When Is an Audit Required for a Nonprofit?

An audit is required for a nonprofit when state law, federal regulations, or funding agreements mandate it. Requirements often depend on the organization’s annual revenue, the amount of charitable contributions received, or the level of federal funding expended during the year.

For example, nonprofits that spend one million dollars or more in federal awards are generally subject to a Single Audit. Grantors and government agencies may also require an audit to ensure funds are used responsibly and in compliance with regulations. In many cases, audits are necessary to maintain transparency, protect public trust, and meet the expectations of donors and oversight entities.

What Is an Independent Nonprofit Audit & Why Do We Need One?

 

An independent nonprofit audit is a comprehensive review conducted by a certified public accountant (CPA) to evaluate an organization’s financial statements, accounting practices, internal controls, and financial transactions. The purpose is to determine whether the financial statements are presented fairly and in accordance with Generally Accepted Accounting Principles (GAAP).

 

In many ways, a nonprofit audit is similar to an audit of a for-profit entity. The primary differences relate to how accounting standards apply to nonprofit-specific transactions such as contributions, grants, and restricted funds.

 

An independent audit provides valuable insight into an organization’s financial health and operations. It helps ensure that funds are being used appropriately, identifies weaknesses in processes or internal controls, highlights potential cash flow or financial risks, and creates a clear connection between funding received and expenses incurred.

What Are the Requirements for Nonprofits Independent Audits?

Financial audits are essential tools for any organization that receives and spends money, pays people for services, or retains resources for economic gain.

A nonprofit may require one for straightforward reasons, such as:

  • Periodic audits may be required in the bylaws of the entity to ensure transparency and financial security.
  • If an entity receives more than $1,000,000 in direct federal funding or funds passed through the state, they are required to conduct an audit.
  • When a nonprofit exceeds certain fundraising thresholds in various states, they are required to conduct an audit.

Pro-tip: Not all states have the same thresholds; check your state requirements to stay compliant.

Even if an audit is not required, a nonprofit may conduct an audit or an internal review to drill down into processes and find ways to improve how they do business.

What Are the Different Types of Audits for Nonprofits?

Financial Statement Audit: This is a review of financial statements to determine the financial health of an organization and the internal controls governing how money flows through the entity.

Compliance Audit: Compliance is important to any entity, but it is critical to nonprofit groups that must adhere to federal, state, and local governing entities. See Single Audits.

How Long Does an Audit Take to Complete?

The timeline of an audit depends on the purpose, scope, and complexity, but typically, an audit will be completed before an entity needs to file Form 990.

Usually, it takes 2-4 weeks to prepare for an audit and an additional 4-8 weeks to conduct the audit and report the findings to stakeholders.

 

How Should a Nonprofit Organization Prepare for an Audit?

Usually, an auditor will do a pre-engagement meeting where they detail the information they will need before the audit, but it helps when an entity does these things regularly to help with an efficient audit process:

  • Reconcile bank accounts
  • Review vendors
  • Review employee payroll
  • Review accounts receivable
  • Review grants received
  • Provide details of fundraising contributions
  • Review revenue recognition
  • Review timing and classification of expense transactions.

What Happens After an Audit is Completed?

After an audit is complete, you will receive an audited financial statement and a governance letter, and if applicable, a management letter, highlighting any concerns or suggestions for improvement.

Audits are conducted to discover aspects about an entity that are hidden or not readily apparent in day-to-day operations.

These discoveries are reported in a letter to management. In it, the auditor provides an opinion about the accuracy of financial information and other significant findings:

  • Were any serious deficiencies in internal control identified?
  • Was the financial information requested to complete the audit inaccurate or incomplete?
  • How closely does an organization follow legal or regulatory requirements?
  • Did the organization follow recommendations from past audits?
  • What findings need to be brought to the attention of the board?
  • Are required reports filled out accurately and filed on time?
  • Has the organization put its tax-exempt status at risk?

How Rubino Delivers Accurate, Timely Financial Statement Audits for Nonprofit Organizations

It is important to understand that the purpose of an audit is not to expose problems. Instead, an audit should be viewed as an opportunity to learn how an organization works (or doesn’t) and find ways to improve it.

These improvements could be simple procedural actions, or they could be major changes that will take hard work and focus to address. At Rubino, we ensure that a nonprofit’s financial practices meet industry standards. Regular audits help nonprofit organizations build a reputation for integrity, transparency, and competent financial practices, and our procedures are built to make the audit process as simple as possible.

Is your organization facing an audit? Are you a new entity that needs to establish proper financial management procedures? Are you dissatisfied with your existing auditors? Rubino can help. We offer nonprofit tax, assurance, and Form 990 consulting services that streamline your nonprofit organization.

We work hard for our nonprofit clients, and the results speak for themselves. Reach out to us today for a consultation.

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