The financial health and transparency of a nonprofit organization is paramount, not only for the leadership and beneficiaries but also for donors, sponsors, and the public. A nonprofit audit is an essential method for maintaining transparency and accountability. This article provides a comprehensive understanding of nonprofit audits and a handy checklist to guide organizations.
What is a Nonprofit Audit?
A nonprofit audit is an independent examination of an organization’s financial statements and related operations to ensure accuracy, reliability, and compliance with regulations and accounting standards. In essence, an audit aims to provide assurance that the organization’s financial statements present a true and fair representation of its financial position.
Does My Nonprofit Need an Audit Every Year?
Whether or not a nonprofit needs an audit annually largely depends on the organization’s size, its funding sources, and state regulations.
Size and Funding
Larger nonprofits or those receiving substantial funding from government sources often have mandatory annual audit requirements. This is to ensure that the funds received are used appropriately and that financial statements are accurate.
States have varying thresholds for when an audit is required, typically based on the organization’s annual revenue. It’s essential to check your state’s specific guidelines and regulations.
Sometimes, a significant donor might require an audit as a condition of their gift. This is especially common with substantial grants or contributions.
Some nonprofits, regardless of size, choose to have annual audits as part of their best practices to ensure continuous financial transparency and build trust with stakeholders.
In cases where an audit isn’t mandatory, a nonprofit might opt for a financial review, which is a less intensive examination of financial statements.
Benefits of Conducting an Audit
Financial transparency is the easiest way to foster trust among your stakeholders, and regular audits demonstrate a nonprofit’s commitment to accountability. This transparency attracts stakeholders, enhancing organizational credibility, and often boosting support and donations.
Audits are more than number checks; they highlight unseen operational inefficiencies. By examining records and processes, auditors identify areas for optimization. These insights facilitate strategic decisions, streamlining functions and ensuring nonprofits operate efficiently and effectively.
Every organization faces risks, particularly in financial systems. Audits preemptively identify vulnerabilities, allowing timely intervention. Through meticulous examination, auditors pinpoint areas of concern, ensuring financial stability and preserving the organization’s reputation.
Nonprofit Audit Checklist
Preparing for an audit can be overwhelming, but having a checklist can simplify the process. Here’s a practical checklist to ensure your nonprofit is ready.
Before the audit begins, ensure all foundational documents and initial financial statements are readily accessible to facilitate a smooth process.
☐Gather all financial statements, including the statement of financial position, statement of activities, and statement of cash flows.
☐ Collect the prior year’s audited financial statements for reference.
☐ Compile a list of all bank and investment accounts, including account numbers and contact information.
☐Prepare a schedule of all grants, contributions, and pledges received during the year.
☐ Update and review the organization’s internal control policies.
Collect Documentation & Records
Maintaining comprehensive financial records is crucial not only for daily operations but also for verifying transactions and balances during an audit.
☐ Bank statements for the entire year
☐ Reconciliations for all bank accounts
☐ Invoices and receipts for all expenses
☐ Records of all revenues, including donor contributions, grants, and other income sources
☐ Payroll records, including W-2s, 1099s, and related tax filings
☐ Minutes from board meetings and any related committees
☐ Copies of current bylaws and any amendments made during the year
Collect Contracts and other Legal Agreements
To accurately assess financial obligations and partnerships, auditors will need to review all existing contracts and agreements.
☐ Bank statements for the entire year
☐ Lease agreements for rented properties or equipment
☐ Grant agreements and related correspondence
☐ Contracts with vendors, consultants, or partners
☐ Any loan or credit agreements
Assets form a significant part of a nonprofit’s financial standing; hence, their detailed documentation helps auditors establish their accurate value and status.
☐ List of all assets, including property, equipment, and investments.
☐ Depreciation schedules for fixed assets.
☐ Documentation of any assets sold, purchased, or disposed of during the year.
Liabilities & Commitments
Understanding a nonprofit’s debts and obligations is key to determining its financial health, and a clear record of these commitments aids in this evaluation.
☐ Schedule of all outstanding loans and mortgages.
☐ Details of any new loans, credit lines, or debt arrangements entered into during the year.
☐ Information about any lease commitments.
Special Considerations for Nonprofits:
Unique to nonprofit organizations, certain financial activities and records require close scrutiny to ensure compliance with donor wishes and regulatory requirements.
☐ Records of any restricted or temporarily restricted funds and how they were used.
☐ Details of any in-kind contributions received.
☐ Documentation of any endowments, including investment strategies and restrictions.
☐ Records and correspondence related to any fundraising events or campaigns.
After the main audit activities are complete, it’s essential to review findings, take necessary actions, and ensure transparency with stakeholders.
☐ Review the draft audit report for accuracy and clarity.
☐ Discuss any findings, recommendations, or concerns with the auditor.
☐ Ensure the finalized audit report is approved by the board and shared with stakeholders as required.
☐ Consider implementing recommendations or changes based on the audit findings.
Understanding the Auditor’s Report
An auditor’s report is a pivotal document for any nonprofit organization. This report serves as a formal assessment of the organization’s financial health, controls, and practices, providing a snapshot for stakeholders about where the nonprofit stands. To derive the most value from this report, it’s essential to understand its components. Let’s delve into the key sections of a typical auditor’s report:
The auditor’s opinion is often the most anticipated part of the report. In essence, it reflects the auditor’s assessment of the organization’s financial statements – whether they provide a true and fair view of the organization’s financial position and performance.
- Unqualified Opinion (or “Clean” Opinion): This is the best type of opinion a nonprofit can receive. It indicates that the financial statements are presented fairly and in accordance with relevant accounting standards. In other words, the auditor found no significant misrepresentations or discrepancies in the financial documents reviewed.
- Qualified Opinion: On the other hand, a qualified opinion suggests that, for the most part, the financial statements are accurate, but there were certain areas or aspects where the organization did not adhere to accepted accounting principles or there was a limitation to the audit scope in certain areas. Such an opinion flags specific issues but doesn’t necessarily indicate widespread problems.
Notes to Financial Statements
These are supplementary details accompanying the financial statements. They provide context and offer a deeper understanding of specific line items, accounting policies, or events that have impacted the financials. These notes can cover a range of topics, including the methods used to value assets, liabilities, commitments, contingencies, and any significant events post the balance sheet date. By examining these notes, stakeholders can gain insights into the nuances of the organization’s financial operations and decisions.
Separate from the main auditor’s report, the management letter is an invaluable tool for nonprofits. This letter captures the auditor’s feedback on the organization’s internal controls, systems, and procedures. While it’s not an official part of the financial statements, the insights shared can be pivotal for the organization. The auditor might highlight areas where the nonprofit can improve its practices, reduce risks, or enhance efficiency. Recommendations can span from simple procedural changes to more significant overhauls of financial systems. By acting on these suggestions, nonprofits can fortify their operations, ensuring greater transparency and accountability.
Types of Nonprofit Audits
External or Third-party Audit
Our top recommendation for nonprofits is third-party audits, as they provide a comprehensive assessment of the organization’s internal controls and financial practices. These are executed by independent entities or individuals, granting a fresh perspective on the organization’s financial health. If you’re seeking assistance in identifying a qualified auditor, our team can guide your nonprofit through the process.
Internal or In-house Audit
In-house audits are spearheaded by your organization’s internal team. The primary objective here is to unearth areas of potential enhancement and contemplate if there’s a more efficient approach than the current one. In essence, it grants the organization an opportunity to introspect and strategize for future betterment.
In this kind of audit, an expert evaluates the different financial documents and reports of your organization. The goal is to pinpoint areas that can bolster the organization’s financial wellbeing. Additionally, the efficacy of your internal controls undergoes scrutiny to ascertain the safeguarding of your assets.
While many think of financial audits, it’s crucial not to overlook regulatory audits. These scrutinize the organization’s alignment with guidelines and stipulations imposed by local, state, and federal authorities, as well as adherence to its own bylaws and any other compliance obligations.
Procedural audits delve into the efficiency of the organization’s various operational facets, like HR, IT, productivity, and more. It offers valuable insights into the reasons for achieving or not achieving organizational milestones and suggests strategies for optimization.
Here are some of the common questions that we encounter when helping clients with their audits.
How is a nonprofit audit different from a for-profit audit?
Answer: While the fundamental principles of auditing remain consistent, nonprofit audits focus on areas unique to nonprofit organizations. This includes evaluating donor-restricted funds, assessing compliance with tax-exempt status, examining in-kind contributions, and verifying the appropriate use of grant funds. For-profit audits, on the other hand, might have a stronger emphasis on areas like shareholder equity and taxable income.
Who should conduct the nonprofit audit?
A nonprofit audit should be conducted by an independent certified public accountant (CPA) or a qualified accounting firm experienced in nonprofit accounting. This ensures that the audit is impartial, objective, and adheres to established accounting standards.
What should a nonprofit organization do if audit findings indicate issues or discrepancies?
If an audit uncovers issues or discrepancies, the nonprofit organization should first discuss the findings with the auditors to understand the nature and extent of the problem. The board of directors and senior management should then address these findings promptly, making necessary corrections or improvements. Implementing corrective measures and improving internal controls not only resolves the current issues but also helps prevent potential future discrepancies.
Can a nonprofit organization conduct an internal audit instead of an external one?
While an internal audit can be valuable for assessing operational procedures and internal controls, it’s different from an external audit. An external audit is conducted by an independent third party and provides a higher level of assurance regarding the accuracy of financial statements. In many cases, state regulations or grantor requirements specifically mandate an external audit. That said, nonprofits can certainly conduct internal audits in addition to external ones to improve operations and internal controls.
Can Velu help me prepare for an audit?
The journey of a nonprofit audit, while seemingly concentrated around the audit period, is fundamentally rooted in staying financially organized year-round. True preparation for an audit isn’t about scrambling last-minute but maintaining financial clarity and structure every single day.
Understanding the multifaceted benefits of an audit—from building unwavering trust with stakeholders to insightful operational improvements, and ensuring robust risk mitigation—is paramount. But what’s even more crucial is the continuous dedication to financial organization, making the actual audit process a validation rather than a daunting challenge.
Now, you might wonder, “Can Velu help me stay prepared for an audit?” Without a doubt! At Velu, we’re not just about crunching numbers at the eleventh hour; we’re about partnering with you throughout the year to ensure impeccable financial organization. Our experienced team specializes in ensuring nonprofits are audit-ready every day, not just during audit season. We pride ourselves on equipping organizations with the tools and insights they need to ensure financial transparency, operational excellence, and risk management.
As you reflect on the importance of audits and staying perpetually prepared, remember that with Velu by your side, you’re not just getting an accounting firm—you’re gaining a dedicated partner in your mission’s financial success.
Need help preparing for a nonprofit audit?
Tyler Wilcox, CPA
Tyler’s extensive background in accounting, tax, and financial consulting set the foundation for Velu’s outsourced accounting solutions for nonprofits and small businesses. As a fractional CFO, he goes beyond routine duties, guiding organizations with strategic insights for sound financial decisions. Velu’s services address the unique challenges faced by nonprofits and small businesses, fostering sustainable growth. Tyler places great emphasis on meticulous attention to detail in financial record-keeping, implementing efficient systems to ensure transparency and streamline operations.
Learn more about Tyler and the Velu team on our About Us page. We’re excited to connect with you!