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What Triggers an Audit and What to Do Next

Every day your organization goes through different transactions that could require your financial statements to be audited by an independent certified public accountant (CPA) firm.

So, what triggers an audit? First let’s understand what an audit actually is.

What is an Audit?

An audit is an official inspection of an individual’s or organization’s accounts and internal controls, typically by an independent CPA or CPA firm.

Usually, the users of the financial statements can request an audit to ensure the statements are accurate. The users of the financial statements can include regulatory bodies, management, boards, investors, grantors, creditors, foundations, and the general public.

From a CPA’s perspective, an audit requires them to review all financial statements and issue an opinion on the accuracy of the financial statements and disclosures.

What Triggers an Audit? 

Now that we understand what an audit is, here are some of the most common triggers of an audit.

1. Creditors, Lenders, and Stock Exchanges

Financial Institutions and investors very often require their debtors or companies in which they invest to submit Audited Financial Statements, or at least some type of Financial Statement with a level of assurance from a CPA – such as a review or some agreed-upon procedures.

This gives the lender confidence that they can rely on the financial statements to make decisions. All public companies are required to be audited by the Securities and Exchange Commission.

2. Private Foundations and Grantors

It is not uncommon for grantors and foundations to request audited financial statements annually from its grantees and those which have received a substantial endowment.

This is a natural response to reduce the risk of misuse of funds received by grantee organizations.

3. Governmental and Tax-Exempt Entities

There is a vast subset of regulatory related financial statement audits.

The most common, however, is if your organization’s benefit plan exceeds a certain number of eligible participants (typically 100), a Department of Labor employee benefit plan audit will be required to be attached to your Form 5500 tax return.

Non-profit or governmental organizations are required to submit audited financial statements to the Federal Audit Clearinghouse if they expended more than $750,000 in federal funds during their fiscal year. This audit will also require the CPA to issue special reports on the compliance of the entity with its federal programs and internal controls. This is commonly referred to as a “Single Audit” required by Subpart F of the Office of Management and Budget.

It is important to be aware that the size of your federal grant pool may require your financial statements to be audited and your compliance with grant requirements to be assessed.

4. The CARES Act

Unexpected disbursements from the federal government to healthcare providers in 2020 and 2021 under the CARES Act resulted in a large number of previously unaudited entities recognizing federal funds over the Single Audit threshold of $750,000, requiring Single Audits.

Privately owned practices and grant recipients can undergo a “Program Specific Audit” to remedy their Single Audit requirements while not undertaking an entire financial statement audit if the federal funds recognized in their financial statements exceeding $750,000 in a fiscal year.

Contact Us

If you are concerned about your entity’s potential assurance requirements or what triggers an audit, be sure to thoroughly read all debt and grant agreements with attention to any required reporting. You can also get in touch with either your local Blue & Co. Advisor or one of our experts below to understand the impact of today’s transactions on your entity’s financial statements.

Peter Szostak, Senior Manager
317-713-7948

Rebecca Jackson, Senior Manager
513-834-6899

Daniel Hicks, Senior Accountant
317-275-7445

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