When Is an Audit Required for a Nonprofit?
Outside stakeholders need to understand what is happening within the organization, whether it is a for-profit business or a charitable organization. In a for-profit company, there may be shareholders that want to know how their investments are progressing or loan providers that want to make sure their borrowers have the ability to pay them back. Federal agencies and other government entities might require an audit to make sure a business complies with regulations.
A nonprofit entity is under the same pressure to prove they are using funds properly, but the stakeholders they have to answer to are vastly different. Some state or federal entities may require an audit depending on an organization’s size, whether they pay officers a wage, or have heavy spending habits. Grant organizations may need a nonprofit audit to prove a group can spend public money responsibly.
What Are the Independent Audit Requirements for Nonprofits?
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 $750,000 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 so do your research 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 Is an Independent Nonprofit Audit?
CPAs conduct independent audits to review the financial statements, accounting practices, internal controls, and business transactions of not-for-profit groups and charitable organizations. In most cases, it is conducted exactly like an audit done for a for-profit business. The only real differences relate to the application of Generally Accepted Accounting Principles on the types of transactions that not-for-profit entities encounter.
Audits are a detailed financial examination by an independent third party that uncovers a wealth of knowledge about an entity:
- They are a check that ensures funds are being used properly.
- An audit will uncover weak processes, potential cash flow issues, and financial risks.
- Audits establish a paper trail that ties funding to expenses.
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 and scope, 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:
- 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?
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.