“Audits” is a scary word for many nonprofits, and your team may understandably dread them, but preparation can go a long way to a successful audit. So where do you start? Whether you’re new to audits or perform two a year, it’s always a good idea to brush up on nonprofit fund accounting basics and best practices. Let’s get started!
Why Are Financial Audits Useful?
Your organization might not be required by law to conduct an audit. So why do it? Well, the answer comes down to three benefits of nonprofit audits, including:
- Knowing you’re doing right by your donors and grant-making organizations by exercising good stewardship over the funds they give you
- Reassuring your supporters that you’re managing the operations well
- Giving board members and executives accurate financial data to make informed decisions for your organization
Should You Outsource Nonprofit Audits?
Having your financials audited or reviewed by outside accounting professionals helps ensure you’re keeping good track of the money that comes into your organization, including where it’s allocated and how effectively your internal controls are governing your operations. But even accounting professionals need quality data to start with, which is why it’s advisable to use a nonprofit fund accounting software to keep track of finances.
Passing your annual audits and using each one as an opportunity to hone your practices gives everyone who interacts with your nonprofit greater confidence, from donors to government agencies as well as staff members. Over the long run, people’s greater confidence in your nonprofit improves your ability to raise money, run projects, and carry out your mission.
Independent Audits Vs. Single Audits: What’s The Difference?
Independent Financial Audit
As the name implies, this type of audit is carried out by a certified public accountant (CPA) who is not affiliated with the nonprofit organization being audited. The auditor or firm is contracted to provide an unbiased opinion of whether financial statements are, in accounting parlance, “free from material misstatement.”
An independent audit typically examines the organization’s statement of financial position, any related statements of activities, cash flows for the year ended, as well as notes to the financial statements.
The audit is conducted in accordance with Generally Accepted Accounting Principles (GAAP),. It also involves a range of procedures selected at the auditor’s discretion and intended to both obtain accurate data about the amounts and disclosures in the financial statements and assess the risks of material misstatements arising from fraud or error. An audit also evaluates the appropriateness of the nonprofit accounting policies used, the reasonableness of significant accounting estimates made by management, and the overall presentation of the financial statements.
This is a special type of audit applied to nonprofits that expend $750,000 or more in federal or state funds in a single fiscal year. The Code of Federal Regulations requires this kind of audit so the government can have the assurance that an organization’s use of federal funds complies with its funding requirements. Given the high stakes involved, many large or growing nonprofits rely on fund accounting software to manage their balance sheets.
Single audits vary depending on who is the recipient and which federal program is providing the funds. In general, single audits cover the scope of both an organization-wide independent financial audit and a compliance-based audit.
Auditors are required to perform compliance audits in both the planning and fieldwork stages of federally funded projects. In the planning stage, the auditor must first determine whether there is a risk that a nonprofit will not comply with applicable laws and regulations and then identify the relevant federal program and evaluate the program itself. In the fieldwork stage, the auditor reaudits the program along with its use of federal or state funds.
What Goes On During An Audit? Three Stages In A Nutshell
Stage 1: Planning and Preparation
During this stage, your auditor will likely send you an engagement letter, which is essentially a vendor agreement, along with a detailed “Prepared by Client” (PBC) list that outlines the supporting schedules and other documentation the auditors need so they can perform the audit.
Stage 2: Fieldwork
While the audit is underway, a team from the auditing firm will work on-site at your organization to review all the information needed to issue an opinion on your financial statements. The auditors are likely to have regular conversations with key staff members to clear up any questions they have.
Stage 3: Post Work
Finally, the auditors will complete their analysis and submit their final report to your nonprofit’s board of directors or audit committee.
There’s a lot of ground to cover when you’re talking about audits – even the basics! For more information, the Financial Accounting Standards Board (FASB) offers helpful resources as well as the latest audit regulations. Ready to learn more more about nonprofit fund accounting?