What about audits? Does a nonprofit need to have one? What kinds are there?

At its best, the term “audit” usually sparks apprehension. While it can refer to contract monitoring, internal review or external management review, a lot of people think immediately of an IRS review.

In actuality, a financial audit most commonly refers to an independent review of an organization’s financial books. Usually conducted annually, it’s really just a part of a reliable checks-and-balances system to make sure everything is in order. Here, we address whether a nonprofit needs an audit or other independent review of its financial condition.

First, it’s important to know if an annual financial audit is required of your organization by the federal government or by your state. These standards vary considerably. The federal government requires any organization receiving federal funds of more than $500,000 in a year to undergo a “Single Audit,” which generally covers the year/program in question.

State governments typically regulate the independent-audit requirement based on income – whatever the source. For example, in Pennsylvania, nonprofits that receive more than $300,000 in funds must file an audited financial statement with the Department of Revenue. In California, gross receipts totaling more than $2 million carry a similar requirement. Some states require an audited statement simply by virtue of fundraising there, regardless of where an organization’s headquarters may be located.

Given these variations, it’s best to consult an experienced attorney or accountant to determine the specific needs of your organization.

Another factor to consider is the requirements of funding sources. In addition to the requirements of federal and state governments, some funders may require an independent audit as a condition of funding.

If you do determine that an audit is beneficial (or required), it’s important to know that it must be prepared by a licensed independent certified public accountant (CPA). Once engaged, an auditor performs a series of selective tests that provide a basis for judging whether the financial reports can be relied upon.

Auditors will examine, among other things, bank reconciliation, selected restricted donations (to see that they were handled and recorded properly), and grant letters (to see that receivables are accurately stated). In addition, the auditor reviews physical assets, journals, ledgers and board minutes. Based on this investigation, the auditor issues a formal opinion about the accuracy of the financial reports.

If you do undergo an audit, you’ll also want to establish an audit committee within your board of directors. These committees are typically responsible for selecting (or approving the selection of) an auditor, reviewing the auditor’s outputs, and meeting with the auditor pre- and post-audit to address any issues or questions. Audit committees also frequently have ongoing responsibility for the organization’s overall financial oversight and internal financial controls.

Finance FAQ

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