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Does Qualified = Bad?

Understanding Audit Reports for Not-For-Profits

In general conversation, the word “qualified” is often considered to be a positive attribute implying that a person has adequate skills for the job at hand and can be trusted. In the context of audit reports, however, a qualified report is not something to aspire to.

As a board member of a not-for-profit, if you see the words “Qualified Audit Opinion” you should be asking why, and consider if changes within your organisation are required.

There are many reasons why an audit report might be qualified, and the seriousness of issues raised needs to be considered in the context of the specific organisation. The most common qualification we see when reviewing financial statement audits conducted by other auditors for not-for-profit entities and is worded as follows:

"As is common for organisations of this type, it is not practical for the management committee to maintain adequate systems of internal control over funds received prior to their initial entry in the financial records. Accordingly, our audit in relation to the funds collected was limited to amounts recorded in the financial records. We, therefore, are unable to express an opinion as to the completeness of income."

This paragraph is essentially saying that the auditor cannot be sure that all income received has been recorded. For many auditors, it seems to be the ‘go-to’ report wording for any not-for-profit entity. At SAAS Audit we do on occasion need to qualify our audit reports in this manner, but it is not the norm.

It can be appropriate when cash income is collected and banked without any controls being in place. We are finding that cash income is becoming less frequent and if we make an effort to ask the right questions of our clients we can often uncover controls or systems that give us sufficient evidence to avoid a qualified audit report.

If the organisation you are involved with has received a qualified report, you should first determine the exact reason for the qualification and if it could have been avoided based on existing systems and controls in place.

Weigh up the risks, if you consider improvements to internal controls are required, resources and advice are available. At SAAS we often direct clients to ‘Internal controls for not-for-profit organisations’ by CPA Australia. The ACNC also has some useful guidance.

Our client based includes a large number of not-for-profits of varying sizes. For more information, contact the team at SAAS Audit.

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