AICPA Guide Chapter-by-Chapter: 2 – Auditing Considerations

As a member of the task force that drove the overhaul of the recently-released AICPA Not-for-Profit Entities Audit and Accounting Guide, I am providing weekly, AICPA guide
chapter-by-chapter summaries to help users preview the guide.

Chapter 2 is a “must-read” for auditors, NFP boards and managers. The chapter takes the reader through the entire audit process, start-to-finish, and explains the roles and responsibilities of the auditor and management of the auditee.


The chapter explains the scope, authority, and structure of Generally Accepted Auditing Standards (GAAS) and includes requirements establishing the general responsibilities of the auditor applicable in all audits, including the obligation to comply with GAAS.


The purpose of an audit of an NFP’s financial statements is to provide financial statement users with an opinion by the auditor about whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, the most common being U.S. GAAP.


An auditor must exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit and, among other things:

  • identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal control
  • obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks, and
  • form an opinion on the financial statements, or determine that an opinion cannot be formed, based on an evaluation of the audit evidence obtained

An auditor must develop an understanding of the NFP entity’s business, the environment in which it operates, and its internal control.


The operations of NFPs differ from those of for-profit entities in several significant ways, and those differences affect the risk of material misstatement. NFPs also:

  • are required to comply with numerous other provisions of statutes, contractual agreements, terms of grants and trust agreements, and similar limitations
  • often have revenue and expense transactions that are unique to the industry
  • are required to recognize agreements for future nonreciprocal transfers of cash, other assets, and services that are unconditional (i.e., promises to give)
  • have unique reporting requirements under GAAP – for example, they must report their expenses by function
  • face pressures that are unique to entities that seek revenues in the form of contributions and grants, transactions that often depend on the state of the economy


Appendix A at the conclusion of the chapter consists of an expanded discussion of fraud risks unique to NFPs and, in addition to being indispensable to auditors, would make a highly useful and instructive text for audit committees, boards of directors, and senior management members of NFPs.

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