Nonprofit Audit Guide

If many payables and receivables have not cleared in the past 90 days, you should immediately review these issues. This will help you determine any cash obligations, potential vendor disputes, and overall cash management strategies. Nonprofits need to categorize material and immaterial assets properly. It’s important to comb through these assets periodically to ensure updated records. Plus, keeping past immaterial assets that no longer exist creates additional recordkeeping work for your team. Large amounts of undeposited funds make it challenging to maximize your cash availability. Depositing cash in a timely manner is essential to improve cash flow and it reduces the risk of theft or misappropriation of funds.

• Find principles of good governance and ethical & prudent practices for your nonprofit.
• This manual addresses the most common legal and financial challenges CBOs face and offers practical solutions.
• Our use of the terms “our firm” and “we” and “us” and terms of similar import, denote the alternative practice structure conducted by Smith & Howard PC and Smith & Howard Advisory LLC.
• The first major difference between an independent audit and an IRS audit is that you won’t have an IRS agent showing up at your organization’s offices.
• The IRS also usesForm 990to identify governance issues that they feel can lead to non-compliance.

Costs are generally determined by the amount of time an independent auditor or audit firm spends conducting the audit. If the organization’s budget is large and its finances complicated, the audit may take longer and cost more. Various accounting firms charge different rates, particularly from region to region across the country, depending on whether the auditor is a large company or an independent consultant.

National Council of Nonprofits

Depending on how large the organization is and where it is located, independent audits cost differently. Even a small nonprofit can expect to incur a cost of $10,000 for an independent audit. If your nonprofit organization has decided to undergo an independent audit, several factors will determine the audit’s cost. If you regularly conduct internal audits, you may already be using a professional or normal employee for these services. Perhaps you are missing out on an industry expert who can provide you with specific knowledge about the nonprofit industry.

Because of this, the Nonprofit Audit Guide includes a chart that details the audit requirements for all 50 states. Using this chart, you can determine if your state requires independent audits of nonprofit organizations and under what conditions these audits will take place. One circumstance where an independent audit is mandated relates to the spending of federal funds. While IRS audits of nonprofit organizations are uncommon, they can still occur for a variety of reasons. Many websites report that the IRS does not require nonprofits to obtain audits regularly, which is true. However, those websites fail to discuss that the IRS does still have a review process for charities and other nonprofit organizations.

Audits of Exempt Organizations

According to Georgia law, a charitable organization with contributions more than $1 million in either of the previous two years is required to conduct an audit performed by an independent CPA. If annual contributions in either of the past two years are between $500,000 and $1 million, the nonprofit’s financial statement must be reviewed by an independent CPA.

Nonprofit audits may seem scary, but they can actually be quite helpful! You’ll be able to identify opportunities to improve your organization’s internal controls, financial practices, and more. The purpose of the audit is to ensure that your nonprofit is adhering to the relevant generally accepted accounting principles. The auditor will examine items such as bank reconciliations, grants, donations received, board minutes, journals and ledgers. For example, the IRS can require an audit if there is any indication that a nonprofit’s spending is not in line with its mission. Or, a government entity may ask for an audit to determine whether a nonprofit is using the funding it gave to the organization as stipulated in the agreement. A compliance check is an accountability tool that examines whether your organization has properly reported certain items.

Charity and Nonprofit Audits

If any of your nonprofit’s funding comes from the government, you should be sure to determine whether you are legally required to conduct an independent audit. It’s important to understand that an independent audit is not required of every nonprofit organization, so you should decide if you actually need to audit your organization before undertaking this process. Generally, the funding source of a nonprofit and its yearly budget will determine whether it is required by the federal or state government to schedule an independent audit. In certain circumstances, you may be able to choose whether you will conduct an audit. As with normal taxes and audits, nonprofit audits can be a very complicated, confusing subject.

• Most nonprofits spend most of their resources on mission-related activities due to their limited budgets.
• The cost of an independent audit varies depending on the geographic region where the nonprofit is located and how large the organization is.
• While your organization does not have to pay for an IRS audit, you will have to pay out of pocket for an independent audit.
• They will issue a Request For Proposal, interview and vet firms, and ultimately determine who to hire.
• Following the initial planning meeting, the auditors will develop a risk assessment.

If you’re new to the audit process, you can request one of these documents from your auditing firm so that you can prepare the information your auditor needs. In addition to all of the inherent benefits of conducting a nonprofit financial audit, there are also charity watchdogs who provide information about charities to potential donors. These watchdogs may rank your organization higher if you’ve conducted an audit. This also increases the element of transparency with your supporters who do their research before contributing, assuring them that you’re a trustworthy organization.

The IRS uses aggregateForm 990 data to target areas of concern or non-compliance assuming forms are completed accurately. WhenForm 990 is submitted with incomplete or inaccurate information, it gives the appearance of a non-compliant organization. The IRS also usesForm 990to identify governance issues that they feel can lead to non-compliance. The numerous questions in the 990 related to board and management governance provide the IRS with insight into organizations that may be more likely to have issues that should be examined. Most likely, your audit firm will be inefficient if they don’t regularly conduct nonprofit audits.

When you file for charitable status, you submit your nonprofit’s mission statement, and an audit’s purpose is to track how much of the funds you receive actually get spent on your mission as opposed to overhead costs. Some grant funders require nonprofits https://www.bookstime.com/ to conduct audits to ensure their financial systems are trustworthy, transparent, and well-managed. Even if granting institutions don’t require an audit, they may require other proof of financial management before they’re willing to provide funding.