Nuts and Bolts of a Nonprofit Accounting Audit

If you’re new to the nonprofit accounting space, you might be a little lost on what’s expected of you – and what to expect – from an audit. Never fear! It’s not difficult to get all caught up and ready to roll when that audit appears on the horizon.

The Fundamentals

What exactly is an audit? According to the Council of Nonprofits, an audit is the work product resulting from the independent examination of a nonprofit’s financial records by a certified public accountant (CPA), also referred to as an auditor or auditing firm. There are different types and formats, too, including:

Independent Financial Audits – The CPA who’s conducting your examination is contracted to provide an unbiased opinion whether your financial statements are free from material misstatement. This type of audit typically includes an evaluation of:

• Your financial statement, conducted following generally accepted accounting principles (GAAP)
• The accounting policies used and the accuracy of significant accounting estimates
• The overall presentation of financial statements, which involves performing procedures to obtain audit evidence – the selection of which is at the auditor’s discretion

Single Audits – This type of audit is only conducted if your nonprofit expends $750,000 or more in federal or state funds in a single fiscal year. In this case, you’re required by law to undergo a single audit under the 2 CFR Part 200, Subpart F (Uniform Guidance). It covers the entire scope of an organization-wide financial audit, plus a compliance-based audit. The federal government requires auditors to perform a compliance audit in both the planning and fieldwork stage.

Non-Audit Financial Reviews – Though no laws require reviewed financial statements, you may have grantors or lenders that want you to provide an annual reviewed financial statement as part of your grant or loan agreement. Financial reviews include:

• Independent Accountant’s Compilation Report – This is a compiled report of your organization’s financial position, including related statements of activities, functional expenses, and cash flows. But this isn’t an audit or a review of financial statements – it merely provides you with formatted financial statements and records for review by third parties.
• Financial Review – This has a narrower scope than an audit. It reviews the nonprofit’s statement of financial position, statement of activities, and cash flows and is conducted per the Statements on Standards for Accounting and Review Services.

Despite which type of audit your organization conducts, there are three stages to complete:

• Stage One: Planning – Your auditor will send you an engagement letter (basically, a vendor agreement), with a “Prepared by Client” list outlining the supporting schedules you need to prepare.
• Stage Two: Fieldwork – This is when the audit is performed, including testing and key staff conversations.
• Stage Three: Post Work – The final report is submitted to your board or audit committee.

At this point, you may be thinking this sounds time-consuming – and expensive! The truth is, audits can take a lot of time and be costly, especially if you need to conduct them more than once a year. But not all nonprofits need to perform a financial audit or review by law. So why should you go through the process and incur the expense? For most organizations, it can be extremely beneficial. An audit or review:

• Assures supporters and donors you’re effectively handling donations, which can make your future fundraising more lucrative
• Shows government funders your accounting is in order
• Provides confidence to board members and executive leadership, which will help boost the sustainability and growth of your organization and mission

We’re just scratching the surface when it comes to audits. It’s also beneficial to know the different types of audits, how to select the right auditor, what you should provide to your auditor, and which red flags auditors look for. Whether you’re preparing for your first audit, or you’ve been down this road before, using the right nonprofit accounting software can simplify the process. To learn how our fund accounting software can help ensure a smooth audit, contact our team to request a demo today!