Financial Statement Reviews and Agreed-Upon Procedures: Cost-Effective Alternatives to Audits for Nonprofits

Introduction

Nonprofit organizations can play transformative roles in their communities, striving to advance missions that address urgent social, cultural, and environmental needs. To safeguard donor trust and maintain accountability, nonprofits have traditionally relied on extensive financial scrutiny in the form of financial statement audits. While audits deliver a comprehensive level of review, they may be more exhaustive, and often more costly, than necessary for many smaller organizations. With limited resources, a nonprofit may find itself seeking a more accessible level of financial examination that can still provide transparency, foster good governance, and offer stakeholders peace of mind. One increasingly popular strategy is to pursue alternative assurance and attestation engagements, such as financial statement reviews or agreed-upon procedures (AUPs), which can meet these needs at a more economical cost.

Understanding Audits vs. Alternative Assurance and Attestation Engagements

Audits remain the gold standard for organizations that need or require thorough financial examination. An audit provides what’s known as “reasonable assurance” that the financial statements are free of material misstatements, whether caused by error or fraud. This includes confirmations of account balances, testing internal controls, and other substantive procedures. For larger nonprofits that regularly deal with government grants or have bylaws mandating an audit, it makes sense to engage an auditor to conduct a full-scale, in-depth review.

Not all nonprofits must adhere to that level of scrutiny. For smaller organizations or those without the compliance requirements, financial reviews and AUPs can serve as strong, more cost-friendly steps toward verifying financial data and processes.

A financial review generally involves higher-level inquiries and analytical procedures to ensure that the financial statements are plausible and consistent with GAAP. It doesn’t involve extensive verification or testing of financial statement areas or internal controls, so it naturally requires fewer staff hours and fees compared to an audit.

AUP engagements differ because they are even more focused. A CPA firm works with a nonprofit to define exactly which financial data or processes need evaluation such as verifying the propriety of a specific grant’s expenditures, validating a particular set of transactions, or assessing internal controls within a financial statement area.

Advantages of Reviews and AUPs for Nonprofits

Unlike an audit, which can sometimes be financially or operationally burdensome for smaller nonprofits, a review or AUP focuses on key areas of concern and helps reduce overall costs. Some organizations simply do not have the budget to fund an audit every year, and a review might be the perfect compromise. Both of these alternatives still demonstrate a tangible level of accountability that fosters increased trust from donors, grantors, and even potential lenders.

A review can be especially helpful for nonprofits with moderate needs. Because the CPA’s procedures include various inquiries and analyses, an organization’s leadership can receive comfort knowing that any glaring issues would likely be identified. At the same time, the limited scope saves time and money, which can be funneled back into mission-centered activities.

For organizations that need to hone in on very specific financial questions such as verifying the accuracy of inventory in a museum gift store or ensuring that a program meets certain donor stipulations, an agreed-upon procedures engagement is often ideal. Rather than scouring every aspect of the organization’s finances, the CPA zeroes in on the area of interest. This approach yields a set of findings with minimal disruption to daily operations and a distinctly lower cost than full-scale audits.

Determining Which Engagement Your Nonprofit Needs

Deciding on an audit, review, or AUP engagement can hinge on a few key factors: regulatory requirements, size, complexity, resource availability, as well as the processes required under each engagement. Some states or federal regulations mandate an audit once a nonprofit’s annual revenue crosses certain thresholds. Large grantors may demand audited financial statements before awarding funds. In such cases, an audit is not a choice but an obligation.

However, many nonprofits do not have such mandates. In these instances, a board of directors might consider a financial review if they wish to maintain an above-average level of oversight or satisfy moderately sized supporters. If your internal controls are stable and your operations are relatively straightforward, a review may be enough. In a financial review, the CPA will typically perform analytical procedures to assess how your statements line up with projected trends and ratios. They may ask about policies, procedures, and significant variations from the prior year. Their final report conveys “limited assurance,” indicating no past evidence suggests misstatements, but it’s not as thorough as in an audit.

On the other hand, if you have a narrow concern such as verifying new donor pledges, ensuring compliance with a single grant, or reviewing internal control structures, a set of AUPs might suffice. You will save costs, enjoy more flexible scheduling, and get exact answers to the questions that matter most. Accordingly, an AUP engagement starts with a more customized discussion. You collaborate with your CPA to precisely determine the problem areas or questions that need resolution. At the end of the engagement, you receive a “findings report,” which spells out the factual outcomes of those procedures, rather than drawing an overarching conclusion on the entire set of financial statements. This direct approach pairs well with targeted concerns.

Potential Pitfalls and How to Avoid Them

When nonprofits pursue a financial statement review or AUP, misalignment between the engagement’s scope and the organization’s actual needs can be a risk. If your board believes that you merely need a spot check on inventory, but your finances involve multiple revenue sources and complex transactions, a partial check may not paint the full picture. Speaking openly with your CPA about your expectations and challenges is key.

Another common pitfall is underestimating future growth. If your nonprofit has ambitious strategic plans or expects major grants soon, an audit might eventually be required. In these situations, it’s wise to treat reviews or AUPs as stepping stones. They help your team understand their finances more deeply while gradually preparing for more comprehensive assurance in the future.

Lastly, nonprofits sometimes overlook crucial compliance requirements. State and federal guidelines, as well as donor mandates, frequently change. Every nonprofit should ensure they remain compliant, even if only an AUP or review is selected for the present year.

Experienced Insight

“Many organizations underestimate how much targeted engagements like reviews or agreed-upon procedures can improve their financial transparency. Even smaller steps in this direction can offer major benefits in terms of donor trust and process improvement.” — Tony Smith, Partner-in-Charge of GreerWalker’s Assurance Practice

Maximizing Nonprofit Efficiency Through Smart Assurance Choices

Smart assurance choices optimize those precious resources that nonprofits work hard to secure. Instead of immediately defaulting to an audit, especially if you aren’t legally required to conduct one, a financial review or a targeted AUP can achieve your objectives in a cost-effective way. Beyond the financial side, independent professional input can help refine internal processes, uncover small oversights, and highlight areas of operational success or vulnerability.

Equally important is the message that limited yet credible engagements send to your supporters. Donors place considerable value on a nonprofit’s willingness to engage third-party professionals to verify accuracy, even if that verification doesn’t rise to the full audit level. This gesture enhances your reputation for prudent oversight and may assist in unlocking additional funds.

How GreerWalker Can Help

At GreerWalker, we tailor our assurance and attestation services to meet the nuanced needs of various nonprofits, from small local charities to larger organizations with robust programming, enabling us to serve an array of nonprofit entities effectively. We focus on delivering practical guidance along with high-quality assurance, leveraging technology like data analytics and a secure cloud-based portal to streamline how information is gathered and reviewed.

If your organization needs collaborative advice in deciding which type of engagement would be best suited to your operational or financial objectives, we can walk you through functionalities and expectations. Our professionals perform an array of assurance and attestation engagements, including financial statement audits, reviews, and AUPs. We also conduct internal control assessments and provide recommendations, ensuring that the systems you have in place align with your accountability goals. By partnering with GreerWalker, you’ll have a dedicated advisor prepared to help you preserve essential resources for key nonprofit activities while maintaining the transparency and credibility your donors and stakeholders demand.

Conclusion

For nonprofits seeking to balance strong financial governance with budgetary prudence, reviews and agreed-upon procedures offer strong alternatives to full-scale audits. These engagements provide adequate transparency to assure donors and constituents that funds are being used responsibly, while leaving sufficient room for leadership to keep resources directed toward mission objectives. By carefully evaluating the degree of complexity involved, regulatory requirements, and organization size, nonprofits can make informed decisions that forge a steady path of financial accountability. In the end, the real goal is consistent stewardship of donor trust. Both financial reviews and AUPs can play a vital part in achieving that purpose.

Experienced Contributors

Tony Smith, Partner
Email: tony.smith@greerwalker.com
Tony is the Partner-in-Charge of GreerWalker’s Assurance practice, advising not-for-profits of all sizes with risk management strategies and common-sense, reliable business solutions.

Olivia Turnbull, Manager
Email: olivia.turnbull@greerwalker.com
Olivia leads GreerWalker’s not-for-profit practice area, offering practical financial insights and dedicated assurance support across a wide variety of nonprofit institutions.