During an audit of a nonprofit organization, one of the first procedures that is usually completed is a test of controls. Control testing allows an auditor to get an idea of the internal financial guidelines, controls and policies that an organization uses to prevent fraud and ensure proper accounting. During the test of controls, a random sample of transactions and documents is selected. The auditor will test these samples in a variety of ways to ensure that the management assertions – the claims made by the organization’s management – are valid.
During control testing, auditors may test the following management assertions:
Existence – All account balances exist for assets, liabilities, and equity.
Occurrence – The recorded transactions actually took place.
Completeness – All business events to which the entity was subjected were recorded; all reported asset, liability, and equity balances have been fully reported; and all transactions that should have been disclosed have been disclosed.
Rights and Obligations - The entity has the rights to the assets it owns and is obligated under its reported liabilities.
Valuation - All asset, liability, and equity balances have been recorded at their proper valuations.
Accuracy – All information disclosed is in the correct amounts, without error, and which reflect their proper values.
Classification – All transactions have been recorded within the correct accounts in the general ledger.
Cutoff – All transactions were recorded within the correct reporting period.
During control testing, your auditor will likely test disbursements (expenses and accounts payable) and receipts (income and bank deposits).
Process for Testing Disbursements
The auditor views the supporting documentation such as an invoice, purchase order or packing slip.
The auditor verifies that the amount and date agree with the disbursement, and that proper approval was documented.
The auditor observes the organization’s bank statements and a copy of the cleared check to verify if the amount matches the supporting documentation. The auditor also verifies that the payee’s name is correct and the signature are on the check is from an authorized signer.
The auditor traces the disbursement to the organization’s general ledger, confirming that the nature and amount of the expense seem reasonable and that it was recorded promptly and accurately.
Process for Testing Receipts
The auditor views the supporting documentation such as a contract, grant agreement or invoice.
The auditor verifies that the amount and the name that was recorded are accurate.
The auditor observes the organization’s bank statements and verifies the mathematical accuracy of the receipt.
The auditor traces the receipt to the organization’s general ledger, confirming that the nature and amount of the receipt seem reasonable and that it was recorded promptly and accurately.
For many nonprofit organizations, one of the most time-consuming parts of an audit is locating all of the supporting documentation required by the auditors during their test of controls. Your auditors will ask to see invoices, purchase orders, approval authorizations, bank statements, images of cleared checks, and many other types of documents.
One of the best ways to save time and stay organized is to keep a digital record of this supporting documentation throughout the year. By keeping an electronic record of all your invoices, payments, deposits, and bank statements, you will be able to quickly locate the random selection of documents that is necessary for control testing. If you prefer to maintain hard copies of these records, make sure your file cabinet is neatly labelled, and avoid boxing up or archiving any old documents until your audit is complete.