With federal and state funding being a key piece of revenue for many nonprofits and governmental units, uncertainty and its risk need to be accounted for. In fact, the impacts of uncertainty should be considered as far back as audit planning and risk assessment.
Volatile federal appropriations and Pennsylvania’s often bumpy budget cycle can turn a routine not-for-profit audit into a moving target. With federal and state funding being a key piece of revenue for school districts, human services providers, community nonprofits, and even for-profits with cost-reimbursement awards, funding uncertainty alters risk, timing, and the kinds of evidence that really matter. In this environment, advance planning and creating space for flexibility are vital.
The impacts of uncertainty should be considered as far back as audit planning and risk assessment. When funding is in flux, inherent risk climbs in familiar places: recognizing revenue at the right time, separating exchange transactions from contributions, and getting cutoff right when awards start late or pause midyear. Control risk can be impacted, too. Hiring freezes and interim spending controls weaken segregation or lessen the time and attention of transaction reviewers, while pressure to “make budget” raises fraud risk. Journal entry testing, analytics, and walk-throughs should reflect today’s conditions, not last year’s steady state.
Revenue recognition and eligibility deserve a careful read. For nonprofits, confirm whether arrangements are conditional contributions or exchange transactions. Barriers to entitlement – approvals, allowable-cost conditions, matching – become bigger hurdles when funding is uncertain. Expenditures must fit the period of performance, and just because funding is available late does not mean it can be spent late. Auditors should understand the timing of reimbursements and drawdowns, and evaluate the risk of impermissible spending in the organization.
Single Audits are often impacted when awards slip. Delays suppress current-year spending and can change major program selection. Anchor the Schedule of Expenditures of Federal Awards (SEFA) in reality with correct assistance listing numbers, accurate pass-through identifiers, and accruals for incurred but unreimbursed costs. Also, make sure communications with pass-through entities are being monitored for changes in the nature of pass-through funding.
Pennsylvania’s budget timing adds nuance. The commonwealth’s fiscal year begins July 1, so late appropriations can slow the pass-through of state and federal dollars. Verify availability before recognizing revenue: “funding is coming” isn’t evidence. Because many recipients are paid through state agencies, inspect the signed grant agreement (not just emails) to lock down award numbers, terms, and performance dates. If federal awards require a state match, confirm eligible sources and avoid double-counting contributions across awards.
Going-concern procedures benefit from scenario thinking: does the organization have contingency plans in place if one or more funding streams disappear or are delayed? If one grantor dominates revenue, consider concentration risk disclosures and be candid with subsequent-events footnotes when cuts or delays are known before issuance.
Expect more subsequent-events work when budgets break after year-end. Funding decisions between the balance-sheet date and the report date rarely adjust historical numbers, but they often require disclosure. Read minutes, monitor agency communications, refresh legal letters and inquiries if issuance slips, and extend procedures to the new report date as needed.
Internal control often morphs during uncertainty. Temporary spending freezes, emergency approvals, and remote sign-offs alter design and operation. Walk through the processes as they actually function. Test the precision of compensating controls and perform user-access reviews in grant, procurement, and timekeeping systems to catch stale or conflicting roles. Estimates, cutoffs, and analytics should work in chaos: base any allowances on observable data, expand cutoff around award transitions, and use targeted analytics to spotlight unusual reallocations and trend breaks.
Reporting choices still matter. Clients may be more averse than ever about findings and the reporting of deficiencies, but auditors cannot give clients grace at the cost of audit accuracy. Describe real control deficiencies plainly in your Yellow Book report, consider an emphasis-of-matter when disclosed funding uncertainty is fundamental, and use other-matter paragraphs to orient readers to separate compliance reports.
Finally, auditors will need to leave room in the schedule for late documents and longer subsequent-events windows, sequence Single Audit testing once the SEFA stabilizes, and tailor management representations to funding status, period-of-performance compliance, matching, SEFA completeness, and subsequent events.
Do that, and your evidence, disclosures, and timing will keep pace with a choppy year, delivering assurance that holds up for boards, lenders, and regulators.
Jeffrey A. Kowalczyk, CPA, CFE, CGAP, is a partner with Barbacane Thornton & Co. LLP in Wilmington, Del. He can be reached at jkowalczyk@btcpa.com.
Sign up for PICPA's weekly professional and technical updates by completing this form.
Statements of fact and opinion are the author's responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.
