Financial Audit for Nonprofits: A Complete Guide

Aligning accounting practices with the organization’s structure, whether it operates on an accrual or cash basis, is also essential. An independent audit may be among the nonprofit audit requirements for those enterprises receiving federal funding. Congress to assure compliance with rules governing federal grant management standards and nonprofit organizations, particularly those that spend more than $750,000 of said funds annually. The same legislation advanced consistent procedures to conduct an independent audit of a nonprofit organization. Recipients of government contracts may also fall subject to financial review, i.e., they must submit audited financial statements upon request of the agency that awards the contract.

• The IRS and the nonprofit’s board of directors also use financial audits to ensure that nonprofits are in compliance with all laws, regulations and their governing documents.
• Before we jump into the specific items to prepare, let’s look at the timeline for preparing for a nonprofit audit.
• This Nonprofit Audit Guide will help you understand what independent audits are, and help you prepare your nonprofit for an audit.
• At the end of the audit, the auditor provides an opinion on the accuracy and reliability of your financial statements.
• Once you’ve gathered all the necessary documents for your audit, you can start organizing them for the auditor’s review.
• Your CPA firm will have its own audit checklist of things they need to accomplish now to complete your audit correctly and on time.

Nonprofit accounting: Best practices for financial management

By identifying and resolving these common issues before auditors arrive, organizations experience significantly smoother audit processes with fewer findings and reduced timelines. Under the ONCA, there is more flexibility for small nonprofits to waive the requirement for independent financial reports. Public benefit corporations that receive less than $500,000 a year can have a financial review engagement instead of an audit. At least 80% of your members, voting at your https://holycitysinner.com/top-benefits-of-accounting-services-for-nonprofit-organizati/ annual meeting, must agree by passing an “extraordinary” resolution. A financial review engagement still needs to be completed by a certified public accountant who is independent of your nonprofit, but it is less time-consuming and less expensive than an audit. A financial review offers a lower level of assurance than an audit, with the auditor reviewing financial statements and performing limited analysis.

Step 2: Preparing for the Nonprofit Audit

It’s a comprehensive process that requires meticulous documentation and adherence to specific guidelines set by the Office of Management and Budget (OMB). 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. Many nonprofit organizations both large and small need to undergo a financial statement audit every year. Preparing for a nonprofit audit can be overwhelming and anxiety-filled, especially if it’s your first audit or you don’t have a strong and experienced financial team. Nonprofits are subject to specific accounting standards, such as the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 958, which governs the presentation of financial statements.

Benefits of Independent Audits for Nonprofit Organizations

Certain grants, particularly those from government agencies or large foundations, require audited financial statements as part of their awarding criteria. External auditors, in contrast, give your organization credibility and are often required for compliance with funders and regulators. For example, some US jurisdictions demand an external audit from nonprofits whose annual revenue exceeds a certain threshold—a threshold that varies between the different jurisdictions.

How can independent audits benefit my nonprofit?

Not only does a well-organized audit process add weight to your standing with supporters, it’s also excellent practice for good financial management and ensuring regulatory compliance. Maintaining accurate bank reconciliations throughout the year is crucial for preparing for a nonprofit audit. Regularly reconciling your business accounts ensures that all transactions have been properly recorded in both your accounting software and bank statements. This process helps identify discrepancies, unauthorized transactions, and errors, which can be promptly addressed to maintain financial integrity. This guide will walk you through what financial audits are, why they matter, and how to ensure your Accounting Services for Nonprofits: Benefits and How to Choose the Right Provider next audit not only meets compliance standards but strengthens your nonprofit’s credibility and financial practices. These controls help your organization safeguard assets and ensure accuracy in financial reporting.

What are the different types of nonprofit audits?

• We can provide the expertise and staff augmentation required to ensure your audit is a success.
• There are individual auditors or entire audit firms that specialize in the nonprofit sector.
• Operational ImprovementsAudits are more than number checks; they highlight unseen operational inefficiencies.
• Some of these are required by other federal or state government organizations, foundations, or nonprofits themselves.

It’s no secret that effective financial management is critical for nonprofits to thrive. However, many aspects of nonprofit finance can be confusing or difficult to navigate, from deciding how much of your budget to spend on overhead to choosing an accounting platform to organize your records. Nonprofits that receive less than $500,000 a year can agree to waive both audits and financial reviews, again through an extraordinary members’ resolution. Use this change as an opportunity to reassess your organization’s long-term financial planning strategies. Consider how the reduced administrative burden and potential cost savings can be leveraged to strengthen your nonprofit’s financial position and impact.