How to prevent a qualified audit report for your charity

When conducting a financial statement audit, every organization wants a clean audit report. It saves them time and resources, it maintains a positive image in the eyes of the public, it displays strong internal controls, and in the instance of not-for-profit organizations, it could even increase the chance of obtaining more funding and grants.

Here's what you need to know about qualified audit reports for your nonprofit:

Why would an organization conduct an audit?

Most charitable and not-for-profit organizations will engage a third-party auditor to conduct a financial statement audit for one of three common reasons:

1. The organization may have received funding from another organization, with certain conditions including the requirement for a financial statement audit to be obtained.
2. The organization may have received a grant from a government agency, with certain conditions including the requirement for a financial statement audit to be obtained.
3. The organization may receive a large influx of donations every year and would want to provide a high level of assurance to its donors.

What is the most common reason for receiving a qualified audit report? 

After the audit is completed, the auditor will issue an audit report along with the audited set of financial statements. Over 90% of audits completed over not for profit organizations result in a qualified audit report due to the fact that the organization’s main source of revenue comes from cash donations. The completeness of which is not susceptible to satisfactory audit verification; meaning most charities do not have the necessary controls in place to verify and maintain how the cash is collected and how it is spent.

Many charities rely on cash donations, however, do not have the appropriate controls in place to be able to ensure the completeness of their cash donations. Implementing the proper controls in place to allow for segregation of duties, bullet-proof systems over cash are generally very expensive and in most situations, not a feasible option for organizations that rely heavily on volunteers and limited budgets. Further, no charity wants to deny cash donations either. The fact of the matter is that most charities need a way of exposing its donor base to cashless means of donating while automating the donation receipt process.

How could this affect an audit with the CRA?

Every year, the Canada Revenue Agency (CRA) audits roughly 1% of the 85,000 registered charities in Canada. Getting an unqualified audit report can help lower a charity’s chances of being selected for an audit by the CRA - unless randomly selected.

Accepting cash donations results in an organization being more prone to fraud, manual errors and mistakes within its books and records, especially when the time comes for issuing tax receipts. Issuing donation receipts with inaccurate or missing information or issuing receipts for an amount greater than was actually received are easy ways of being penalized by the Canada Revenue Agency (CRA). This is especially difficult for charities who rely heavily on cash donations because it is impossible to issue receipts for cash that is collected, for example, in a donation box.

In certain circumstances, these errors can result in the CRA financially penalizing the charity and even suspending the charity’s tax-receipting privileges. For a full list of penalties and suspensions, click here. In more serious cases, the CRA may even go to the extent and revoke an organization’s registered charitable status. A revocation of charitable status means:

• The charity cannot issue donation receipts.
  
• The charity will not be exempt from income tax.
  
• It will be extremely difficult to regain charitable status. 

If a charity is penalized, the CRA posts this information publicly. A poor image in the eyes of the public can damage a charity’s reputation and drive donors away.  This can make it very difficult for a charity to get grants and funding.

What is the PaystoneFundraising Platform and how can it help? 

This solution is a modern fundraising platform digitally connecting charities with their donors. It features an online portal to accept and manage online donations, an unattended kiosk to accept offline donations through debit and credit, and payment processing solutions for in-person and ecommerce sales transactions. Your charity is given access to an online reporting tool that helps track donations, view your donor information, automatically generate official tax receipts, create and monitor campaigns for specific fundraising targets, and engage with their donors via email and social media.

Donors can set up recurring donations and view your charity’s campaign progress, giving them the ability to see how their money is being spent.

This inexpensive solution ensures a paper trail of all donations, relieves volunteer time for fundraising efforts, reduces time spent and errors made on donation receipts, and gives your donors a transparent look into your charity’s efforts.