Organization is fundamental to the growth of a company. Workflows, for example, must be properly aligned between teams and the production line. In this way, the quality and delivery of a product or service is guaranteed. Likewise, the company's balance sheets also require this organization, to ensure transparent, solid and useful reports for corporate governance.
The definition of accounting audit
Before we specifically address third sector auditing, it is important to understand accounting auditing as the process of verifying balance sheets and financial statements. It consists of analyzing and evaluating whether the company's numbers reflect the true patrimonial, financial and economic situation. Therefore, it brings important benefits to administrators and business owners. These advantages should never be neglected, as they are fundamental to business security.
The first and greatest benefit of the audit is the identification of inconsistencies in the financial statements. Errors in these numbers are dangerous, as they can result in legal problems, such as fraud and non-payment of taxes due. Being aware of the errors, the entrepreneur can ask the financial area team to correct the errors.
The importance of auditing for the third sector is indisputable, as it plays a fundamental role in ensuring the transparency, reliability and efficiency of non-profit organizations. The third sector encompasses a variety of institutions, such as non-governmental organizations, philanthropic entities, associations and foundations, whose main objective is to promote social, environmental, cultural or economic well-being.
Main steps of the accounting audit
In a nutshell, the main objective of an accounting audit is to examine the information contained in a company's financial statements. The purpose of this process is to review a company's financial documents in order to have an up-to-date and true view of the accounting situation to determine its reasonableness.
When carrying out accounting audit work for a company, there are certain steps and phases that are followed by professionals and it is no different in third sector auditing. The first phase is planning, when relationships are established between auditors and the audited company, to determine issues such as scope and objectives. An outline of the company's situation is made, regarding its organization, accounting system, internal controls, strategies and other elements that allow the auditor to prepare the audit program that will be executed. Preliminary analyses, risk analyses, knowledge and understanding of the company's activity are also developed at this stage.
The next phase is the execution phase. Furthermore, in this phase possible failures are also detected, when test results are evaluated and findings are identified.
Then, conclusions and recommendations are drawn up to finally communicate them to the company's leadership. This is the phase of finalizing and preparing the audit report, which must firstly contain the opinion on the financial statements of the administrative area audited. It must also contain the conclusions and recommendations resulting from the audit, detailing the findings in a clear and simple way.
Why do an Accounting Audit
The accounting audit analyzes accounting documents in detail, checking whether the financial statements are compatible with the financial situation, as well as checking whether accounting principles are respected. Carrying out a third sector audit is essential, as it is a process that ensures the accuracy of records, preventing irregularities or fraud.
Even if the company is not part of the mandatory list, there are many advantages in seeking an accounting audit. In addition to knowing the company's real situation, the ability to monitor finances in more detail helps with planning and projections of future scenarios.
It is important to highlight that, to obtain satisfactory results from the accounting audit, it is essential to have the support of a professional accountant, with knowledge of national and international accounting standards and the competence to monitor their constant updates.
Planning for third sector audit work
To carry out a satisfactory accounting audit, including third sector audits, it is necessary to have experienced professionals. The accounting auditor must have prior knowledge of the business carried out by the company, as well as its organization, applicable legislation, among other factors. Therefore, the necessary data to obtain the information must be available to this professional. Among the points to be considered when carrying out the audit are:
- The nature, timing and extent of the audit procedures to be applied;
- The need to meet the deadlines established by the body itself or by third parties;
- Execution individually or in conjunction with other bodies.
The number of third sector entities has grown a lot in Brazil in recent years. The third sector includes voluntary and community organizations, social, mutual and cooperative entities, that is, non-profits. On the other hand, there was also a marked growth in philanthropic organizations for the diversion and laundering of public money. In view of this, the importance of auditing the third sector as a tool to help management in monitoring standards and policies can be seen.
Auditing the third sector is a requirement that can be statutory or legal, coming from financiers or Public Authorities, or even through the liberality of the management body.
The audit of the third sector must be carried out by independent auditors, qualified by the CRC – Regional Accounting Council and in some cases also registered with the CVM – Securities Commission.
Given the growing regulations for these entities and because their operations resemble those of companies in general, auditing the third sector has become a very valuable tool for its management, be it of any size, since the possible contingencies brought about by Management, tax, financial and labor risks also exist in these organizations.
Third sector accounting complies with accounting principles (Law nº 6404/76, amended by Law nº 11638/2007), ITG 2002 (Resolution nº 1409/2012), NBC TG 1000 – Accounting for Small and Medium-sized Companies, or the standards complete IFRS. Decree Law No. 8.242/2014 specifies that philanthropic entities are obliged to pass their accounts under the scrutiny of a third sector audit.
Accounting plays a fundamental role in the third sector, whether to clearly demonstrate activities or to prove financial suitability in the case of receiving public resources. Furthermore, these entities also need to prove that they are eligible for tax exemption. When private resources are received, counterparts are normally required and the financial statements need to be approved by independent auditors. With the third sector audit, an auditor will express a formal opinion on the entity's accounts and examine the financial statements, validating whether they adequately represent the organization's financial and asset situation.
In auditing the third sector, internal auditing is also relevant, in which internal controls are evaluated, aiming to verify and validate operations, identifying errors and/or fraud and suggesting improvements to avoid them. This audit also provides greater credibility to the organization, as it establishes control plans through methods that evaluate and optimize processes. The third sector audit aims to assist management in fulfilling its responsibilities and obligations.
With the increase in supervision over third sector entities, third sector auditing has become a very valuable tool for its management, be it of any size, as the possible contingencies brought about by management, fiscal, financial and labor rights also exist in these organizations.
Third sector accounting complies with accounting principles (Law nº 6404/76, amended by Law nº 11638/2007), ITG 2002 (Resolution nº 1409/2012), NBC TG 1000 – Accounting for Small and Medium-sized Companies, or the standards complete IFRS. Decree Law No. 8.242/2014 specifies that philanthropic entities are obliged to pass their accounts under the scrutiny of an external third sector audit.
In the third sector audit, several situations are identified that have negative financial consequences. Therefore, the higher the quality of internal controls in entities, the greater the security of their actions. It is the third sector audit that brings the opportunity to test and evaluate the entity's procedures, as well as their consequences. This importance of internal controls has been a reason for entities to seek internal audit services as well.
The most important thing is that, although the new regulations for the sector established clear and objective criteria for the provision of charitable services, they also introduced accounting and ancillary obligations so that tax exemption is maintained. In this case, it is no longer enough for the entity to provide quality assistance services, but it also needs to maintain adequate controls and impeccable accounting records. Hence the importance of auditing the third sector.
Entities that have difficulty obtaining clearance certificates for tax debts, for example, are usually the result of errors in accounting records or incorrect financial statements. The third sector audit adapts the entity's accounting routines so that it takes advantage of the opportunities provided by the legislation.
The work carried out by the third sector audit also aims to strengthen controls, bringing credibility and transparency to the entity, through validating the values presented in the financial statements. It also audits HR routines and procedures, integrates the accounting area with the social area, checks technology systems and validates financial statements.
Third sector audit as a transparency instrument
“Third sector organizations” is a term used to describe the range of organizations that are neither part of the public nor the private sector. It includes voluntary and community organizations such as associations, self-help groups and community groups, social enterprises, mutuals and cooperatives. And like any company, they are also monitored by third sector audits.
With the growth of third sector organizations, there is a positive perception by donors and interested parties in those that are transparent to society. This is because in practice, few entities disclose their financial statements to the public, which has changed over time, given the regulations and standards directed at these entities that require auditing by the third sector, providing a higher rate of disclosure of their financial statements.
It is then necessary to understand the relevance that third sector auditing can bring to non-profit entities, as it adds credibility to the organization's image. The opinion of experts is already consolidated that third sector auditing provides a greater degree of reliability to users of financial statements.
Many third sector organizations have already become aware of the value that audit work brings to the organization and hire the service, understanding that third sector auditing, in addition to contributing to the credibility of financial statements, also contributes to improving internal controls and adds concepts of corporate governance.
The work carried out by the third sector audit also aims to strengthen controls, bringing credibility and transparency to the entity, through validating the values presented in the financial statements. It also audits HR routines and procedures, integrates the accounting area with the social area, checks technology systems and validates financial statements.
In a context where trust and credibility are essential to attract resources and collaborators, carrying out audits offers external validation of the financial and operational processes of third sector entities. This practice not only reassures donors, sponsors, and partners, but also helps protect the organization's reputation.
A well-conducted audit is not limited to verifying whether accounting records are correct, but also assesses compliance with applicable laws and regulations, analyzes the effectiveness of internal controls and evaluates the impact of the organization's activities. This contributes to more efficient management of available resources, ensuring that they are directed appropriately to achieve the proposed social objectives.
It is important to highlight that transparency and accountability are essential values for the third sector, as they contribute to the construction of a fairer and more democratic society. In this sense, audits not only meet legal and regulatory requirements, but also promote an organizational culture based on integrity, responsibility and trust.
In summary, carrying out third sector audits is an essential practice, as it strengthens the management of non-profit organizations, increases stakeholder confidence and contributes to achieving their social objectives. By investing in robust and transparent audit processes, third sector entities reaffirm their commitment to effectiveness, ethics and positive impact on the community.
TATICCA carries out auditing and issues reports on the financial statements and other reports of third sector entities, in compliance with the guidelines of the Federal Accounting Council – CFC and the entities themselves. Get in touch to find out more about the practical aspects of third sector auditing.
Please contact TATICCA Allinial Global Brazil, which provides integrated auditing, accounting, tax, corporate finance, financial advisor, risk advisory, technology, business consultancy and training. For more information, visit www.taticca.com.br or email taticca@taticca.com.br. Our company has professionals with extensive experience in the market and has certified methodologies for carrying out activities.