9 min read March 12, 2024 Nonprofit organizations do not pay taxes, so they are not subject to audits performed by the Internal Revenue Service. Audits, however, are still sometimes required for nonprofit organizations by federal, state, or local entities. Key Takeaways What Is a Nonprofit Audit: While audits often do focus on finances, they can also encompass an evaluation of an organization's internal operations, compliance with rules and regulations, compliance with… How an Audit Can Benefit Your Nonprofit Organization: An audit shows that an organization takes its finances and operations seriously and is committed to continuously improving the use of its valuable resources… Always Be Audit-Ready With Outsourced Accounting for Nonprofits: With an outsourced accountant, you can get your NPO's back office in order, its budget operating at full capacity, and already have a strong relationship with an accounting firm equipped to provide nonprofit audits… Whether your organization must have an audit or simply would like to use an audit to improve its operations, then you'll need to learn more about what nonprofit audits are and the different types of audits available to your organization. Most often audits are considered to be financially focused processes designed to inspect and analyze a nonprofit's back office. While audits often do focus on finances, they can also encompass an evaluation of an organization's internal operations, compliance with rules and regulations, compliance with grant requirements, human resources structure, and more. There are several different types of nonprofit audits including: Each type of audit serves a different purpose and offers different benefits to your nonprofit organization. Read More: Whether your organization is required to perform an audit or not, audits can benefit your nonprofit in the following ways: Audits can help improve your nonprofit's transparency. Your organization can share the information discovered in an audit and how that information is being used to improve operations with its constituents. Not only does this demonstrate your organization's ability to embrace change but to leverage it to the nonprofit's benefit. An audit also shows that an organization takes its finances and operations seriously and is committed to continuously improving the use of its valuable resources. Routine audits help improve accountability throughout an organization. If you (and your entire staff) know that the organization will be subject to an audit every year or every few years, then you'll consistently work to maintain high standards and sound financial management to avoid having lazy or careless work discovered in an upcoming audit. Audits can often feel worrisome, but the actual point (and benefit) of an audit is to find imperfections. When imperfections have been identified in your organization, they transform into opportunities for improvement.
What Is a Nonprofit Audit?
Why Audit Your NPO? How an Audit Can Benefit Your Nonprofit Organization
Improved Transparency
Greater Accountability
Identify Opportunities for Improvement
Nonprofit Financial Audit Checklist: Be Prepared For Your Organization's Next Audit.
What Executive Directors Need To Know To Fly Through Their Next Audit
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Does Your Organization Need to Be Audited? How to Know If You Require an NPO Audit
Many circ*mstances require a nonprofit organization to undergo an audit. Some of these include state or federal regulations under which your nonprofit might fall. For example, some states require nonprofit organizations to undergo audits, others do not, and some require audits only when an organization has exceeded a certain amount of revenue. Additionally, audits can be triggered when nonprofits receive a certain amount or type of federal funding or assistance.
Beyond state and federal regulations, in certain circ*mstances, local governments, private foundations, or banks might request a copy of a nonprofit's most recently audited financial records as a part of their own organization's due diligence.
👉 Find State-by-State Nonprofit Audit Requirements HERE.
How Much Does a Nonprofit Audit Cost?
On average, nonprofit audits cost thousands of dollars, usually in the $5,000 to $20,000 range. However, the cost of an NPO audit can be significantly more or less, depending on several factors such as:
- Time needed to conduct the audit
- Budget size
- Organization size
- Cash handling practices
- Financial complexity
- Types of revenue sources
- Changes in the Financial Accounting Standards Boards
- Accounting firm rates and fees
- Regional differences in auditing rates and fees
- Audit timing
The audit provider you select for performing an external audit can provide you with a closer cost estimate based on your organization's size, complexity, and needs.
It's also important to note that nonprofit audits (internal and external) come with internal costs to your organization in the form of time and attention being focused on the auditing process, rather than your nonprofit's mission. The following best practices can help reduce the amount of time and attention you need to focus on your next audit to reduce the internal strain on resources that can occur.
5 Best Practices for Nonprofit Audits
Following these best practices will ensure that your next audit goes smoothly, helping your organization reduce the cost of its audit.
1. Choose the Right Nonprofit Audit Services Provider
If your organization needs an audit, the most important step is selecting the right firm. If you choose the wrong firm to conduct your audit, then every other part of the process could be more difficult and more expensive. Additionally, the audit might not benefit your organization as much as it potentially could with the right nonprofit audit service provider.
To find the right provider for your NPO, begin by doing a lot of initial research and making a list of potential auditors. Some good ways to begin creating a list of firms are to ask fellow NPOs for recommendations, read reviews of auditing firms, and even conduct an online search.
Next, you can narrow your list based on your NPO's budget and needs. Find out how many NPOs these firms serve. Ask how long the process will take and closely examine their fee structure and costs.
When you have narrowed your list, submit formal requests for proposals (RFPs) to your top candidates. This process allows you to provide a list of firms with information about your organization and its needs, receive information about auditing firms in return, and determine which firms are a good fit for your NPO. The RFPs you receive should include a description of the firm and what sets it apart from others, information about the specific auditors that would be working with you, a description of the work and auditing steps that will be performed, the fee structure, and a list of references.
2. Be Prepared for the Audit
If you are not prepared for your audit, it will be more expensive and take longer to complete. Plus, the audit will feel much more stressful, as you scramble to gather the information and documents your auditor needs. You can save time, money, resources, and stress by being well-prepared for the audit. This means having your records up to date and complete before your audit begins.
To prepare for your audit, reconcile all bank accounts and credit card statements and review the following:
- Account balances
- Capitalization
- Uncleared transactions
- Undeposited funds
- Accounts receivable and accounts payable
- Vendor list, agreements, and information
- Payments from customers or members
You should also comb through your records of financial transactions, looking for coding, categorization, or other data-entry errors.
Compile the following information and documents before your auditor arrives:
- Copies of bank and credit card statements
- Copies of account reconciliations
- Outstanding invoices
- Schedule of prepaid items
- Investment statements
- Grant information
- Payroll information
- Schedule of accrued wages and PTO
Whether or not your nonprofit is subject to routine audits, you should keep a potential audit in mind at all times. Always operate as if an audit is imminent. This will ensure you maintain books and records that are complete, well-organized, and thorough so that your NPO is always audit-ready.
Read More: Bookkeepers vs. Accountants: What Nonprofit Leaders Need to Know
3. Have an Audit Plan and Timeline
You should have a plan and timeline in mind for your organization's audit. In addition to allowing time for selecting an auditor (maybe one to three months), you should also allow time for preparing for the audit (up to one month). Talk with your auditor to determine how much time they believe the audit will take. They might require anywhere from a couple of weeks to a month or longer. After the audit has finished, plan time that will allow you to take immediate action, implementing the auditor's recommendations.
4. Ask Questions
When the audit is complete, your organization will receive a letter to management from the auditor that outlines recommendations regarding the NPO's processes and activities (internal control issues and/or operating inefficiencies). Your organization's leadership and board of directors should review and discuss this document and then prepare a list of questions for the auditor. You should also discuss whether or not the organization is satisfied with the job performed by the auditor to begin making plans for the next audit.
5. Be Ready to Implement Changes
Plan to make changes based on the findings and determinations of the audit. This means you need to be prepared to revise policies and procedures and even reassess your NPO's budget to improve the operational soundness and efficiency of your organization.
Always Be Audit-Ready With Outsourced Accounting for Nonprofits
Outsourced accounting for nonprofits is an excellent strategy for staying audit-ready, compliant, operationally efficient, and mission-focused. With an outsourced accountant, you can get your NPO's back office in order, its budget operating at full capacity, and already have a strong relationship with an accounting firm equipped to provide nonprofit audits when you're ready to improve your organization's transparency, accountability, and performance.
