Nonprofit Audits 101

Nonprofits handle audits as a critical component of their financial management and accountability practices. An audit is an independent examination of an organization’s financial statements, internal controls, and compliance with relevant laws and regulations. It helps ensure the accuracy and integrity of financial reporting, provides assurance to stakeholders, and identifies areas for improvement. Here’s how nonprofits typically handle audits:

1. Selecting an Auditor:
   • Choose a certified public accountant (CPA) or a professional auditing firm experienced in nonprofit audits. Consider factors such as expertise, reputation, cost, and compatibility with the organization’s values and mission.
2. Planning and Pre-Audit Preparation:
   • Collaborate with the auditor to establish the scope, objectives, and timing of the audit. Provide necessary documentation, financial records, and access to relevant personnel to facilitate the audit process.
3. Internal Review:
   • Conduct an internal review of financial records, transactions, and controls before the audit. Address any discrepancies, errors, or concerns to ensure accurate financial statements.
4. Audit Fieldwork:
   • The auditor conducts fieldwork, which includes testing transactions, examining supporting documentation, assessing internal controls, and performing substantive procedures to verify the accuracy of financial information.
5. Audit Procedures:
   • The auditor may perform various audit procedures, including:
     • Testing the completeness and accuracy of transactions.
     • Reviewing the organization’s accounting policies and procedures.
     • Confirming account balances and outstanding obligations.
     • Analyzing financial ratios and trends.
     • Assessing compliance with laws, regulations, and grant requirements.
6. Communication with Management:
   • Throughout the audit process, the auditor communicates with the nonprofit’s management to discuss findings, address questions, and seek clarifications on financial matters.
7. Draft Audit Report:
   • The auditor prepares a draft audit report that includes their findings, observations, and recommendations. This report outlines any significant issues identified during the audit.
8. Management Review:
   • Nonprofit management reviews the draft audit report to ensure accuracy and completeness. Management responses and explanations may be included in the report.
9. Final Audit Report:
   • The auditor finalizes the audit report based on management’s input. The final report is presented to the nonprofit’s board of directors for review and approval.
10. Board Approval:
    • The board of directors reviews and approves the final audit report. The board’s oversight ensures that the audit process was conducted appropriately and that the organization’s financial reporting is accurate.
11. Action on Recommendations:
    • If the audit report includes recommendations for improving internal controls, processes, or financial practices, the nonprofit takes appropriate action to address these recommendations.
12. Filing and Distribution:
    • The final audit report is typically filed with relevant regulatory authorities and may be shared with donors, funders, stakeholders, and the public to demonstrate financial transparency and accountability.
13. Continuous Improvement:
    • Nonprofits use audit findings to identify areas for improvement in financial management, internal controls, and operational efficiency. These insights contribute to ongoing organizational development.

Audits are a valuable tool for nonprofits to uphold their commitment to responsible stewardship of resources, build trust with stakeholders, and ensure accurate and transparent financial reporting.