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There has been considerable talk regarding changes being made to the generally accepted accounting principles applied when preparing financial statements for non-profits and registered charities, as well as to the Canadian Auditing Standards. Some of these changes are effective as of December 14, 2010. This article discusses two changes in the Canadian Auditing Standards which charities and non-profit organizations are likely to face in the coming year. The first is the form of the auditor’s report that is provided with the financial statements and is found in CAS700. In a fashion similar to the changes that have been made to the audit report for for-profit entities, auditors are now going to include a paragraph in their letter to the members of the non-profit organization which specifically sets out management’s responsibility for the financial statements and the auditor’s responsibility. In particular, it is likely that the auditor’s report will now include a paragraph along the lines of the following:
“Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian Generally Accepted Accounting Principles, and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.”
This reflects the responsibility that management generally has for financial statements, but until now the auditing standards have not specifically required that the separation of responsibility and declaration of management responsibility be so clearly set out.
The second change is in Canadian Auditing Standard 560. This change relates to the date of the auditor’s report. Historically, auditing standards have permitted the auditors to date the financial statements as of the date that the audit was substantially completed. It may have been that the Board of Directors did not approve the financial statements until some period after the date of substantial completion, but that was acceptable and the Board could approve the financials at that later date and the audited statements would be issued as of the date of substantial completion.
The new standard requires that the date of the auditor’s report be the date that legal approval of the financial statement has been provided by the organization. This is likely the date the Board of Directors approves the financial statements. The ramifications for this are that the organization should plan the date for the Board meeting to approve the financial statements to be held on a date which is close to or the same as the date of substantial completion of the audit.
If the current practice of having the Board meet at a later date to approve the financial statements is followed, it will require the auditors to attend again and complete further review because they will have to ensure there have been no material changes to the financial circumstances of the organization between the date of substantial completion of their audit and the date of Board approval. If the time period is significant, this may mean that the auditors have to re-attend at the charity’s premises to perform additional audit functions. This is clearly inefficient and not cost effective.
This change regarding the date of the audit report is consistent with changes made in the for-profit sector. That said, it will require some adjustment in timing of meetings for organizations going forward, and as stated above, will apply to fiscal years ending after December 14, 2010.
We encourage your organization to discuss these changes with your auditors to ensure that you are planning your meetings and considering your financial reporting in a way that ensures it will be easy to comply with these new rules.
We of course would be pleased to assist if you have any issues or questions regarding how to comply with these rules.