Not-for-Profit Organizations Industry Developments 2008 – Audit Risk Alert

This Audit Risk Alert is intended to provide auditors of financial statements of not-for-profit organizations with an overview of recent economic, industry, technical, regulatory, and professional developments that may affect the audits and other engagements they perform. This alert can also be used by an entity's internal management to address areas of audit concern. This alert is an important tool in helping you identify the significant risks that may result in the material misstatement of financial statements. Moreover, this alert delivers information about emerging practice issues and current accounting and auditing developments.

This alert provides regulatory updates for IRS activities in relation to not-for-profit organizations. You will also find information on recently issued accounting and auditing standards such as:

• Disclosures about Derivative Instruments and Hedging Activities (FASB No. 161)
• Business Combinations (FASB Nos. 160 and 141(R))
• Fair Value Accounting Standards (FASB Nos. 157 and 159)
• Risk Assessment Standards
• SAS No. 112
• SAS No. 114

You will also find information on emerging issues such as:

• Convergence with International Financial Reporting Standards
• The FASB Codification Project
• The ASB's Clarity Project including convergence with international standards

This publication is an other auditing publication as defined in AU section 150. Other auditing publications have no authoritative status; however, they may help the auditor understand and apply the Statements on Auditing Standards. The auditing guidance in this document has been reviewed by the AICPA Audit and Attest Standards staff and published by the AICPA and is presumed to be appropriate. This document has not been approved, disapproved, or otherwise acted on by a senior technical committee of the AICPA.

How This Alert Helps You

.01 This Audit Risk Alert (alert) helps you plan and perform your notfor- profit organization audits. This alert can also be used by an organization's internal management to address areas of audit concern. This alert provides information to assist you in achieving a more robust understanding of the business, economic, and regulatory environment in which your clients operate. This alert is an important tool in helping you identify the significant risks that may result in the material misstatement of financial statements. Moreover, this alert delivers information about emerging practice issues and current accounting, auditing, and regulatory developments.

.02 This alert is intended to be used in conjunction with AICPA Audit Risk Alert-2007/08 (product no. 022338kk). This alert can be obtained by calling the AICPA at (888) 777-7077 or visiting www.cpa2biz.com. You should refer to the full text of accounting and auditing pronouncements as well as the full text of any rules or publications that are discussed in this alert.

.03 References to Professional Standards. When referring to the professional standards, this alert cites the applicable sections as codified in AICPA Professional Standards and not the numbered statements, as appropriate. For example, Statement on Auditing Standards (SAS) No. 54, Illegal Acts by Clients, is referred to as AU section 317 of AICPA Professional Standards.

Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

.04 An auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. An auditor's understanding of the entity and its environment consists of an understanding of the following aspects:

• Industry, regulatory, and other external factors
• Nature of the entity
• Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements
• Measurement and review of the entity's financial performance
• Internal control, which includes the selection and application of accounting policies

.05 The not-for-profit industry may be subject to specific risks of material misstatement arising from the nature of its activities, the degree of regulation, or other external forces (for example, political, economic, social, technical, and competitive forces).

Copyright © 2008 American Institute of Certified Public Accountants, Inc. All Rights Reserved

Product# 022428