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By Thomas A. Ratcliffe

In June 1996, the American Institute of Certified Public Accountants (AICPA) issued a new audit and accounting guide, entitled Not-For-Profit Organizations (the guide). The May 1997 issue of The CPA Journal contained an article that provided an overview of the major substantive provisions of the new guide. The purpose here is to explain some of the major auditing issues practitioners will face in implementing the provisions of the new guide. A similar article on the accounting implementation issues was published in last month's Accounting Department.


Statement on Auditing Standards (SAS) No. 67, The Confirmation Process, requires the confirmation of accounts receivable (with limited exceptions) as a generally accepted auditing procedure. SAS No. 67 defines accounts receivable as a) the entity's claims against customers that have arisen from the sale of goods or services in the normal course of business, and b) a financial institution's loans. Under the SAS No. 67 definition, contributions receivable are not accounts receivable to which the confirmation presumption would apply; however, the auditor may nevertheless decide to request confirmation of contributions receivable.

Receivables usually are confirmed principally to provide evidence about the existence assertion. SFAS No. 116 stipulates that for a promise to give to be recognized in the financial statements, there must be sufficient evidence in the form of verifiable documentation that a promise was received. If the documentation is not present, an asset should not be recognized. Confirming recorded promises to give (contributions receivable) may provide additional evidence about the existence of promises to give, the existence or absence of restrictions, the existence or absence of conditions, and the periods over which the promises to give become due.

Going Concern Issues

SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern, provides guidance to the auditor in meeting the responsibility to evaluate whether there is substantial doubt about the client's ability to continue as a going concern. SAS No. 59 requires that auditors make an assessment concerning whether the entity is a going concern for a reasonable period of time not to exceed one year from the financial statement date.

Paragraph 6 of SAS No. 59 delineates the following conditions and events that could indicate a problem with the entity continuing as a going concern:

* Negative trends (e.g., recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and/or adverse key financial ratios).

* Other indications of possible financial difficulties (e.g., default on a loan or similar agreement, denial of trade credit, and restructuring of debt).

* Internal matters (e.g., work stoppages, substantial dependence on the success of a particular project, etc.).

* External matters that have occurred (e.g., legal proceedings; loss of a key franchise, license, or patent; or loss of a principal customer, etc.).

Above and beyond factors typically associated with going concern problems with for-profit entities, not-for-profit entities may be associated with conditions and events that are unique to their form of organization that could indicate problems associated with continued existence.

The following conditions and events should also be considered when addressing going-concern issues for not-for-profit organizations:

* Insufficient unrestricted revenues to provide supporting services to activities funded by restricted contributions.

* A high ratio of fund-raising expenses to contributions received or a low ratio of program expenses to total expenses.

* Insufficient resources to meet donor's restrictions. This may result from the use of restricted net assets for purposes that do not satisfy the donor's restrictions, sometimes referred to as interfund borrowing.

* Activities that could jeopardize the organization's tax-exempt status and, thus, endanger current contribution levels.

* Concerns expressed by governmental authorities regarding alleged violations of state laws governing an organization's maintenance or preservation of certain assets (e.g., collection items).

* A loss of key governing board members or volunteers.

* External events that could affect
donors' motivations to continue to

* Decreases in revenues contributed by repeat donors.

* A loss of major funding sources.

Client Representations

SAS No. 19, Client Representations, established the requirement that independent auditors obtain written representations from management as a part of an audit performed in accordance with generally accepted auditing standards. Statement on Standards for Accounting and Review Services (SSARS) No. 7, Omnibus Statement on Standards for Accounting and Review Services­1992, contains a requirement that these written representations also be obtained in review engagements.

Paragraph 7 of SAS No. 19 also stipulates that auditors may request other written representations from management in circumstances where they are considered relevant to an audit. Because of the substantive differences between for-profit and not-for-profit entities, auditors (and accountants involved in reviewing financial statements) should consider obtaining additional representations when they are associated
with not-for-profit organizations. These additional representations might include the

* Compliance with contractual agreements, grants, and donor restrictions.

* Maintenance of an appropriate composition of assets in amounts needed to comply with all donor restrictions.

* Taxation and tax-exempt status.

* Reasonableness of bases for allocation of functional expenses.

* Inclusion in the financial statements of all assets and liabilities under the entity's control.

* Propriety of reclassifications between net asset classes.

* The governing board's interpretation concerning whether laws place restrictions on net appreciation of donor-restricted endowments.

Thomas A. Ratcliffe, PhD, CPA, is chairman of accounting and finance programs and professor of accounting at Troy State University.

Douglas R. Carmichael, PhD, CPA
Baruch College

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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