How to read and understand the contents of your association’s audit report is crucial. The report contains several sections:
Introductory Letter
The introductory letter identifies the responsibilities of the board and the independent auditor. The letter explains that the auditor has examined the financial statements of the organization in accordance with generally accepted auditing standards and has performed appropriate tests to make a reasonable assessment of the organization’s financial processes. The letter also contains the audit opinion. The most favorable opinion is an unqualified opinion, meaning that management provided all the necessary financial documents and met all auditing requirements. A qualified opinion means that while the majority of documents were in order, the auditor found some exceptions. An adverse opinion states that the organization’s financial records were inaccurate, incomplete or not in compliance with generally accepted accounting principles.
Statement of Financial Position
The Statement of Financial Position reports the organization’s assets, liabilities and net assets.
Statement of Activities
The Statement of Activities reports the revenue and expenses of the organization.
Statement of Cash Flow
The Statement of Cash Flow describes changes in cash from one year to the next created by the items reported on the statement of financial position and statement of activities.
Footnotes
The Notes to the Financial Statements or Footnotes provide important explanatory information and context to help understand the information presented in the audit. Included in the footnotes is the Schedule of Functional Expenses that breaks down expenses by functional area, such as program services, including education and the annual meeting. The independent auditor will also issue a management letter, separate from the audit report. The management letter provides recommendations for operations, internal controls, changes in financial reporting standards that impact the organization and potential risks.
Board members, armed with the understanding of these basic areas, can feel confident that they are fulfilling their fiduciary duty of care.