Does your nonprofit need to have an independent audit?

The type of audit your organization conducts will depend on the size and complexity of your nonprofit and its specific needs. After you've reviewed the audit report, it's time to implement any changes or improvements that have been suggested. This could involve updating your policies and procedures, increasing internal controls, or instituting new processes. Before we jump into the specific items to prepare, let’s look at the timeline for preparing for a nonprofit audit. You need to get started early (up to a year ahead of time, if you don’t already have a relationship with a CPA for your audits) to ensure everything runs smoothly. A financial statement audit is a thorough review of your financial statements to determine if your financial statements present fairly, in all material respects, in accordance with generally accepted accounting principles.

An internal audit is a chance to step back, see the bigger picture, and look at your nonprofit’s history and trajectory. Common reasons why you might conduct a nonprofit audit are to improve your charitable organization’s financial position, transparency, accountability, and bookkeeping practices. In short, it helps you keep track of your donations and expenses and ensures no malpractice behind closed doors. The following illustrative independent auditor’s report template is intended to assist not-for-profit financial statement auditors. Auditors should exercise professional judgment in any situation not specifically addressed in the illustrative report provided.

Different Types of Audits for Nonprofits

These types of audits also provide assurance to donors and other stakeholders that their funds are being used appropriately and in accordance with the organization's mission. The audit firm will come in to review your final end-of-year numbers and all the documentation they need to complete your audit. Nonprofit audits are an important part of ensuring that your organization is operating efficiently and effectively. Although they can be costly and time-consuming, they are typically worth the investment once you reach a certain size. If your nonprofit is not required to have an audit, you may still choose to have one conducted on a voluntary basis.

Operational audits assess your organization’s operation systems, productivity, staffing, IT, HR, and other functions. This type of nonprofit audit can provide insight into why your organization is hitting or missing your goals and how to create a more efficient and effective organization. She understands the value of strong relationships with an agency’s clients, its volunteers and its donors and finds innovative ways to bring those individuals and groups together to best achieve the nonprofit’s objectives. ‍The first step to auditing a small nonprofit is to select the auditor that is right for your organization. The auditor should be independent and have the necessary qualifications for conducting such an audit. Get our FREE GUIDE to nonprofit financial reports, featuring illustrations, annotations, and insights to help you better understand your organization's finances.

What Are the Steps in Auditing a Small Nonprofit Organization

The auditor will do an independent investigation to test the accuracy of your accounting records and internal controls. The auditor's letter is attached to the front of your financial statements. A clean bill of health from an auditor shows the world that you're keeping your books in a responsible manner.

• One industry best practice is to make sure your audit is completed before you file your Form 990.
• Explore the world of operating foundations and their role in nonprofit partnerships in this comprehensive article.
• External audits are our recommendation to ensure your organization has effective internal controls and financial practices.
• The experts at Jitasa can help your nonprofit find an auditor to review your various financial statements and documents to determine the best course of action forward.
• During the research process, your auditing committee must have a clear idea of how long the audit will take and how much working with the auditor will cost.
• Nonprofits who may not be required to conduct an audit may still consider doing so in order to make sure their financial records and internal controls are up-to-par and to find potential opportunities for improvement.
• Nonprofit organizations may require compilations, reviews, audits, or Single Audits.

This isn’t a complete glossary of auditing and accounting terms, but it’s a good place to start. Terminology is critical in accounting, so don’t be afraid to check a term if you’re unsure what it means. Nonprofit audits might sound intimidating, but they are far less scary than you think. 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. By providing audited financial reports and annual reports on your website, you’re helping build trust with your donor base. Nonprofits may be surprised when they realize that the request for a nonprofit audit may come from many sources.

Areas of Focus in Auditing a Small Nonprofit Organization

Once again, be as cooperative as possible and set aside time to work with your firm and get them all the documents they need. If you’re not available, the auditors can’t do their jobs and may even suspect that there’s something you don’t want them to find. Program audits are conducted by staff or consultants but can also be conducted by donors or grantors to assess the effectiveness of the program being funded. An audit can provide valuable insights into your nonprofit’s financial health and help to identify any areas of weakness or governance needs in order to reduce the risk of potential fraud.

But it’s the ability to compete for donor contributions, to attract competent, business savvy board directors and staff leaders, and to plan and operate cost effectively that results in a successful nonprofit. Fundraising, Board Leadership, and Building Capacity � Cynder has the demonstrated leadership experience audit guide for small nonprofit organizations and expertise to help nonprofit organizations master these three fundamentals of success. Try to be as cooperative as possible with this vital step in your nonprofit audit prep. Your CPA firm will have its own audit checklist of things they need to accomplish now to complete your audit correctly and on time.

You’ll need to do some preparation before your nonprofit audit can take place. Usually, auditors will send a PCB (Pull by Client) list that tells your organization what information the auditor will be requesting. To start your research, you may choose to conduct an initial Google search, ask your accounting firm for recommendations, or collect referrals from other nonprofits.

For example, if your nonprofit is based in California and you have a gross income of $2 million or more, you will be required to get annual audits. Since you’ll have plenty of time to plan for most audits, you can take time to research and prepare. Immediately after you receive the final auditor report, your nonprofit must begin making all suggested changes. An alternative to using a standing committee, such as an audit committee, is to convene an “audit task force” that may choose to meet only when necessary, and may also disband and reassemble annually, as needed. As with an audit committee, no members of a task force assigned to oversee the audit should be employed by the nonprofit.

Accountability

In addition, an audit is also a great way to demonstrate transparency and accountability to donors, stakeholders, and other interested parties. There are different types of audits for nonprofits, which we will cover in more detail later on in this article. However, the most common type of audit for a nonprofit organization is a financial audit. However, how often these audits are necessary will depend on factors like the size of your organization and the scope of your spending. Some nonprofit organizations even specify how often they should be conducting audits in their bylaws. A nonprofit audit is a review of a nonprofit organization's financial records and internal control systems.