Detection Risk (DR) is the risk the auditor will not detect a misstatement in the financial statements. Detection risk is a function of the effectiveness audit procedures.
Therefore:
RMM (defined previously) X DR = Audit Risk
Since the beginning of the year, we have been discussing the general requirements for reporting contributions. In this post we will discuss when to record a contribution.
When is the unconditional transfer considered a contribution? When does the church record a contribution? The timing or delivery of the unconditional transfer is very important in determining how/when to record a contribution.
Let’s review the following:
a. Checks that are mailed to a church are considered “delivered” on the date the donor mails it or the date of postmark.
b. Checks that are delivered in person are considered a contribution at the time of delivery. Checks that are postdated are basically considered to be a promise to pay and should be treated like a promissory note. The church should retain the check until the date and then deposit the funds and record the contribution.
c. Contributions charged on the donor’s bank credit card are recorded in the year the charge is made.
d. If an individual utilizes a pay-by-phone account, the date the financial institution pays the amount is the date of contribution.
e. If stock is donated to the church, the contribution is recognized when the properly endorsed certificate is mailed/delivered to the church or the church’s agent. However, if an individual gives a stock certificate to their agent or to the issuing corporation for transfer to the name of the church, the gift is not completed until the date the stock is transferred on the books of the corporation.
f. If an individual issues a promissory note to a church, it is not a contribution until the payments are made.
g. If an individual makes a contribution with borrowed funds, the contributions are recorded when received, regardless of when the loan is repaid.
h. If a contribution is a conditional gift that depends on a future act or event that may not take place, a contribution cannot be recognized unless there is only a negligible chance that the act or event will not take place.
Here’s an example: Individuals donate cash to a church to help build a new educational wing. The church needs $250,000 to build the wing. The church will refund the contribution if the $250,000 is not raised. The contribution is not recognized until the $250,000 has been raised.
Churches may recognize contributions when received, if the transfer is “unconditional”.
As you can see, it is important to determine when the Church receives the unconditional transfer. See our next post regarding the amount that can be deducted by the donor.
Posted by Floyd Langley & Kirk Vanderslice
In our previous posts we have discussed the new risk standards promulgated by the AICPA affecting audits for years ending beginning on or after 12/15/06. In post #4 we briefly discussed SAS 106 and 107. Now we will discuss SAS 108 and 109.
SAS 108 –requires a more detailed audit plan than what was previously accepted. This standard will require more interaction with clients and it may take the auditor longer to generate the plan.
SAS 109 – requires the auditor to perform “risk assessment procedures” to gather information and gain an understanding of the client and their environment. This can be performed in conjunction with documentational questionnaires, client interviews, and “brainstorming” sessions amongst the auditors. This understanding will help the auditor obtain the evidence necessary to support the auditor’s assessment of risk.
Control Risk Definition: Control Risk (CR) is the level of risk that a misstatement will occur and not be detected by the entity's internal controls.
IR (inherent risk - defined in a previous post) x CR (defined above) = Risk of Material Misstatement
Posted by - Anthony Miller
As we learned in post #4 of 5, organizations must determine how to properly record leases, either as an operating or as a capital lease. In this post we will now assess how to determine prepaid expenses and unrecorded liabilities. To assist you in this determination print out the Church’s disbursement ledger for at least the last two months of the year. Review items that represent payments made before year end; but services or goods will not be received until after year end.
Prepaid/Other Assets Generally Consist of:
Prepaid Insurance
Prepaid TV/Radio Airtime
Prepaid Postage
Loan Origination Fees
Deposits
If payments were made before year end, relating to something to be received in the subsequent year, these payments must be properly recorded as a prepaid expense (asset).
The next step is to verify accrued liabilities at year end. Accrued liabilities represent invoices received subsequent to year end relating to services or goods received before year end. Review the subsequent year payments to the year in which the goods or services were received. If goods and services were received prior to year end, these items should be recorded as payables at year end.
To assist you in your closing efforts, see the Month/Quarter/Year end Closing Procedure Checklist (See Exhibit E).
This concludes our series for closing procedures.
Note: Continue to walk in integrity.
Posted by - Kirk Vanderslice
Under the Internal Revenue Code section 501(c)(3), charitable organizations, including churches and religious organizations, are exempt from federal income taxes and are generally eligible to receive tax-deductible contributions.
What is a church? What are the characteristics of a church?
According to www.dictionary.com **, "church" can be a noun or a verb. As a noun, a church can be defined as:
1. a building for public Christian worship.
2. public worship of God or a religious service in such a building: to attend church regularly.
3. the whole body of Christian believers; Christendom.
4. any division of this body professing the same creed and acknowledging the same ecclesiastical authority; a Christian denomination: the Methodist Church.
5. that part of the whole Christian body, or of a particular denomination, belonging to the same city, country, nation, etc.
6. a body of Christians worshipping in a particular building or constituting one congregation
7. ecclesiastical organization, power, and affairs, as distinguished from the state: separation of church and state;
8. the clergy and religious officials of a Christian denomination.
9. the Christian faith: a return of intellectuals to the church.
10. the Christian Church before the Reformation.
11. the Roman Catholic Church.
12. the clerical profession or calling;
13. a place of public worship of a non-Christian religion.
14. any non-Christian religious society, organization, or congregation: the Jewish church.
Church is classified as verb and can be defined as:
1. to conduct or bring to church, esp. for special services.
2. to subject to church discipline.
3. to perform a church service of thanksgiving
The word “church” has a broad definition and has a universal recognition in our society. Despite a number of references to the word “church”, the tax code provides no definition. A definition that is too narrow or too broad could interfere with the constitutional guaranty of religious freedom or encourage abuse.
However, the IRS has attempted to fill this void by developing a list of 14 criteria that characterize a church. See our next post, as we discuss these characteristics.
Posted by Becky DaVee
** - obtained from Dictionary.com, unabridged version 1.1. Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.
In our 2 previous posts in the contribution/event series, we have discussed the common scenario of a non-profit solicitating contributions/revenues in exchange for a donor benefit. Donors often receive something in exchange for a contribution. Whether it is a meal, a book, a video, all of these items are treated similarly. Remember the criteria for financial reporting:
What has been communicated to the donor and what is the donor’s intended response?
The Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA) consider these types of items as direct donor benefits. The donor receives a benefit in exchange for the contribution or “event” sponsorship.
The Internal Revenue Service (IRS) refers to this type of contributions as a quid pro quo contribution. The above regulatory agencies have a similar view of how to treat these items, the first two specifically focusing on financial reporting requirements, and the later on tax benefit considerations.
The following is an excerpt from the AICPA’s Not-For-Profit Audit Guide, chapter 13 paragraph 22:
Organizations may report the gross revenues of special events and other fund-raising activities with the cost of direct benefits to donors (for example, meals and facilities rental) displayed either (1) as a line item deducted from the special event revenues or (2) in the same section of the statement of activities as are other programs or supporting services and allocated, if necessary, among those various functions.
Alternatively, the organization could consider revenue from special events and other fund- raising activities as part exchange (for the fair value the participant received) and part contribution (for the excess of the payment over that fair value) and report the two parts separately.
The above guidance by the AICPA is excellent in helping with the financial reporting aspects of this situation. The following are the presentation options discussed above:
Illustration 1
Changes in unrestricted net assets:
Contributions $200
Special event revenue 100
Less: Costs of direct benefits to donors (25)
Net revenues from special events 75
Contributions and net revenues from special events $275
Expenses:
Program 60
Management and general 20
Fund raising 35
Total expenses 115
Increase in unrestricted net assets $160
Illustration 2
Changes in unrestricted net assets:
Revenues:
Contributions $200
Special event revenue 100
Total revenues 300
Expenses:
Program 60
Other program costs relating to
direct donor benefits 25
Management and general 20
Fund raising 35
Total expenses 140
Increase in unrestricted net assets $160
The "net answer" remained the same, just a difference in reporting the expense as "net revenue" or "expense". See post # 4 as we finalize our discussion on these types of contributions.
Posted by Floyd Langley and Becky DaVee
NACBA and S&O are partnering together to provide a regional training seminar in San Antonio. This seminar invites NACBA members and guests (Texas/Louisiana/New Mexico) to attend a 2- day seminar exploring ways that churches and ministries can "Create Accountability". The seminar begins on May 29th with a kick-off luncheon led by Eric Bryan, Executive Pastor of Fellowship Bible Church, Tulsa.
First Baptist Church on the Riverwalk is hosting the seminar and it begins at noon at May 29th.
The following will be covered during the 2-day sessions:
May 29th, (noon - 5:00 p.m.)
Kick-off Luncheon - Eric Bryan - reviewing key concepts from Andy Stanley's book "Visioneering".
Session I - "Create Tone" - leadership
Session II - "Create Transparency" - financial reporting and responsibilities
May 30th, (8:00 a.m. to 12:00)
Session III - "Create Stability" - compensation and benefits
Session IV - "Create Compliance" - regulatory changes/perspectives/focus
Check out NACBA's website and join us.
Posted by Becky DaVee
In our two previous posts, we have discussed the different financial statement presentations, GAAP, cash basis and now we will define modified cash basis of reporting.
There must be "substantial support" for reporting under the modified cash basis. Ordinarily, a modification would have substantial support if the method is equivalent to the accrual basis of accounting for the particular item and if the method is not illogical. The modified cash basis is more common than the "pure" cash basis.
Examples include the need to report property and equipment purchased as assets; accumulated depreciation; material amounts of inventory purchased for cash as assets; liabilities arising from the receipt of borrowed cash; and employee withholding taxes not deposited with the IRS.
See our next post that discusses how to disclose these modifications.
Posted by David DuBois
In our previous posts we have discussed several of the new auditing standards that auditors are required to perform for audits with financial statements ending after December 16, 2007. Basically this impacts financial statement audits for years ending December 31, 2007. In this post, we will update you on Statements of Auditing Standard “SAS” # 106 and #107.
SAS 106 – This new standard requires auditors to utilize assertions (i.e. is the account valued correctly? Is this the complete population? Does the client have rights to that asset?), assigned to each account to assess risk and design audit programs. While this step will require additional work in the first year of implementation, it will eventually reduce the amount of testing by eliminating the previously mentioned potential of “over” auditing.
SAS 107 – This step goes hand in hand with SAS #106. Auditors will utilize the audit assertions mentioned above and identify the inherent and control risks for each account within each assertion. The statement provides definitions for the following risks:
Inherent risk - defined as the susceptibility of a material misstatement to a particular account assuming there are no related controls.
Control risk - defined as the susceptibility of a material misstatement to a particular account will go undetected by the controls that are in place.
While this probably sounds like gibberish, in layman’s terms the auditor will assess both of the above-mentioned risks for each account (i.e., cash, inventory, fixed assets, etc…), thus dictating the amount of testing that will be done. So if, for example, the auditors determine that an account has a “low” inherent risk and a “low” control risk, a “low” level or amount of audit testing will be performed. However, if inherent risk and/or control risk is assessed at “moderate” or “high”, then more audit testing will be performed.
Watch for our next post as we discuss the implications described by SAS 108-109.
Posted by Anthony Miller
Several religious organizations have created integrated auxiliaries. What are these entitites? How should the information be reported?
According to Publication 1828, Tax Guide for Churches and Religious Organizations an integrated auxiliary of a church refers to a class of organizations that are related to a church or convention or association of churches, but are not such organizations themselves.
In general, the IRS will treat an organization that meets the following three requirements as an integrated auxiliary of a church. The organization must:
** Be described both as an Internal Revenue Code section 501(c)(3) organization and be a public charity under Code section 509(a)(1), (2), or (3),
**Be affiliated with a church or convention or association of churches, and
**Receive financial support primarily from internal church sources as opposed to public or governmental sources.
Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy the first two requirements above are considered integrated auxiliaries whether or not they meet the internal support requirement.
So how does a church report an integrated auxiliary? See post #2...
posted by Becky DaVee
