Typically, smaller nonprofits, especially those with limited funding sources, might not face a mandatory audit. Nonprofit organizations play a crucial role in society, providing valuable services and support to those in need. However, with the responsibility of managing funds from donations and grants, nonprofits need to maintain financial transparency and compliance.
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Depending on your organization’s spending, source of funding and size, state and federal agencies may require your nonprofit to have an audit. Our nonprofit CPAs and nonprofit auditors will assist you in evaluating these criteria and begin the audit process, if necessary. Ensuring that these policies are clearly documented and consistently enforced is vital for maintaining organizational integrity. The duration of the independent audit can vary according to whom the audit is due, board members, for example. While some expectations can appear generous, the amount of work demanded by the audit may find auditors sweating to make the finish line in time. Selecting an independent certified public accountant with the right experience can take up to 12 months.
When Is a Financial Audit Required?
- For nonprofit executives, a successful financial audit is both a compliance milestone and a strategic advantage.
- Instead of asking audit firms to provide a detailed description of their audit approach, we think it’s much more important to ask which areas the firm will focus on during the audit.
- Writing a good nonprofit audit RFP involves clear communication of your organization’s needs and expectations while providing prospective audit firms the necessary information to submit thorough proposals.
- One-third of all states in the US need nonprofits to perform regular audits if they solicit state residents.
- This checklist will help you be ready for your nonprofit audit so you can catch–and resolve–potential issues in your financial documents.
In preparation, the financial compilation of pertinent documents is crucial as is the brevity and honesty of answers. There are individual auditors or entire audit firms that specialize in the nonprofit sector. It is especially relevant for if your nonprofit receives government grants or public funding as the audit will check if you’re following the specific spending guidelines set by https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ the grant providers.
- It also makes the case for a regular independent audit to flush out issues in advance of an initial contact letter from the IRS.
- This will ensure you maintain books and records that are complete, well-organized, and thorough so that your NPO is always audit-ready.
- Internal audits are better than nothing but don’t necessarily increase public transparency and accountability—since an internal team could be the root of the problem.
- Increasing donor trust in the financial health of your nonprofit can be achieved by making audited financials available upon request or on your website along with your Form 990 returns.
Evaluating Internal Controls
To find the right provider for your NPO, begin by doing a lot of initial research and making a list of potential auditors. Some good ways to begin creating a list of firms are to ask fellow NPOs for recommendations, read reviews of auditing firms, and even conduct an online search. Try to be as cooperative as possible with this vital step in your nonprofit audit prep.
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At that time, the organization will be able to issue the findings to any regulating agencies as required. The CPA may also issue a letter to management with comments about accounting processes, internal controls, or areas for improvement. Mention the specific financial statements and related items that need to be audited, as well as whether you expect the audit firm to prepare your Form 990 or other tax related filings. If applicable, mention the requirement for a Single Audit under the Uniform Guidance if your organization receives federal funds. Include the fiscal year-end date for which the audit is required, and whether you are looking for a three-year commitment or something else. A compilation involves the preparation of financial statements by a CPA based on information provided by the nonprofit organization’s The Key Benefits of Accounting Services for Nonprofit Organizations management.
For nonprofits, audited financial statements demonstrate proper management of donor and grantmaker contributions. Regardless of the sector, audited financial statements play a vital role in fostering trust, enhancing financial management, and supporting informed decision-making. A formal audit, performed by an independent auditor, provides an impartial assessment of your financial statements and internal controls. This results in an audit opinion that can enhance credibility with donors, grantors and other stakeholders, bringing trustworthiness to your donation appeals. Once the CPA has finished going through all of the statements and their corresponding report, they will take some time to write up their findings. They will also issue any adjusting journal entries that need to be done, as well as adjusted financial statements.
The frequency of audits can vary, but many nonprofits undergo annual audits. The requirement may depend on the size of the organization, funding sources, and regulatory requirements. A poorly prepared financial report can cause management or board members to receive incorrect financial information. This can result in penalties, worse yet material fraud, including misappropriation of funds.
Need Help Preparing for a Nonprofit Audit?
- By actively working on improvements suggested by auditors, organizations can strengthen their operations while demonstrating their commitment to accountability and transparency.
- When it comes to managing your nonprofit, it’s important to focus on serving your mission and achieving your organization’s greatest potential.
- Many states also require nonprofits to perform an audit when renewing their nonprofit registration once they reach a specific revenue.
- If applicable, mention the requirement for a Single Audit under the Uniform Guidance if your organization receives federal funds.
- The National Council of Nonprofits has created this Nonprofit Audit Guide© to provide charitable nonprofits with the tools they need to make informed decisions about independent audits.
- In reality, reviews can provide valuable insight into an organization’s financial health.
In fact, nonprofits are required to disclose their financial information to the public in a number of ways. Some RFPs ask audit firms to disclose information on the biggest client(s) they’ve lost in recent years. While CPA firms seek permission to share the contact information for existing clients for reference purposes, firms cannot disclose details about past clients. We simply cannot name former clients and disclose why they are no longer clients. Set a deadline for when questions from audit firms must be submitted to you, then provide responses to all firms in a timely manner. You might also want to ask the audit firms about their capacity to conduct remote audits if that’s something you wish to consider.
Once it’s done, you’ll receive a letter from your auditor with a report discussing any issues they found and any recommendations they have for your organization. Your board will give the auditing committee authority to oversee all audits, including hiring and evaluating an independent auditor. An auditing committee is optional if you have a finance committee, but it may help your organization keep up to date with internal and external audit requirements.
