If you’re arranging for a nonprofit audit, it’s essential to have the right tools and a to-do list in place. An audit is not just about reviewing numbers; it’s about demonstrating integrity, accountability, and effective financial control. A CPA plays a significant role in ensuring your financial records are accurate and complete. In this guide, we will walk you through how to conduct an audit of your nonprofit, avoiding common risks.
What is a Nonprofit Audit?
A nonprofit audit is an independent review of your financial records. It helps confirm your organization is handling funds properly and following all rules. The goal is to verify that your reports are accurate and complete. It’s not just about numbers; it’s about showing your commitment to transparency and accountability.
Why Nonprofit Audits Matter
Audits play a crucial role in building trust within your organization. They show that your nonprofit uses its funds responsibly and follows proper financial practices. This is exclusively important when working with donors, grant providers, or government agencies. With a successful audit, your nonprofit can earn trust, attract more support, and stay compliant with legal and funding requirements.
When Does a Nonprofit Need an Audit?
Not every nonprofit needs an audit, but certain conditions make it necessary. For example, certain states or funding agencies may require one based on your annual revenue or the size of the grant. Large donations or government contracts can also initiate the need for a formal review. Even if an audit is not required, a CPA might suggest one to improve clarity or make for future development.
State-by-State Audit Standards
- Varies by State: Each state has its own rules for when a nonprofit must experience an audit. The limits are often based on yearly revenue or donations.
- Donations Matter: Some states set audit points based on the amount of help received, specifically if there are significant donations from individuals or foundations.
- Compliance and Reporting: A CPA can help define if your nonprofit meets these levels. They keep track of your finances to confirm you meet state and federal standards.
Types of Audits for Nonprofits
1. Financial Audits
A financial audit dives into your books to certify the validity of your financial statements. This is often needed by investors and for compliance purposes.
2. Compliance and Development Audits
Development audits and reviews for nonprofits examine how well your fundraising, grant management, and donor tracking systems are functioning.
3. Internal Controls Audits
This type focuses on your nonprofit’s internal controls guide, from who has access to bank accounts to how expenses are approved.
The Audit Prep Checklist Every Nonprofit Needs
There is an extensive audit preparation checklist to ensure you are ready.
1. Gather Financial Statements
Start with your statement of activities, statement of financial position, statement of cash flows, and functional expense report. These are significant for the audit.
2. Reconcile Bank Accounts
Before the auditor appeals, reconcile every bank account. Use your financing software’s reports to ensure that everything is in order.
3. Collect Supporting Documentation
Receipts, invoices, donation recognition, and grant agreements, you will need them all. Do not wait for the audit ask list to start pulling these.
4. Prepare the PBC List
Your auditor will send a PBC audit list. This outlines everything they demand from you. Organize files properly and label them appropriately.
Nonprofit Internal Controls Agenda
Internal controls can be the difference between a clean audit and a messy one.
1. Separation of Duties
Do not let one person control all the money. Split who handles funds, who accepts expenses, and who does the accounting.
2. Access Controls and Authorization
Limit who can access bank accounts and finance software. Keep a clear trail of approvals for all major expenses.
Common Mistakes in Audit Preparation
- Waiting until the last minute
- Incomplete or missing documentation
- Poor communication with your auditor
- Lack of understanding of audit needs for nonprofit organizations
Avoid these, and you are already ahead of the game.
How to Request an Audit of a Nonprofit
If you are a financier or board member wondering how to request an audit for a nonprofit, start by proposing a board vote. From there, contract an expert auditor experienced in auditing nonprofits.
Hiring an Auditor for a Nonprofit Organization
Finding the right auditor is a vital part of planning for a successful audit. Nonprofits should look for someone with experience in the nonprofit sector, as rules and reporting standards differ from those for for-profit businesses. A CPA who is an expert in this area can offer significant clarity and aid. Selecting an autonomous and experienced auditor builds trust with donors, funders, and board members.
Building Trust with Donors and Financiers
Think of your audited financial files like your nonprofit’s resume. A clean audit speaks volumes to donors, board members, and funders. It shows you take awareness and duty seriously, and that develops trust.
Legal Requirements and Compliance
Nonprofits must follow specific laws and reporting rules to stay in good standing. These can depend on state, funding source, and organization size. Meeting these levels is not just about avoiding penalties; it’s about maintaining public trust and accountability.
