Nonprofit Audit: A Complete Guide

Every dollar counts for nonprofits, and an independent audit is the perfect opportunity to check that you’re being as efficient as possible. Plus, going through this process is great for demonstrating transparency among stakeholders. Organizations that receive more than $750,000 https://holycitysinner.com/top-benefits-of-accounting-services-for-nonprofit-organizati/ in federal funding may be required to complete an audit.

Conduct the audit

Assessing internal controls ensures the integrity of financial reporting, safeguards assets, and promotes operational efficiency. For nonprofits, these controls not only prevent fraud or errors but also ensure resources are used in alignment with their mission. Explore essential practices and insights for effectively auditing nonprofit organizations, focusing on unique financial and compliance aspects.

Nonprofit Audit Guide© Table of Contents

Once you’ve selected an auditor, they should provide information about preparing for the audit. This will usually come in the form of a Provided by Client (PBC) list, which ensures you give them access to all of the documentation they’ll need to effectively assess your nonprofit’s finances. After they receive the items on the PCB list, your auditor will begin conducting the audit.

Recommendations for improving the organization’s operations

• The problem with joint cost allocation is that you can’t arbitrarily pick a spending ratio out of the air – even if you’re making an educated guess.
• The auditor will then perform tests of the organization’s financial records and transactions.
• We’ll dive into what these are, why these are important, the different types of audits, how to choose the right auditor, and more.
• Hiring a professional CPA to conduct an independent audit highlights points in the process where details fall through the cracks.
• Some states require nonprofits that receive certain levels of state funding to submit independent audits to the state agency providing the funding or other specified state agencies.
• Even if you’re not required to conduct an independent audit, you can still benefit from voluntary audits, since you’ll demonstrate to stakeholders that you take financial management seriously.

Knowing the reasons that organizations do end up getting audited by the IRS is important and can help instruct your organization on ways to operate properly in order to avoid ever being in that situation. As you prepare for your nonprofit audit, collect your grant agreements and the records of related expenditures. Carefully compare these documents to ensure compliance with grant terms accounting services for nonprofit organizations and conditions.

Audit findings can be used to improve systems and processes 🌟

• Auditors must verify compliance with these stipulations, ensuring revenue is recognized according to donor intent and applicable accounting standards.
• The most common type of audit is the financial statement audit, which is conducted by an independent certified public accountant (CPA).
• Ask your auditor at the beginning of the year to provide you with a copy of the PBC (provided by client) schedule, so that you can collect all the materials you’ll need for your audit throughout the year.
• While some expectations can appear generous, the amount of work demanded by the audit may find auditors sweating to make the finish line in time.
• Another important difference between an independent audit and an IRS audit is the cost.

Overall, the audit ideally confirms that the organization is operating in accordance with generally accepted accounting principles (GAAP). They include cost principle, revenue recognition, materiality principle, and full disclosure principle, among many others. The audit helps to hold the organization accountable to its directors, its investors, and its donors. Figuring out if your organization is mandated to obtain an annual audit is an important step in your overall compliance with the guidelines and regulations for nonprofits. If your nonprofit is not required to obtain an audit, you may still consider doing so because of the benefits. You’ll also want to verify that donor restrictions are properly documented and adhered to when using funds.

• These requirements, governed by accounting standards and regulations, ensure financial information is presented accurately.
• The financial statements of nonprofit organizations include the statement of financial position, statement of activities, statement of cash flows, and statement of functional expenses.
• Think of it simply as an inspection that makes sure key areas in your finances are working correctly.
• Some nonprofits have written instructions about the frequency and types of audits to be performed.
• However, preparing for an audit can be overwhelming if you don’t have the right guidance.

Review the Audit Report Carefully

To conduct an independent audit thoroughly, examiners must likewise analyze payments to the firm’s vendors, staffing agencies, office supply wholesalers, and maintenance services, for example. Furthermore, any undeposited funds that are held by the organization require identification and tabulation. Sound financial practices demand that the enterprise works from a sufficient base of capital, a reality that an independent audit will confirm or question. Ledgers and financial statements are checked and re-checked in search of duplications, omissions, or mathematical miscalculations.

Auditors will review any laws and regulations applicable to the nonprofit sector, including tax-exempt status compliance and fundraising restrictions. They may also look into grant compliance or other specific requirements related to your organization. ‍This type of audit focuses on the accuracy and completeness of financial statements. Financial audits are often used for tax purposes or to meet requirements for certain grants.

• For example, nonprofits receiving $750,000 or more in federal funding annually are subject to a Single Audit under Uniform Guidance.
• Implementing and making changes to your processes and internal controls after an audit can help make future audits even more successful and ease the stresses that these can cause.
• While for-profit companies are much more likely to face extensive IRS audits, nonprofits are still accountable for their financial conduct, especially due to their tax-exempt status.
• If your organization is not required to do an audit, you can show donors that you’re committed being financially transparent by doing a more affordable option such as a review or a compilation.

Evaluating Internal Controls

For starters, the Internal Revenue Service (IRS) rarely has a reason to audit your organization—since you’re a nonprofit and don’t pay taxes. Additionally, a smart back office that automates your accounting processes simplifies your month-end closing process to ensure your nonprofit is audit-ready with accurate data every day of the year. The best way to do this, to have a substantial record that tells a story and will hold up during an audit, is to use a time-tracking system that’s available to all of your employees on their mobile devices. Conducting frequent audits, primarily financial and operational ones, can help identify any potential risk that may impact the smooth running of the organization and its sustainability in the long term. These audits should focus on spotting potential fraud, financial issues, and inefficiencies while offering suggestions for improving moving forward.