Your nonprofit organization may be required to hire an independent outside CPA to audit its books, depending on its annual gross receipts and other factors. Even when external audits aren’t mandated, however, they’re often recommended. These audits can provide assurance to donors and other stakeholders that your organization is operating with integrity and within acceptable accounting guidelines.
Most nonprofits conduct internal audits on a regular basis, perhaps quarterly or annually. These audits are typically performed by a board member or a member of the organization’s staff. The objective is to review the organization’s financial statements, accounting policies and spending habits.
Internal audits promote fiscal responsibility and are essential to good governance. But they’re often conducted by people who don’t have extensive audit training and who have a vested interest in issuing a clean bill of health.
Outside auditors may be in a better position to determine whether your statements offer a fair picture of your finances. In an external audit, a CPA examines your organization’s financial statements and issues an opinion on whether those statements adhere to Generally Accepted Accounting Principles (GAAP) or another reporting framework.
To support this opinion, the auditor tests underlying records such as your nonprofit’s bank reconciliations, accounts payable records and contribution classifications. The auditor also evaluates your organization’s internal controls, including procedures for fraud prevention and detection.
This type of audit is completely separate from an internal audit. Though external audits are optional for nonprofits in some states, they’re required in others. Be sure you learn the rules that apply to your organization.
Preparing for the audit
You can facilitate external audit fieldwork by anticipating information requests and inquiries from your auditor. He or she will ask for various financial documents, including:
- Financial statements,
- Bank correspondence,
- Board meeting minutes, and
- Payroll, accounts receivable and accounts payable records.
Your auditor also may ask to review records related to loans, leases, grants, donations and fundraising activities. In addition, be ready to answer questions about such issues as how money and other resources are received and spent, what the organization does to comply with applicable laws, and how financial transactions are recorded.
We can help
Internal audits are essential. But they’re no substitute for an external audit by a qualified CPA, especially in light of the major changes to GAAP in recent years and increasing government scrutiny of nonprofits. Contact us to discuss whether you’re required to obtain an external audit under state or federal guidelines.