Sales audit process for Animal science

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hi thanks for listening to our webinar on how to get ready for your next audit this is specifically for our not-for-profit organizations animal welfare and conservation we hope you can take away a few good tips to today to improve your next audit experience I'm grace Williams I'm a senior audit manager out of our San Francisco office I specialize in non not-for-profit audits and I also am part of our animal welfare and conservation sub-niche I've been with the with our Menino for 11 years hi this is Jessica summers I'm a senior manager in our San Ramon office I've been in public accounting for 7 years and work primarily with not-for-profit organizations specifically animal and worker Welfare clients uh hi this is melody Xue I'm a senior tax associate yeah we're a nonprofit tax team and and also a member of the animal welfare and conservation sup nation so what we kind of wanted to run through first is just really the three main takeaways for how to improve an audit so as auditors we really want the audit to be the most efficient and effective process you know nobody likes surprises and the best way to minimize those is really just to work with your auditors often so how do you do this the first way would be through communication you should communicate early and often throughout the year if any challenges are coming up um you know as finance people you guys are good with the day to day operations what really causes issues are those complex situations that may come up so really it just disclose everything it's better to know about any potential issues in advance then for your auditor to find them during on it and then if you don't know what to do about a transaction so maybe it's a situation that's new or you haven't been exposed to it in a few years talk through those with your auditor just so there aren't those surprises um and then lastly work through that PVC list with your auditors if you're not sure what the term PVC stands for in the accounting world this is either prepared by client or provided by client this is yours to request that the team receives and will send to you at the beginning of the audit with all those requested documents so go through this list with your auditors talk through any confusing requested items you know work through that list make sure you're on the same page before the audit begins oftentimes we find that clients might not have provided us some schedules just because they weren't sure really what the requested item was and then also we don't want you having to create schedules just for the audit if we can leverage the work that you do on a day to day basis that's really what we want to do there may be situations that come up where our schedule request has it means something differently or the description might not be very clear but this could be something that you do on your day to day basis that accomplishes the same thing that we want so don't try and recreate the wheel and create a schedule just for the audit really talk through any of those items with your auditor before you go through that process I think really what the takeaway on this slide is is that we want this to be a collaborative relationship right as your auditors like we are here to help so please reach out communicate often that's really gonna lead to a successful on it and so really if you have those three things on the main slide you know what else can you use your auditor or how else can your auditor help you and so we can work with you to validate the things you know you do really well but the other piece of that is we can be a change agent for you so change is hard you know sometimes there might be a new system you want implemented or something that you you know you need a change you know how you need to do it but you just need someone else to help say it you know if you've been saying it it might fall on deaf ears but if your auditor comes in makes the same recommendation kind of says the same thing everybody kind of hops on board so work with your auditor for this you can leverage them to be able to get you know your needs fulfilled also work with your auditor for any you know internal controls or best practice recommendations um your auditors work with many different not-for-profit client then you might find yourself in a situation where maybe you're the only person left in the finance department you're running everything or everything's kind of fallen just on you you find yourself doing everything in that case you know look to your auditors for what a recommendation might be how do other organizations in a similar situation as you how do they segregate duties or maybe how do they have internal controls of having such limited resources so asking your auditors those types of questions and you know leveraging the their experience with organizations that are in similar situations can really help you and you know maybe that the recommendation in that case wouldn't be to hire somebody else but it would be it you know get someone else involved in the process so maybe someone from a Finance Committee or a board to provide additional oversight and really help strengthen your internal controls and we touched upon this on this on the last slide as well but discussing transactions in real time super key to successful audit we don't want to know about you know significant issues at the start of our audit we'd rather you contact us you know when you're experiencing those issues so we can work through them together you know we're always available for a phone call you know send us a difficult request or grant agreement and then we can give you know the proper advice and work through it together before it's recorded that way that when we come out to audit the transaction we already know that it's recorded properly and that will prevent any audit entries and then the last piece on here is just kind of technology so most organizations we go out to there's some sort of technological frustration maybe they aren't getting the right reports or they don't have the right systems in place so this is something you should talk to your auditors about you know they as auditors we see lots of different systems and technologies and we can give you some best practice recommendations of what other organizations that are in a similar size or nature are using or doing to combat these frustrations a lot of organizations we run into that are frustrated may not necessarily be with the technology piece but be with all the manual processes and work that they have to do you know a software it continues to get better and better there are a lot of ways an organization can automate those processes there may be some functionalities within your current system that you could implement that could save countless hours each week so something you should do is just off to your auditor about this you know maybe ask the question how can we better use our current software to better automate all these processes and then there's also systems out there so if you find that your current system there's no more functionalities that you could use for it maybe you need some help with a monthly closed or a financial closed process you could look into a system like black wine and it could be where the cost of implementing the system may be worth the time saved from having to do everything manually and then lastly cybersecurity is always a huge issue among all organizations and companies the big thing for not-for-profits really isn't the financial loss that you could incur it's really the public perception and the donors perception of an organization after breach has occurred so really getting in front of all those all of those issues and having a data readiness test done to ensure that you have proper safeguards in place will really help you know better your organization and what your organization would kind of grow and so what we kind of wanted to do now is just jump through each of the different areas of an audit walk through common issues that we find and really kind of help you out as much as possible to kind of set you guys up for success for your next on it and so the first one cash and cash equivalents so the real main thing with cash is really completeness everyone can audit a cash account anyone can do a bank reconciliation from what they know and what they can see the issue is what you don't know so if there's any cash accounts that maybe are being missed on the general ledger or weren't picked up in the listing that was sent to us for the confirmation process or you know transactions on the bank reconciliation that aren't being kicked up just make sure that as you go through your process that you maintained a complete listing of cash accounts or changes in cash accounts during a year to prevent any of these issues the other things on here just kind of minor really just refile type things so depending on your organization's cash policy you may have some cash sitting in investment accounts that should be presented as cash on the statement of financial position so just really making sure that any of those things have been properly reclassified before the audit begins and then you also may have some restricted cash um so if you have any endowment funds maybe it's restricted for land purchases or it's used for finance and collateral so if you have to maintain any certain reserve amount so keep those balances on hand so just reclassifying those balances ahead of time and if you aren't gonna make the read class entry yourself just making sure that you've at least identified those amounts as restricted cash will really help and prevent any potential Mis disclosures for the financial statements and then so down here on the bottom is just kind of a best practice tip for you so maintaining on that listing of accounts with all the information relevant to it and you know it really just touches on completeness and how does maintaining that listing of all accounts and bank information help you you know how does this help your auditor well your auditor most likely is gonna be confirming cash at year-end and most banks nowadays are able to confirm cash electronically so really if you have this listing maintained throughout the year and updated you're just able to send this off to your auditor and you'll be done with that process all right the next topic we're going to talk about is investments we have Planned Giving agreements listed here since these will be typically held in investments fun funds especially if you have like a charitable remainder trust or a pooled income fund and those are you know typically held in an investment fund and the fair value measurement disclosures will be will apply to those so anytime you see you know the word will or trust requests included in any of the donor agreements that you receive that should be a triggering event to talk to come talk to your auditors and you know these transactions can be difficult to record depending on you know whether there's multiple beneficiaries or whether it's you know revocable or irrevocable so it's important that your auditors are aware of these transactions even if you're aware that there's a large given gift coming in it might not need to be recorded for you know your current audit but maybe it needs to be disclosed in the financial statements so just making sure that your what auditor is aware of you know any of those significant Planned Giving agreements also we are starting to see more alternative investments these days and other level 3 types of investments and with investments you know it all comes down to valuation so it's easy to you know value a mutual fund and easy to report that that value on any given day but you know an investment in a private company or maybe investment in real estate certainly those types of investment vehicles are more difficult to value so discuss those you know discuss what's your auditor to look what type of information is available and what type of information your auditor is going to want as part of their audit and so that way you know you can appropriately value those types of instruments what you know what we really want to know is what you're doing to get comfortable with the value of those investments reported on your books I guess one of the best practice tips that you know is very important is to be performing that monthly roll forward of your investments your auditors gonna want to see all of that activity for the year between the beginning of the year and end of the year and it's gonna be much easier much easier for you to accumulate that information if you're performing that role for it on the monthly basis then Rock trying to you know go through the investment statements you know month by month just the end of the year as you're preparing for the audit the other thing you might want to consider doing is considering the leveling inputs of urine Iceman's so you know detailing out each of your investments by level whether that be level 1 level 2 or level 3 this is something that's going to be needed for your financial statements but note disclosures so you know be good to prep that ahead of time so contributions receivables and requests you know typically this it can be a real tricky area so it is an area where do you see a lot of adjusting journal entries particularly if there's a capital campaign or if you've received a challenge or a matching grant or some other type of conditional contribution this is one of the more complicated areas since it's definitely different than what we usually see you know these are non reciprocal transactions so a donor is pledging an amount and not getting a good or service in return the way that gap accounts for this is you would record that promise to give when it's made so not when the cash is coming in or when it's being paid and the cash can come in years after this so it can be kind of unusual feeling to record it or you know just to understand how it works and we do end up seeing a lot of issues here so some good questions to kind of ask as you're going through this process is you know is it a valid but should it even be recorded are there conditions attached to it you know making sure any language and the agreements are properly recorded with what the donor intent is if you find yourself having any matching conditions that may not be met you know trying to figure out when it should be recorded and then anytime that there is more complicated language that's really when you want to spend more time to kind of understand what the donors intent is and what the accounting behind it should be with capital campaigns we do see some language where you could be building you know a building or maybe a new shelter and the agreement could state that 90% of contributions come in would go towards this new shelter and the other 10% would go towards an endowment um well the question can the Ox you know what 10% if you talk to the people that are running the shelter project they are obviously gonna say the first 90% is gonna go towards the shelter because they to make sure that they have the funds available to finish the project but then some could argue that the other 10% should be split so as in 10% of every contribution that comes in would have to go towards the endowment not the last 10% so just making sure you're kind of looking at these things and not everyone's interpreting it the same and you're all on the same board for how it could be recorded so you're not recording it incorrectly and then if you do have any development departments making sure that you're meeting with them and that you guys are all on the same page and everything's valued and being recorded correctly oftentimes development knows about something that may have come in that the finance department doesn't and then talk to them about allowances and collectability so there could be something that they know might not be collectible and they just haven't relayed that information yet collectability is a big thing that you know the auditors come in they're gonna have questions on the collectability of some of those contributions so just making sure that you've looked over your listing of receivables and that you've identified if there is anything that should be reserved or written off and then if you do have any multi tier contributions making sure that you've kind of looked at when they're gonna come in so when you expect those future cash receipts and then considering whether or not that you need to discount that back to net present value those are another area where there could be an audit adjustment if you haven't already done this calculation or even consider the calculation and grace do you want to kind of walk us through some requests yes on the quest you know these can be quite significant and we touched briefly on it on the last slide but they can also be difficult to record since you know the related will doesn't become irrevocable until the donors death and so sometimes the organization will not you know exactly know when that occurs but then in addition this state also needs to go through probate in order for the organization to know the value of the gift that they're going to receive so sometimes these bequests can be really difficult to determine when to record that it's perceivable and so it's important that the organization develops the quest policy you know that that dictates when you're going to be recording those the quests and then this would be also another good example of where to discuss with your auditor if you receive a book question you're not sure whether to record it we would certainly love to hear from you at that time and we can work through it together yeah so down on the bottom here we just kind of had our best practice tips so really the main thing was just make sure you have a schedule that ties to the general ledger and know it's kind of what those purpose restrictions are and then when you expect to collect the funds and Jessica touched upon it a little bit earlier as well but a lot of adjustments do come up you know with respect to contributions receivable due to a lack of communication between the development department and Finance so you know a lot of times those contributions are going to come directly to the development team and for whatever reason it doesn't get to finance timely so ensuring there's ongoing communication between development and finance is key especially you know near your end where the cutoff could be an issue so best practice you know perform that reconciliation between development the general ledger at least quarterly you know when you perform this reconciliation and also you know make sure that my ongoing communication is being performed throughout the year so I'm kind of looking through a fixed assets you know fixed assets are fairly easy you know the day to day things so being able to record a purchase of a computer or furniture really isn't going to be an issue what we do find is difficult and where we usually find issues is when there's construction going on so some common areas would be not recording all the payables related to that construction at year-end oftentimes we see that those invoices from contractors don't come in for a month or two and or whatever it may be so there's times when we do come in to do the audit that that lasts accrual may not have been recorded another piece that often gets missed is the tenshun retention is basically that last 10% on a construction that gets held back from the contractors to make sure that those final checklist items are complete and the project's actually getting done so once that projects done that 10% would be paid but before that happens that 10% that was held back should be recorded as a payable and this gets missed a lot another tricky item with construction is usually the construction comes out as a campaign to build a building or maybe a new shelter and so this kind of ties in with our net assets but if you raise donor money for all of this all that money should have been recorded as restricted and throughout throughout this whole building phase your remaining cash you're paying your contractors but really you need to stop and ask yourself when do those restrictions get released so when is those done' restrictions when has a restriction been met so what gap says is that those restrictions are not met until the building is placed into service so really looking at that and making sure you're not releasing those funds until the building is done and placed into service is important oftentimes we do have adjusting entries to correct that as well all right this next topic is really going to be geared towards our land conservation organizations but very important because some of these land transactions can get a little complicated and they're typically quite material so it's important that the proper documentation is being maintained to support the amounts that are being recorded so something your auditors always will always ask for when testing land acquisitions is going to be the purchase agreement in the case that the property was purchased or if you received a donation you'll need to provide the deed of trust as well as the current appraisal of the donated land the land transactions or the land acquisitions are typically recorded at cost in the case where the land was purchased or you know if the land was donated it needs to be recorded that fair value so just important to make sure you have those you know the proper documents on hand and because the auditor will request for this for those items conservation easements you know the agreements that put the restrictions and limitations on land these can get tricky sometimes especially because sometimes when the easement is purchased the amount could be a significant amount of money and so you know based off of the GAAP rules since the organization doesn't necessarily have title to the properties for which the easements relate and since there's no expected future economic benefit the easements don't get capitalized so based off of those rules the purchase easements are expensed when they're required and then the donate donated easements are not recorded at all in even but even though you don't record those donated ease of easements it's still equally important that you you know track those appropriately and you have those listed in your listing of land and Eastman's for any day Bester's or transfers of land easements that occurred during the year you know your auditor is certainly going to want to test those transactions as well so just making sure you maintain any of those transfer agreements as well as maintaining the deed of trust showing the transfer to the other entity and then last on this slide certainly a significant audit area is evaluating any land assets for impairment this was certainly something that came up for several of my clients this past year with the you know the devastating fire season in the North Bay unfortunately some of the properties for some of my clients were damaged and management then had to evaluate for impairment of those properties or write-off in the case where there had been land improvement and improvements on those properties so just make sure that you're considering any impairment as you're going through your year-end close and you know performing the valuation before your team audit team comes out and then when it comes to best practice tips I think the most important thing here is just you know since your auditor is going to be testing all that activity and any significant activity for the year just make sure you have a complete and accurate roll forward of those land conservation and easement assets that you have that way it'll be easy for your auditor to test that activity so count table and accrued expenses is really a straightforward area but there are some adjustments from time to time the best practice is really just making sure you have a detail of all your accounts payable and accrued expenses that ties to your general ledger as far as accounting where we do see audit entries and adjustments is really accrued salaries and wages so making sure if that year in payroll was paid out in a subsequent period that you've accrued for it and then the other one is accrued vacation or any PTO curls so making sure you have accrued for what's been earned but not paid out as of your end and then that you have a schedule to show those balances and it ties back to the general ledger then I think the only other thing I would say here is you know you know while it is a DES straight forward area we actually do propose part a few adjustments here and that's really just due to the timing of when you receive those invoices so many subsequent invoices that come in and relate to the fiscal year under audit you really need to make sure that those have been accrued for and you should review for those accruals through you know through the start of the audit because most of the time that adjustments that we do promote propose are preventable okay so dead this one seems like it's pretty straight forward because you have a balance that you owe and you record it but there are some nuances here that we want to look at especially with debt covenants you certainly want to be monitoring those closely and performing the calculations regularly to make sure that you're in compliance so also with some of the accounting changes coming you want to make sure you're looking ahead to see what types of impact those might have on your covenants and then talk through them with your baker so for example the new lease accounting standards in a couple years you might you could potential a material asset and a material liability that gets recorded so making sure you're looking at what that change could pop could potentially do to your covenants and then talking to your banker to see if there's you know possible possibly a need to make any modifications to the Covenant requirements I also want to stress how important it is to be performing these company calculations regularly there's been instances when I've gone out to perform an audit and you know something that we always do as part of our audit is making sure the organization's in compliance with those covenants so in instances we've gone out to do the audit and we run the covenant calculation and it turns out that the organization was out of compliance and it was something that they were not even aware of and that hadn't ended up actually holding up the issuance of the financial statements because then the organization had to go back to their banker request a waiver took several months for that to occur and then you know we were able to eventually issue but you know a lot of times the bank will offer a waiver if you're out of compliance just certainly something better to have those conversations about real time and if the waiver does need to be obtained certainly try and get that process tour started prior to the start of the audit you know grace makes a good point with the covenants another thing that actually should be considered that would affect it is if you're having any adjusting journal entries that come up as part of the audit you would have to go back and recheck that covenant calculation just to make sure that none of those adjusting entries now put the organization out of compliance so just it's one of those areas where it's really important and we can't stress enough just trying to have you know make sure that you give yourself some leeway with them if you are starting to get close and you're worried an adjusting entry might push you into that say oh you're reaching out to your bank ahead of time just to start working on that process yeah that's a good point and then the other item that on debt that I wanted to touch on is just with regards to interest there's several organizations that I work with that have debt agreements either a 0% interest rate or maybe a below market rate interest so just making sure that you're performing and considering considering any potential imputed interest that would need to be reported also something to consider you know if you are in the midst of any construction projects that you took dead out for the interest on that debt can be capitalized into your CIP so just make sure that you're looking out for that as well for debt you know one best practice tip that I would say is you know make sure you do provide all the debt agreements or you know line of credit agreements there's times where you know potentially an organization will take out a line of credit but since there's no maybe they didn't take any draws during the years so the balance is zero at your end so it won't show up in the GL right but that line of credit still needs to be disclosed in the financial statements so certainly an area that could get missed if you're not disclosing those agreements or providing them to your auditor all right so net assets you know obviously this is a very key area to all nonprofit organizations in the area of a higher audit risk so what's key here is making sure that the you know the donor contributions that have been received are being recorded in ance with the donors intent so the first thing that your auditors gonna do is make sure that the beginning net asset balance rolls forward from the prior year so meaning you know does it agree does your beginning that assets agree to the prior audited financial statements and a lot of times if it doesn't agree it's because you know maybe there were some prior audit adjustments that didn't get posted so it's a really good practice that you're performing this you know beginning net asset check before the auditor gets out there the area that your auditor is gonna be most concerned about though is with respect to your restricted net assets to make sure you're maintaining complete and accurate roll forward of any restricted net assets you know roll forward that includes the addition to those restricted net assets or your current your contributions and then the related releases from restrictions during year and something to mention here is that with the new reporting nonprofit reporting model that's an effect for this year even though the you know temporarily restricted and permanently restricted net assets have now been collapsed into one new category of net assets now called your net assets with donor restrictions just make sure you know you should still be maintaining separate schedules for tracking purposes since you will you know still need to know your restricted net assets due to you know either the purpose or time restrictions or you know versus the net assets that need to be held in perpetuity which would be what we previously called your permanently restricted net assets so it's just the verbage of the categories that have changed but the accounting for the restrictions has not been changed and the amounts actually will still need to be disclosed in the financial statement so continue keeping separate schedules for the different categories the other item to mention on net assets is with regards to the tracking of any board or donor restricted endowment assets an issue that you know commonly comes up is with endowments as the endowment allocation entries and the allocation of any investment earnings so depending on whether you have a separate investment account to hold your endowment or maybe their commingled with non endowment investment funds you'll need to be making an investment you know allocation entry so also making sure that the endowment appropriations has been made minutes in ance with the organization's spending policy so these are you know entries that need to be made Munir auditor will always be happy if these adjustments for the endowment earnings and appropriations have been made prior to fieldwork kind of moving next into our statement of activity is running through some of the accounts the first would be fee for service revenue so this is the revenue earned from services provided in the animal welfare space this could be from adoptions spay and neuter or any other medical sort of services that the organization is providing typically we don't see too many adjustments here but just as the best practice we would make sure that you have maintained schedules for each of those revenue streams that ties back to your general ledger and also that you have the statistical information for each of those so the number of adoptions that you had during the year the cost per adoption maybe the number of stayin neuters so just the different services and the rates that are being charged for each of those and then another thing just to mention if you are going to use a different system so if you have some point-of-sale systems that aren't automatically integrated into your general ledger making sure that you have a schedule and it properly reconciles that all right so contribution revenue so we already touched on this topic quite a bit but certainly you know it's typically your highest risk area for nonprofit organizations and will be an area of high scrutiny by your auditors also you know we see quite a few adjustments in this area primarily related to the classification between contributions with or without donor restrictions and then also on the cutoff you know making sure that those contributions are recorded in the correct period so with restricted contributions you know you want to know that these can only be restricted by a donor and so you can have restrictions based on a specified purpose or maybe it's a program that they're trying to support but there also could be a tight restriction so I've seen contributions for some of my clients that you know there might be no purpose restriction but the donor has specified a length of time that the funds cannot be used for in one case that they're you know the donor put a 20-year restriction time restriction on the use of those funds so when you know in that case that contribution had to be was required to be maintained in the restricted net assets for that period of twenty years also you know so organizations have the option with restricted contributions that are released in the same year as received they can either record those and as I their contributions with without donor restrictions so you know previously your unrestricted net assets or it could be in the contributions with donor restrictions and show the related release and while the organization can choose which policy they want to adopt the key here is that they must be consistent in the application of that policy so you can't choose you know you can't kind of pick and choose which way you want to record the contributions you can record one contribution one way and then the next contribution either the other way so you know just make sure you maintain your documented policy and then apply it consistently another area of difficulty with contributions is regarding conditional gifts and we discussed these earlier but you know these contributions they can't be recognized until the hurdles or the conditions I specify that by the donor have been met but even if you haven't recognized a contribution because of the conditions still make sure that you're disclosing these to your auditor because they will be required to be disclosed in the financial statements so make sure that you're still having those discussions with your auditor the last item I wanted to mention on the contribution revenue is the new accounting guidance it's gonna be effective for fiscal year 19 4 12 31 nonprofit organizations or fiscal year 2024 6 30 nonprofits and this is the clarification standard that came out with respect to recognizing contributions first exchange transactions and this will specifically be important to our nonprofit organizations that receive you know combination of both government and funding and donor contributions so the key takeaway is you know really in determining whether the transfer of assets is a exchange transaction or a contribution so this standard really just provides some additional guidance on making that determination because it could be really quite difficult and a lot of circumstances this dinosaur avise some additional guidelines for distinguishing between conditional and unconditional contributions so I'm not going to go into too much detail on this new pronouncement now but we do have several other webinars on this topic that you can watch so grants to others can be unique one for organizations this typically comes up a lot in the conservation space of either wildlife or land conservation typically we don't have adjustments to this area but we do have other matter comments or best practice recommendations that come up so if you're receiving contributions from donors for other organizations and are acting as that grant or organization it's important to ensure that those grantees and sub recipients that are receiving those funds are not only legitimate organizations but whether the funds are being utilized as the donor intends and really this all comes down to just making sure that you're maintaining the proper documentation to support this so any memorandums of understanding may be the tax exempt certifications for those other organizations documentation for the funds that you've passed and then if you get any program progress reports or those other organizations annual financial statements in the case for grants or land grants of lions or easements making sure that you've retained support for the strains from the property so really you know document retention and maintaining that support is really the key item here and important for the organization and then also looking at kind of some other expenses this year with a new nonprofit reporting model a statement of functional expenses is required and it's required to report those expenses by national classifications and functional classifications previously this used to only be by function so your report by program management in general or fundraising so showing the natural classifications is now required and what we mean by those natural classifications are those line items like salaries your benefits occupancy interest expense etc um so this has been required for your 990 so a lot of organizations might already be doing this but it's definitely something that we recommend that you have to start giving sooner you know we work with a lot of organizations that have said we do this but we don't typically do this and so we have to do the 990 so much after the audits already kind of been finalized well now since it's part of the audit and it's needed for the audit it's something that you know just to keep in mind you are going to have to start it early and then some other things to keep in mind as you're preparing the schedule if you do present any cost of sales on your statement of activities these costs all now have to be presented in their natural classification as well on your statement of functional expenses and then you would have to show a reconciliation on the bottom to get back to your seeing their activities amount and then if you do have any investment expenses so any costs of having those investment accounts managed those are not presented on your statement of functional expenses on your statement of activities they're actually netted against any income from investments in the current year and then just always about practice to keep in mind keep your allocations consistent and make sure you have a basis for those allocations determined part of the testing that all your auditors will be doing is making sure there were any changes those changes to the allocations are properly supported and then you may be asking yourself kind of you know why does this all matter if you follow any watchdog groups so Charity Navigator is a big one and guidestar they've pulled us information from your 990s so they take all your functional allocations how much is going to programs how much is going to management in general and fundraising and they actually rate each organization based on those percentages they also calculate like the fundraising efficiency or cost or is a dollar and from a donors perspective this information is really important donors want to know how an organization is doing and kind of see the impact to the programs that those organizations are serving and then looking at kind of leases you know lease expenses the new ASU isn't effective yet and so it's being proposed to actually be delayed by a year so for now you'll still follow the same lease criteria so evaluating whether leases classified as an operating or a capital lease and really the best practice tip that we can give is just thank you sure that if you do enter into new lease agreements during the year that you're classifying it correctly the biggest area where we typically have adjustments for leases relates to the deferred run so if you have any leases that have any escalating rent payments or any rate rent abatements so if you receive free rent for a certain period of time that would trigger a deferred rent calculation needing to be done so GAAP says that you would record rent on a straight-line basis over the term the lease which differs from the actual cash paid and just one thing to note on the deferred rent the deferred Renken cept will be going away with the newly standard but until the lease standard is adopt the newly standard is adopted you'd still need to do that deferred rent consideration and then the only only other thing I wanted to mention on the leases you know best practice tip is to maintain that future lease run-out schedule you're gonna need to disclose the five-year maturity is for the financial statement footnote disclosures and sometimes that schedule depending on how many leases you have it could be you know a bit time-consuming to prepare also just make sure that listing of leases is complete I mean all new agreements have been provided to the audit team and so great kind of mention you know maintaining that schedule and I would go a step further and just kind of in making sure you reconcile that schedule back to your general ledger oftentimes we see that lease agreements have some cam charges so those common area in the int expenses that you know the total amount that you pay during the year won't be explicitly stated in the lease there's often times issues reconciling back to the expense that you recorded so just kind of going through that and making sure before you provide everything that you've checked that and everything does tie out okay and the next topic here is with respect to the financial statements and footnotes with regards to the preparation of financial statements certainly something you want to discuss with your you know auditor during the planning phase significantly far out from the audit is whether you're going to be preparing the quite financial statements or if you want your auditor to assist with that preparation of the financial statements if you do want your honor there to assist you you just need to make sure you know if you have a qualified individual to oversee those services being performed and then another thing to keep in mind you know but it's part of is having complete footnote disclosures and having that support on hand right so you know concentrations for receivables and revenue your future release commitments investment fair value disclosures your schedule of conservation land and easements these are all things they're going to need to be accumulated into those footnote disclosures so making sure that you have that information on hand so that you're not struggling to put it together as we're trying to prepare those financial statements and so another big thing just to kind of point out with your financial statement process and your footnotes this year with the new nonprofit reporting model a liquidity footnote is required since it is the first year of adoption if you are presenting comparative financials you don't have to present for that comparative prior period but just making sure that you have that information available you've identified kind of what those assets are that are available available to meet cash needs within one year you've identified what those restrictions on those assets would be and that you've really worked through with your committee or your board kind of what the organization's policy for maintaining liquid assets is I think that's a big one and going forward you know that's no it's gonna be there and it's huge for donors to kind of get an understanding of where the organization actually is in terms of liquidity since you know sometimes there could be very big swings year over year depending all the contributions coming in and this is you know it is a new footnote so it can be a bit time-consuming to prepare and since it's new you have you know no prior basis but we do this is something that you should certainly reach out to your auditors for there's lots of example disclosures out there that we could provide and you know work through you with to develop that disclosure and so from on its side hopefully we've given you kind of some good tips and some useful things to carry forward to your next audit we'll kind of pass things over to melody to walk us through the difference between audit and tax PVC requests yeah Thank You Jessica so I know everyone who is listening to this webinar right now want to learn how to prepare for next audit but while we include tax into the how to prepare for the next audit topic so that's the reason because recently we found that most of our audit clients would like to have their tax return to be sorry as soon as the audit report is issued or even for certain clients due to their internal board meeting timeline they would like their tax return to be prepared as soon as the auto trial balance is finalized so that's a reason the audit team and the tax team would like to coordinate together to help the client to prepare for your audio and packed ready at the same time so today I would like to explain a few area between the the difference among Audient acts to better help you understand the engagement and also understand like why we request those information why we ask those questions so the first is the PBC request as it's known to all so for both the our apbc request and the tax reprieve is request for all of our clients we have the sure link set up so for the full each year we have the audit folder and the tax folder people include all the PPC requested I mean churning so I oftentimes I call a question from the client for example I already upload this information to audit while you're across the same information to me in tax so that's the reason I would like to elaborate on this the two most frequently asked our areas a board member list and statement of functional expenses so the first one the board member list so the audit if they ask for the board member list there were like a whole word document to include the board member for the entire year however for the tax we have a separate noncoms a board member list at year-end that designed for you the reason we request this is because from 990 part seven we have to disclose all the non compensated for a member on that page and from the orderlies we do not know whether the board member is compensated or not and also on our salmon of the form nine ID we have to disclose if any in status of the board member changed during the year for example if any new board member join the board during the year or left the board we have to include the date join of the dáil of the board that's also the information that we cannot get from the board member list you provided to audit so please understand that we do not request the duplicate information yeah that's for the board member list and the other area is for the statement of functional expenses so for our a usually the order report the like statement functional expenses when they prep for the same of activities and then that on the same of activities on the audit report we got a total for each category so for program for management and port fundraising and for some of the clients we might have a statement of functional expenses report included in the audit report but that's not most of the cases even if we have a statement of functional expenses report including in the auto report that is different from what is required by RS on the form 990 past nine so basically we design our tax as a few PVC requests exactly 100 percent match the Form 990 part 9 and reporting lineman line so that's the reason we want to get the primary number from you and we will based on the information you provide we will make any adjustment if necessary so please understand that is also different from audit because we have to report different category different expenses and the best practice tip here is tax an auto request different PPC based on different recording requirement because audit report follows tab and the tax reporting follows IRS so that's the reason we require we have different PPC request and the other area is the disclosure requirement that is the topping in general so for tax sometimes during the preparation we often ask client some very detailed information that the auditors might not ask before for example we might ask line how do you review the tax return how does the officer compensation get reviewed and if you have grants out how do you monitor immigrants and also do you have any below policies in act in the organization such as the conflict of interest policy the whistleblower policy and if you do accept gift especially non-cash contributions do you have a gift acceptance policy in act and also we have very detailed disclosure requirement per the IRS for contribution including cash contribution and non-cash contributions so cash contribution is going to be disclosed in detail on Schedule B and non-cash contributions gonna be disclose detail on schedule so that's the information that will not be included in the audit report and that's the reason about it has to be disclosed on the form 990 and that's a reason we ask and also we have something new this year is due to the tax cut and job act imposed on the employee parking and Camille benefits starting January 1st 18 so we never asked about the employee parking and communicate that provided by you umpires but since this is new to you and it's new to us starting from this year so if you ever get a question like this please do not be freaked out because it's totally new and that's something that we need to start looking into for the tool in the 18 packs which are so the best practice tips here is text will have more disclosure requirement in the audit due to the nature of the return and that's the text part I like to talk about thank you thanks melody so again hopefully you guys got some good tips and takeaways and really trying to help you guys you know be set up for success and have the most effective and efficient audit as possible when following these best practice recommendations make your how to do happy so so what kind of thing that we did want to run through it's just you know what's next what's on the horizon for everyone so the new nonprofit reporting model is effective now grace mentioned a little earlier the revenue standards that are coming out so effective 2020 we do have revenue recognition so 606 and then we do have some clarifications for those grants and contributions and then looking down the line 20 24 December clients 21 4 6 30 year end is our lease accounting standards um both as B has proposed you know delaying issuance of the lease accounting standard for maybe a year so well stay tuned for that one if there is any you know further questions or clarifications on any of these specific asu's that we do have webinars specific for each one of those so that is information that we can help you with just to make sure that you're kind of staying ahead of the curve for everything for your organization all right well thank you so much hopefully you learned a few tips and tricks and thank you for watching our webinar