-for-Profit Industry Conference, held in Washington, DC:

Impaired Independence - defined as "auditing what I prepare".

"I can't audit...what I prepare" - Nancy Shelmon, Partner-in-Charge of the West Region's NPO/HE Services Group of PricewaterhouseCoopers, said during the In the Management vs Auditor Responsibilities - Whose Financial Statements are They Anyway? session. Nancy discussed the new risk assessments/auditor responsibilities for financial statement audits.

Understanding GAAP for Churches

Financial Accounting Standards Board (FASB) provides guidance on how Churches and Ministries should report information in their financial statements. FASB is the authoritative entity providing direction on how things should be accounted for and reported in accordance with generally accepted accounting principles (GAAP).

Over the last 10-15 years, the FASB has written and re-written several standards that specifically address non-profit (ie., which include Churches/Ministries) entities.

FASB Statement 116 Accounting for Contributions Received and Contributions Made

Finding Subsequent Events

There are several procedures that help auditors find and evaluate subsequent events. These include:

1. Reading and comparing the most recent financial statements to the statements under audit. Obtain client explanations for significant fluctuations.

2. Discussing with executive management:
a. how contingent liabilities were estimated at year-end and if they have been paid subsequent to year-end.
b. if any significant events have occurred after year-end.
c. if any unusual adjustments were made after year-end.

What is a Subsequent Event?

Many financial statements disclose subsequent events for a church or ministry. What is a subsequent event and why are they important?

A material event that occurs after the balance-sheet date (say December 31, 2006) but prior to the auditor issuing the financial statements (say March 15, 2007) is a subsequent event. This event may require an adjustment to the financial statements or may require disclosure.

How do you determine if you adjust or disclose?

Report Date of Auditor’s Opinion

In December 2005, the AICPA (American Institute of Certified Public Accountants) issued SAS (Statement on Auditing Standards) #103, Audit Documentation. This statement addresses certain audit practices incorporated during fieldwork. One of the significant changes provided by this new standard is the dating of the audit opinion. Prior to years ending before December 31, 2006, the last day of audit fieldwork was the date the auditors used for the opinion. SAS #103 changes the date of the auditor’s report.

Fraud Maintenance and Detection (7 of 7)

In the last several fraud postings we have discussed ways that ministries and churches may be vulnerable for fraud. Fraud is defined as an intentional act to misrepresent financial information or misappropriate resources.

Management has a responsibility to set "ethical standards" within the organization. They must establish the "tone at the top" promoting ethical behavior. In post #4 we discussed that management has the opportunity to create a culture of honesty and high ethics.


The following is an excerpt from an e-mail from a client who is in the middle of an IRS examination:

Yesterday our auditor was in a talkative mood. He told us that he had just returned from meeting in Washington, D.C. where he was told that the IRS was going to audit "televangelists" this year. He indicated that the target will be those living in expensive homes owned by the ministry and they'd also be looking for other ministry expenses that benefit the minister.