Nonprofit organizations are exempt from filing taxes. But it doesn’t mean that the organization won’t have to conduct an independent audit since they have to record financial statements and keep documentation.
The state or federal agencies don’t always require a nonprofit or independent audit, but this process is still beneficial for a nonprofit organization. Read the article to learn more about nonprofit audits. You can find out when and why to conduct an independent audit in a nonprofit organization.
What is an Audit for Nonprofits
A nonprofit or independent audit is an examination of the financial documentation of a nonprofit organization. The task is carried out by an independent accounting professional with a CPA certificate or by a public accounting company. The goal of the examination is to check whether the organization meets the accounting standards.
Why do a Nonprofit Needs an Audit?
State or federal regulations require a nonprofit audit. An organization is exempt from audits in some cases, but a nonprofit can still conduct one. Here are the reasons to choose to conduct a nonprofit audit:
- Get the trust of potential foundation companies. Some companies require audits from nonprofits so that they can prove their reliability. By going through an audit, a nonprofit can get more funds.
- Keep good relationships with existing donors. An audit can prove that an organization is committed to financial accountability and transparency.
- Get proof that the organization’s financial statements meet all requirements. The audit is carried out by an independent third-party company that has no interest in false reporting.
Overall, the goal of an audit for a nonprofit is to help optimize the organization, not to uncover financial fraud. A proper audit might help an organization to receive funding, uncover potential strategies and tools to protect the nonprofit from fraud, etc.
Do all Nonprofit Organizations Need an Audit?
In some cases, conducting an independent audit is not a requirement. But a nonprofit has to audit in the following cases:
- If the charitable organization applies for getting fundraising purposes. It’s a requirement of some state laws.
- If the charitable organization spends $750,000 and more of federal/state funds per year.
- If the federal, state or local officials send an official request for a copy of an organization’s audited statements.
- If the nonprofit has a contract with the state or local governments that requires providing services.
- If the nonprofit organization plans to get a grant or wants to receive funds. It’s a typical occurrence since foundation companies want to be sure of an organization’s eligibility before becoming a donor.
Most of these requirements prove that an audit is more a tool to optimize the nonprofit organization.
Alternatives to a Nonprofit Audit
As mentioned, if organizations are exempt from independent audits, they still prefer to conduct them as they help optimize the nonprofit. But are there any alternatives to conducting a nonprofit audit? If an organization is smaller and doesn’t have sufficient funds to have an independent audit, it can use the following methods:
- Compilation. An independent accountant collects financial statements provided by a nonprofit to make an examination. It’s the most affordable option, even though it’s not as useful as a full audit.
- Review. An accountant with a CPA certificate will examine specific financial statements of a nonprofit. This solution has disadvantages compared to a full audit. For example, the accountant won’t offer a formal written opinion on whether the organization records financial statements according to the GAAP.
It’s still recommended to do an independent audit as it is beneficial for organizations. But if a nonprofit can’t organize an audit, the management might consider one of the alternatives mentioned above.
When does a Nonprofit Require an Audit?
To determine when to conduct an independent audit, an organization should look at the company’s requirements to which it has to submit the results. E.g., if a nonprofit has to submit the results according to state law, the organization should look at the state law and its requirements.
But if it’s easy to find the deadlines by which nonprofits should submit the results, it’s unclear when to begin the audit. To better understand how time approximately an organization needs to organize an audit and submit the results, here is a rough estimation:
- Selecting an independent auditor or auditing firm: 4-12 weeks.
- Preparing financial statements: 2-4 weeks.
- Conducting an audit by an independent auditor: 2-4 weeks.
- Implementing changes according to a formal written statement by an auditor: Immediately upon receiving the results.
It’s also recommended to finish the audit when an organization has to file a Form 990. Nonprofit organizations have to record changes or adjustments based on audits in Form 990, so it’s only logical to conduct an audit before filing the form.
If the nonprofit fails to record these adjustments in the 990 form, it’s possible to file a Form 8868, that an organization has to send to the IRS. It contains a request to extend to 990. That way, the nonprofit can still inform the IRS about important adjustments.
Guide on How to Prepare for an Audit
Conducting an audit is not as stressful as most people think. But this process does require a lot of work and communication. Consider the following recommendations to be ready for an independent audit.
Learn about Federal/State Law Audit Requirements
As mentioned, the law does not require every nonprofit to conduct audits. Find out whether your nonprofit has to send audit results to a state or federal agency.
Know what to Expect
It’s wise to do research or ask the audit company what to expect from their visit. You can ask what documents to prepare, what team members should be present, etc. This information gives a better understanding of what documents to prepare for the audit.
Organize a Pre-Audit Meeting
This meeting should be held among staff members who will stay in touch with the auditing team. During the meeting, you can inform the staff what documentation to prepare.
Prepare Documentation
Typically, auditors request the following documents:
- List of the received and expected funds.
- Depreciation schedule of organization assets.
- Bank and reconciliation statements
- List of physical items that an organization plans to sell.
- List of grant awards with related documentation.
In some cases, the list can be different.
Take Your Time
Assembling documentation might take a while. It’s a good idea to start early if a nonprofit has a deadline to submit the results.
Prepare for Auditor’s Visit
Make sure the organization is ready to meet the auditor. It’s recommended to coordinate with the auditor to be prepared and guarantee easy access to necessary documentation. Consider preparing a workspace for the auditor or a team of auditors. Ask if they will need access to a computer network.
Announce the Results to the Board
When the audit is officially over, the organization receives a formal written auditor’s opinion. The organization might need to implement changes. That’s why the last step is to inform the board about the need to make adjustments.
