You Go-To Nonprofit Audit Guide and Checklist

Nonprofit audits are the backbone of financial transparency, accountability, and compliance with regulations. In this guide, our team at SSL Associates aims to demystify the audit process, highlight its importance, and offer a step-by-step checklist to help nonprofits prepare effectively. Whether your organization is mandated to undergo an audit or opts for one voluntarily, understanding the intricacies can improve your financial health and boost donor confidence. Let's dive into the essentials of a nonprofit audit to set up your organization for success.

Understanding Nonprofit Audits

A nonprofit audit is a detailed evaluation of an organization's financial records that ensures accuracy and compliance with various regulations. It can be mandated by legal requirements, grant agreements, or board policies and offers a comprehensive view of the organization's financial health and integrity. Auditors scrutinize financial statements, verify transactions, and assess internal controls to identify potential areas for improvement. It’s important that nonprofits understand the different types of audits to fulfill their financial and regulatory responsibilities.

Does My Nonprofit Need a Financial Audit?

Your nonprofit might need an independent financial audit for several reasons:

1. Bylaws requirement: Founders may have stipulated regular audits in the bylaws to ensure financial transparency from the outset.
2. Federal funding: Receiving over $750,000 in federal funds annually necessitates an audit, including state-passed federal funds.
3. State laws: Many states mandate audits for nonprofits with annual revenues exceeding a set threshold, often around $500,000.
4. Grant applications: Grantmakers often require an audit report to confirm financial stability and responsible fund management before providing funds.

Even without these requirements, an audit can improve your organization’s financial understanding and promote accountability.

Benefits of Nonprofit Audits

A nonprofit organization reaps several advantages from conducting independent audits:

• Transparency and trust: Demonstrates commitment to honesty, enhancing credibility with donors and stakeholders.
• Improved financial health: Highlights areas for better financial management and strengthens internal controls.
• Regulatory compliance: Ensures adherence to legal standards and reduces the risk of non-compliance issues.
• Funding opportunities: Increases attractiveness to grantmakers and donors who need audited financial statements.
• Operational efficiency: Offers insights into operational strengths and areas that need improvement, promoting overall organizational effectiveness.

Nonprofit Audit Types

Understanding the various types of audits can help nonprofit organizations meet their financial and regulatory obligations. Here are some common types:

IRS Audits

• Field audits: Conducted at the nonprofit's location and involves a thorough review of the organization’s financial records.
• Office/correspondence audits: Performed remotely, requiring the nonprofit to submit documents for examination.

Independent Audits

• Financial statement audits: A third-party auditor examines the organization’s financial statements, transactions, accounting practices, and internal controls to guarantee adherence to generally accepted accounting principles (GAAP)
• Compliance audits: Focus on ensuring that the organization adheres to specific laws, regulations, or grant requirements.
• Operational audits: Assess the operational efficiency and effectiveness of an organization's internal processes, productivity, staffing, and management strategies.
• Single audits: Required for nonprofits receiving significant federal funding, combining both financial and compliance audits.
• Internal audits: Conducted by the nonprofit's management team to assess internal controls and identify opportunities for improvement.
• Grant audits: Focus on the proper use and management of grant funds, often required by grantmakers.
• Bylaw audits: Mandated by the nonprofit's bylaws to guarantee ongoing financial security and transparency.
• Federal audits: Needed for nonprofits receiving federal funds, focusing on how these funds are managed and spent.
• State audits: Required by state governments for nonprofits soliciting state residents, ensuring compliance with state-specific regulations.

Nonprofit Audit Checklist

Preparing for an audit can be overwhelming, but having a checklist can simplify the process. Download your free nonprofit audit checklist from SSL Associates.

Pre-Audit Preparation

Start by ensuring all foundational documents and financial statements are accessible. Gather statements of financial position, activities, and cash flows, as well as the prior year's audited statements. Compile a list of bank and investment accounts, and prepare a schedule of all grants and contributions received. Review and update internal control policies.

Collect Documentation and Records

Maintain comprehensive records, including bank statements, reconciliations, invoices, receipts, revenue records, payroll documents, board meeting minutes, and bylaws.

Collect Contracts and Other Legal Agreements

Gather all existing contracts, including lease agreements, grant agreements, vendor contracts, and loan documents.

Asset Documentation

Detail all assets, such as property, equipment, and investments. Include depreciation schedules and documentation of any asset transactions during the year.

Liabilities and Commitments

Document all outstanding loans, mortgages, new loans, credit lines, and lease commitments.

Special Considerations for Nonprofits

Record the use of restricted funds, in-kind contributions, endowments, and details of fundraising events.

Post-Audit

Review the draft audit report for accuracy. Discuss findings with the auditor, get board approval for the finalized report, and implement any recommendations or changes based on the audit findings.

The Timeline of a Nonprofit Audit

Planning an independent audit for your nonprofit involves several key steps that each require careful scheduling to result in a smooth experience. Here's our suggested timeline for a nonprofit audit process:

12 Months Before

• Build an audit committee: Establish a committee to oversee the audit process.
• Assign roles: Designate a point person for auditor communication.

6 Months Before

• Find an auditor: Research and select three to four firms, considering conflicts of interest and nonprofit-specific experience.
• Choose an auditor: Finalize the auditor and create a contract outlining fees and necessary documents.

3 Months Before

• Prepare documentation: Create a checklist of required documents and start gathering them.
• Organize records: Keep both digital and hard copies, ensuring everything is well-organized.

1 Month Before

• Final preparations: Verify that all documents are ready and meet with the audit committee for any last-minute questions.

During the Audit

• Provide space: Allow the auditor to work without interruptions.
• Be available: Ensure the point person is ready to answer any questions.

After the Audit

• Review and implement: Meet with the auditor to discuss findings and then with the board to create an action plan.
• Update procedures: Adjust internal processes based on the audit experience.

To meet regulatory deadlines, complete your audit before filing your annual tax return. For most nonprofits, Form 990 is due on the 15th day of the fifth month after your fiscal year ends (e.g., May 15). If you need more time, file for an extension with IRS Form 8868. This structured approach will help your nonprofit remain compliant and financially organized.

Understanding the Auditor’s Report

An auditor's report offers a comprehensive analysis of a nonprofit's financial status and practices. Here's a breakdown of its main sections:

Auditor's Opinion

• Unqualified opinion: This positive assessment confirms that the financial statements are accurate and adhere to generally accepted accounting principles (GAAP).
• Qualified opinion: This indicates that, while generally accurate, there are specific areas where standards were not fully met or where the audit scope was limited.

Notes to Financial Statements

These notes offer detailed explanations of specific items, accounting policies, and significant events impacting the financials, providing deeper insights into the nonprofit's operations.

Governance Letter

This letter contains feedback on internal controls and processes, with suggestions for improvements to enhance efficiency and reduce risks. Implementing these recommendations can significantly strengthen the organization's financial practices and accountability.