Proper nonprofit audit preparation and compliance is important for building donor trust, financial transparency and accountability.
During an independent audit, all aspects of a charitable nonprofit get examined by an auditor, including the following:
- Financial records.
- Accounts and transactions.
- Accounting practices.
- Nonprofit internal controls
What is a nonprofit audit?
The examination of the financial statements by an accounting professional to determine whether they conform to accounting standards. Independent audits are performed by a public accounting firm or an individual who is a certified public accountant (CPA).
Do all nonprofits need to have an audit?
Audits for nonprofits are based on the funding source and yearly budget.
Audits are required for the following conditions:
- Federal, state and local governments may request a copy of the nonprofit’s audited financial statements.
- Charitable nonprofits who spend $750,000 or more in federal and state funds per year.
- Some contracts with state and local governments to provide community services.
- State laws require charitable nonprofits to submit a copy of their audited financial statements when they register with the state for fundraising purposes.
- Private foundations may request a nonprofit to submit a copy of recent audited financial statement(s) when applying for a grant.
Alternatives to Audits
If a nonprofit is exempt from preparing an independent audit, they can opt for less expensive alternatives: such as a review or a compilation. This is much more cost-effective for smaller organizations.
- Review: Certified Public Accountant examines specific financial statements. This is less thorough than a full audit. It does not include a formal written opinion about whether the financials are in accordance with Generally Accepted Accounting Principles (GAAP).
- Compilation: Least expensive alternative. This involves an accountant to assemble financial statements from the information provided by the nonprofit. Financials are not subject to an audit or review. Transactions are not tested or analyzed. No opinion is provided regarding compliance with GAAP.
Nonprofit Audit Report
The Financial Accounting Standards Board (FASB) principles require auditors to issue a report to the board of directors, presenting a professional opinion about the nonprofit’s financial practices. It will determine whether the financial statements represent the financial position of the organization without inaccuracies or material misrepresentations.
There are four types of reports:
- Unqualified Opinion – Shows no red flags or misstatements of any financial position.
- Qualified Opinion – Shows the auditors found one or two situations where the organization is not following GAAP. Overall, there are no misstatements of any financial positions.
- Adverse Opinion – Shows auditors found a material misstatement. Overall, the organization is not conforming to GAAP.
- Disclaimer of Opinion – Shows auditors found material misstatements. This can have a serious negative impact on obtaining funding.
How much does an audit cost?
Onsite audit fees can cost $20,000 or more for large nonprofits. There is a growing trend for smaller nonprofits to have “remote audits” where the auditors conduct the audit without a site visit. This can reduce fees.
How to reduce audit costs?
Using a fund accounting software system like FastFund Accounting can help your organization improve tracking and compliance with reporting standards requirements. It can also help your organization prepare for your audit, eliminating preparation expenses with an auditor.
Key benefits of using a fund accounting system:
- Access to an auditable general ledger system.
- Complete audit trail of transaction changes.
- Generate Audit-ready financials for compliance.
An independent audit reviews financial statements, including your nonprofit’s statement of financial position, related statement of activities, cash flows and notes to the financial statements. With FastFund Accounting, you can generate all the required financial statements. An auditor can examine profit/loss segments so they can easily track expenses back to each donation or grant.
It also gives you the ability to classify net assets (with restrictions or without restrictions) and provide this information to the auditor to determine if restrictions were satisfied. This saves the auditor time reconciling activity.
Another benefit involves grant tracking by funding source, grouping them by state or federal grantors. This is helpful when an auditor requests grant-specific details for generating this information into a report.