By Joseph Scarano, CEO of Araize, Inc.
A nonprofit audit is an independent examination of a nonprofit organization’s financial statements and records to ensure compliance. An audit can also provide insight into the organization’s financial health and help identify areas of improvement.
Nonprofit Audit Guide
Preparing an audit for a nonprofit requires careful planning and consideration of best practices. From establishing goals to reporting findings, there is an organized process that should be followed to ensure accuracy and efficiency when conducting the audit. In this blog post we will discuss the best practices for preparing an audit for a nonprofit organization including gathering necessary documentation, determining scope of the audit, assessing risk and developing a plan for addressing it, undertaking steps to complete the process, and reporting findings from the audit.
What is a nonprofit audit?
A nonprofit audit is an independent examination of a nonprofit organization’s financial statements and records in order to determine whether they are free of material misstatement, accurately reflect the transactions that have occurred, and are in compliance with generally accepted accounting principles (GAAP). Nonprofit audits typically include evaluating internal controls, analyzing financial data, and assessing risks.
Nonprofit financial audits are performed by outside public accounting firms to verify that nonprofits comply with federal tax laws and regulations. The IRS and the nonprofit’s board of directors also use financial audits to ensure that nonprofits are in compliance with all laws, regulations and their governing documents.
An accounting professional examines financial statements to determine whether they conform to accounting standards. Independent audits are performed by a public accounting firm or an individual who is a certified public accountant (CPA).
What is the purpose and goals of a nonprofit audit?
The primary goals of a nonprofit audit are to provide transparency into the operations and financial health of the organization. Additionally, this allows organizations to make informed decisions about how they manage their funds, endeavor to be compliant in their operations, and demonstrate good stewardship of donor funds.
Ultimately, an audit allows the nonprofit to provide financial overviews that are clear, concise and meaningful. This process will help strengthen public confidence in the organization’s financial transparency as well as give members an opportunity to share their feedback. By understanding the goals behind an audit, nonprofits can strive for greater accountability and improved long-term success.
A nonprofit audit evaluates internal controls, analyzes financial data, assesses risks, detects any material misstatements or errors in the financial statements, determines whether the organization is following GAAP guidelines properly, and generates accurate reports that reflect the true state of the organization’s finances. An independent auditor should be able to determine if there have been any irregularities or fraudulent transactions made by management as well as uncover potential opportunities for improvement within the organization’s operations.
Gathering Necessary Documentation for the Audit
Gathering the necessary documentation for a nonprofit audit is an essential part of the process that helps to ensure accuracy and compliance with reporting standards. The steps involved in gathering the required paperwork are fairly straightforward, but they must be followed diligently in order to provide sufficient evidence for the auditor.
- Collect any financial statements or reports used by the nonprofit organization such as income statements, balance sheets and other documents related to the operations of the organization. This information is essential for auditors to gain a comprehensive overview of the financial situation of the nonprofit.
- Gather supporting documentation such as bank account statements, check registers and receipts from purchases or donations made during specific periods. These documents should be organized chronologically and clearly labeled so that auditors can quickly reference them when needed. It’s also important to provide financial statements from preceding years in order for auditors to identify any areas of concern or discrepancies between current year performance and previous year performance.
- Compile all relevant contracts, agreements and records pertaining to employee salary and benefits packages along with donor information, if applicable. All this paperwork needs to be organized neatly in preparation prior to handing over everything to the auditor who will review every document carefully before beginning their work.
Determining the Scope of an Audit
Understanding the scope of a nonprofit audit is an important part of the process to ensure accuracy and compliance with reporting standards. The scope refers to the extent and type of review that will be conducted by the auditor. This can vary greatly depending on the size and complexity of the organization, as well as its financial activities and strategy.
When determining the scope of an audit, it’s important to consider any areas where there could be potential discrepancies or weak points in operations or governance. Auditors must have access to all relevant documents and records related to the finances of the organization, including cash management practices, long-term investments, accounting systems and procedures, internal controls, legal contracts, risk assessment policies and processes.
Goal of Audit
The goal is for auditors to gain a comprehensive understanding of how funds are being used and managed across various departments within the nonprofit organization. By understanding any risks or areas for improvement within each department’s operations, auditors are able to provide meaningful feedback that can help nonprofits improve their overall financial planning and performance.
Once a clear understanding has been reached about what needs to be reviewed during an audit process, auditors can develop a timeline for completion along with budgeting requirements necessary to complete an effective review in accordance with reporting standards. Timely completion is essential for ensuring transparency into the finances of a nonprofit organization while also providing assurance that donors’ funds are being used in accordance with their stated goals and objectives.
Assessing Risk and Developing a Plan
Once all documents and records have been gathered, auditors will conduct an examination to identify any risks posed either internally or externally to the nonprofit organization. These risks could be associated with financial reporting processes, cash management practices or internal control systems. Auditors will then evaluate the potential effects that these risks could have on the accuracy of the financial statements or on compliance with applicable laws and regulations.
Based on their evaluation of these risks, auditors should be able to develop a plan for addressing them in order to minimize any potential impact on the operations of the nonprofit organization. This will involve creating controls or procedures to ensure that corrective action is taken should any issues arise during future audits. In addition, proper documentation should be maintained in case further evidence is needed by auditors at a later date.
By assessing risk carefully and developing a plan for addressing it, nonprofits can help protect against errors or misstatements while also maintaining their reputation with donors who trust them with their donations. Through careful planning and effective risk assessment strategies, organizations are better equipped to deliver accurate financial reports while remaining compliant with all reporting standards.
Do all nonprofits need to have an audit?
An audit is not required for small nonprofits but it is highly recommended because it provides a third-party assessment of the organization’s financial records and practices.
Nonprofit organizations are audited for a number of reasons:
- To ensure that the organization is operating in a legal and ethical manner
- To verify the financial statements are accurate
- To determine if the organization has complied with laws, regulations or its governing
Criteria for nonprofits, public charities, private foundations required to conduct an independent audit:
- Annual gross receipts of more than $500,000 or total assets (net worth) of more than $250,000 at the end of a fiscal year.
- Federal, state and local governments may request a copy of the nonprofit’s audited financial statements.
- Charitable nonprofits who spend $750,000 or more in federal and state funds per year.
- Some contracts with state and local governments to provide community services.
- State requirements may request charitable nonprofits to submit a copy of their audited financial statements when they register with the state for fundraising purposes.
- Private foundations may request a nonprofit to submit a copy of recent audited financial statement(s) when applying for a grant.
Alternatives to Audits
If a nonprofit is exempt from preparing an independent audit, they can opt for less expensive alternatives: such as a review or a compilation. This is much more cost-effective for smaller organizations.
- Review: Certified Public Accountant examines specific financial statements. This is less thorough than a full audit. It does not include a formal written opinion about whether the financials are in accordance with Generally Accepted Accounting Principles (GAAP).
- Compilation: Least expensive alternative. This involves an accountant to assemble financial statements from the information provided by the nonprofit. Financials are not subject to an audit or review. Transactions are not tested or analyzed. No opinion is provided regarding compliance with GAAP
When does my charitable organization need an audit?
An audit is not always necessary, but it may be required by law or contract. The Board of Directors should determine which type and frequency of audits to conduct based on the organization’s circumstances.
Audits are not always necessary, but they may be required by law or contract. Nonprofit Organizations may need an audit to fulfill a legal requirement or as part of a contractual agreement. In these cases, the Board should determine which type and frequency of audits to conduct based on the organization’s circumstances.
How long do they anticipate the audit will take?
Nonprofit Audits are often used by donors, grantors and other stakeholders in an organization’s financial health. Nonprofits must provide a minimum of five years’ worth of documentation for the auditor to review. The audit will examine the organization’s financial statements, including income and expenses (including salaries), as well as any other relevant information that may be requested by the auditor.
The length of the audit will depend on the size and complexity of the nonprofit. The average length is three to four weeks, but if a nonprofit has not been audited in several years, it may take longer.
Auditors will also review the organization’s policies and procedures, including its operations and management. They will look at any documentation provided by the nonprofit to ensure that it is accurate and complete.
The auditor will also look at the nonprofit’s financial statements from previous years, if they are available.
The length of time required for an audit will depend on a number of factors including:
- The size and complexity of the nonprofit organization
- The effectiveness of internal control and management systems
- The number and type of transactions being audited
Federal Government Requirements for Nonprofit Audits
Audits are not always required by law, but they are required by the IRS and other governmental agencies. Audits are also required by some donors to make sure their money is being used properly, and they may require a financial audit before any federal funds can be disbursed.
What variables determine length of audit?
- What is your annual budget? What is the total value of your annual budget? (ie. $1,000,000). How much of your total budget was spent on administrative costs and how much was spent on program services? (ie. Program A- $10,000; Program B-$5,000; Program C-$8,000).
- How many employees does the nonprofit have? What are their roles in the organization? (ie. President/CEO, Vice President, Secretary, Program Director, Program A- 1; Program B- 2). Do they receive any compensation for their service to the organization?
- Are you a member of any other organizations that might require an audit? (ie. United Way, etc.)
- How many volunteers do you have? Do they get paid or is it strictly a volunteer position? What are their roles in the organization? (ie. Board- 3; Program A- 2; Program B- 1; Program C- 4).
- What kind of fundraising activities does your nonprofit participate in on an annual basis? These can include:
- How many board members do you have? Do they receive any compensation for their service on the board?
- How many programs do you offer, and what are the costs associated with each program? (ie. Program A- $10,000; Program B-$5,000; Program C-$8,000)
- What is your total revenue for the last fiscal year?
- What is the total value of your assets? (ie. building- $200,000; equipment- $100,000; cash- $50,000)
- What is the total value of your liabilities? (ie. building- $200,000; equipment-$100,000; cash- $50,000)
- What is the total value of your net assets? (ie. building-$200,000; equipment-$100,000; cash-$50,000)
- What is the total value of your endowment?
How much does an audit cost?
Onsite audit fees can cost $20,000 or more for large nonprofits. There is a growing trend for smaller nonprofits to have “remote audits” where the auditors conduct the audit without a site visit. This can reduce fees.