Case Studies in Not-for-Profit Accounting and Auditing

Chapter 13 AUDIT ISSUES RELATED TO THE STATEMENT OF FUNCTIONAL EXPENSES

LEARNING OBJECTIVES

After completing this chapter, you should be able to do the following:

• Determine which organizations are required to include a statement of functional expenses.
• Identify risks related to the statement of functional expenses.
• Identify audit procedures to address identified risks related to the statement of functional expenses.
• Identify audit considerations related to management's estimates.

TECHNICAL BACKGROUND INFORMATION

A statement of activities or the notes to the financial statements should provide information about expenses reported by their functional classification, such as major classes of program services and supporting activities. FASB ASC 958-720, Not-for-Profit Entities — Other Expenses, provides guidance for presenting a statement of functional expenses, which is useful in associating expenses with service efforts and accomplishments. Voluntary health and welfare entities should report information about expenses by their functional classes—defined as major classes of program or management and general services or fundraising services and supporting activities—together with information about expenses by their natural classification in a matrix format in a standalone financial statement. A natural classification of expenses would include expense categories such as salaries, rent, electricity, interest expense, depreciation, awards and grants to others, and professional ...