Financial Reviews vs. Financial Audits: Making the Right Choice for Your Nonprofit

Most nonprofit organizations work with a firm to do their annual financial audit. But some organizations might benefit from a financial review as a first step to, or in place of, a formal audit. Could that be your organization?

Both financial reviews and audits serve important purposes, but they differ significantly in scope and detail. Understanding the differences between these two processes can help you make informed decisions and improve transparency, compliance, and trust within and outside your nonprofit organization.

Keep reading to learn what financial reviews and audits entail, when to opt for one over the other, and how specialized fund accounting software can simplify and enhance these processes.

What is a Financial Review?

A financial review is an assessment conducted by a Certified Public Accountant (CPA) to provide limited assurance that no material modifications are needed for your financial statements to comply with Generally Accepted Accounting Principles (GAAP). This type of review primarily focuses on analytical procedures and inquiries, rather than an extensive examination of your financial records. A review won’t have a formal opinion from the CPA and doesn’t dig into individual transactions or internal controls.

The primary purpose of a financial review is to identify any unusual trends or items that might need further explanation from your organization’s management. It helps ensure that your nonprofit financial statements make sense and are presented fairly, but without the depth of testing and verification seen in an audit.

Organizations that typically opt for financial reviews include smaller nonprofits or those not mandated to conduct an audit but still need external validation of their financial statements, or new organizations heading into their first audit. A financial review could highlight issues that can be addressed prior to the time-consuming audit.

A financial review is less expensive than an audit, so smaller organizations may opt to do a financial review one year and an audit the next.

To prepare for a financial review, you need to compile your standard financial statements and supporting documentation. Your organization’s management will need to respond to inquiries from the CPA and provide explanations for any anomalies or significant changes noted during the analytical procedures.

The review process also involves fewer personnel hours than an audit. Typically, your financial team, including accountants and bookkeepers, will work closely with the CPA to ensure that all necessary information is available and that any questions are promptly addressed. But because the process isn’t as in-depth as an audit, it doesn’t require as much time from your team or your management to review and respond to the report.

What is an Annual Financial Audit?

An annual financial audit is an in-depth evaluation of your organization’s financial records, conducted by an independent CPA. The purpose of this audit is to ensure that your financial statements accurately reflect your organization’s financial health and comply with GAAP. This process involves a comprehensive examination of your internal controls, accounting practices, and the verification of transactions and balances.

Financial audits are typically required by external stakeholders such as grantors, regulatory bodies, or lenders. They provide a high level of assurance that your financial statements are free from material misstatements, whether caused by error or fraud.

Preparing for an audit requires significant effort. You’ll need to gather comprehensive documentation, including financial statements, receipts, and records of transactions.  Your auditor will test your internal controls and verify balances with third parties, such as banks and creditors.

The audit process involves significant time from staff within your organization. Your finance team, especially your CFO, controller, and staff accountants, will work closely with your auditor to provide access to the documentation, be available for walk-throughs of processes, and answer any questions. Additionally, management will play a critical role in explaining the financial practices and addressing any findings the auditor may uncover.

Financial Review vs. Financial Audit

Financial reviews and annual audits serve different purposes and offer varying levels of assurance. Choosing between a financial review and an audit depends on your organization’s needs and external requirements. If your small or brand-new organization is looking for a cost-effective way to validate financial statements without the extensive procedures of an audit, a financial review may suffice. However, if your organization needs to demonstrate a higher level of financial integrity and assurance to stakeholders, an audit is essential.

Streamline Your Financial Audit with Fund Accounting Software

Leveraging fund accounting software designed specifically for nonprofits can simplify the audit or review preparation process. By centralizing all financial data and providing robust reporting capabilities, fund accounting software ensures that all necessary audit trail documentation is readily accessible and properly formatted.

Fund accounting software, especially when integrated with your CRM software, makes it easy to determine funder intent, simplify reporting, and strengthen internal controls by maintaining an audit trail throughout the process. Additionally, view-only access enables your auditor to dig into the reports without playing email tag or shutting down the office to have the auditor on-site.

Looking for a fund accounting system that takes the stress out of your financial audit or review process? Join us for an on-demand product tour of Blackbaud Financial Edge NXT® to see how you could simplify your next audit.