By David Babb
It’s that time of the year again – no, not tax season; it’s “no, I don’t do taxes season.” I find myself being asked at least once per week, usually by a parishioner at church I’ve known for years, or even family members, “how’s tax season going?!” My immediate, and canned, answer (spoken as politely as I can) is “I don’t know; I don’t do taxes; I’m an auditor.” This is what life is like for auditors for nearly a quarter of the year. This same conversation with friends and family inevitably leads to explaining that I do not work for the IRS. In fact, I have come to the conclusion that three things in life are certain: Death, taxes, and auditors being asked about tax season!
There seems to be a lot of confusion by the public about what auditors really do. An audit in its simplest form is a systematic and independent examination of information. Strangely, the word “audit” translated to Latin means “to hear.”
That leads us to the question of “Why Get an Audit?”
The answer is simple: The users of the financial statements need accurate and reliable information to make decisions. Below are the main reasons for having an audit, by industry:
For Profits – These entities have various reasons for receiving an audit. Most commonly, when a business takes on debt, there is often a clause in the debt agreement that an audit is required for use by the lender. Secondly, it may be as simple as the company’s by-laws require such an audit.
Nonprofits – In Tennessee, state statutes require an audit for nonprofits with gross revenues (less certain other revenues) greater than $500,000. Many charitable organizations are part of a larger national network whose by-laws require annual audits. Additionally, nonprofits receiving or expending state and federal grant funds may need an audit if they cross certain thresholds. In Tennessee, state statutes require an audit for nonprofits with gross revenues (less certain other revenues) greater than $500,000.
Local Governments – These entities, as least in Tennessee, are required to have an annual audit based on state guidelines. These audits are sometimes performed by state employees, while others are performed by independent CPAs.
Construction Contractors – Certain contractors are required to maintain licenses by the State, which involves obtaining audited or reviewed financial statements based on state-prescribed thresholds.
Retirement Plans – Plans with one hundred or more eligible participants may be subject to an annual audit of the plan. The audit report would then be filed with the plan’s tax return. These requirements stem from the Employee Retirement Income Security Act of 1974 (ERISA).
Even though an entity may not meet the requirements from any of these above, it may still be appropriate for an audit to be conducted. An audit provides users of financial statements a reasonable level of assurance as to whether the information within those statements can be relied upon for making decisions. Even though it is not the purpose of an audit, an audit also gives a glimpse of how the internal controls within the entity are designed.
If you find yourself unsure if your company, charity, or retirement plan needs or requires an audit, please contact us and we would be glad to discuss the requirements specific to your entity and explain the process in more detail.