Follow These Steps to Prepare for a Nonprofit Accounting Audit

What Is An Audit? What Is Its Purpose?

A nonprofit accounting audit is a thorough examination of an organization’s financial statements, transaction records, accounting policies, and internal controls. Since the IRS does not conduct audits on nonprofit organizations, they are performed by independent auditors outside of the organization.
An independent financial audit results in the auditor’s opinion on whether the financial position of the company is represented fairly in their financial reports. An audit assures external users, like government agencies and potential donors, that the financial reports are correct. It also provides insight on opportunities for improvement for internal users, like management and board members.

When Does A Nonprofit Conduct A Financial Audit?

Be Aware of the Federal and State Law Audit Requirements

The timing and frequency of a nonprofit audit depend on the agency that is requiring the audit. If the audit is required by state or federal law, it is important to understand the timing required by that agency. There are several different resources that can be used to determine the timing of an audit.

State Law Nonprofit Audit Requirements

The reporting and audit requirements for a nonprofit organization depend on the state that they operate in. Some states only require nonprofits to provide audited financials if they receive state funding or have state government contracts. Others require audits for all organizations that participate in fundraising activities. The National Council of Nonprofits provides guidance on each state’s requirements on their website.

Federal Law Audit Requirements

Nonprofit organizations that receive more than $750,000 in federal funding are required by law to conduct an audit. This law applies to organizations that receive federal funding passed through the state as well. For most nonprofits, a “single audit” meets federal requirements and provides a cost-effective way for all financial operations of the organization to be examined in the same audit. Read more about federal law audit requirements on the National Council of Nonprofits’ website.

Select A Nonprofit Auditing Firm

Research or ask your accounting firm for recommendations

Most companies are already in contact with their best option for an audit referral. The accounting service that a nonprofit outsources ordinary accounting tasks to, or even the accountants that complete the annual reports, can provide a great reference.

Provide a formal request for proposal (RFP)…

to ask for information about the firm, fees, and a list of references to other organizations who have worked with them.

Once the names of a few firms are gathered, it is important to make an informed decision about which firm is the best choice to conduct your nonprofit’s audit. It takes most organizations about 4 – 12 weeks to select the right CPA firm. Sending an RFP to a few firms is a great way to compare costs and services, as they will differ with each accounting firm.

Choose an audit firm that is a good fit for your needs and budget

Comparing the information received through the proposal requests is necessary to choose the right firm. It is suggested that you choose a CPA firm that has experience working with other nonprofit organizations with similar state and federal requirements. It is also important that financial audit services are reasonable compared to the organization’s budgeted expenses and available cash flow.

Hold A Pre-Audit Meeting With The Board And Staff Who Will Be Working With The Auditor

Once you have selected the auditing firm, the next step is to decide which team members will prepare the documents for the audit and support the auditor throughout the process. Organizations are most successful when they appoint one point person, like the accounting manager, and a few staff members to prepare for and oversee the audit. Invite those staff members and any board members that will be involved or interested in the audit to a meeting to discuss the details.

Develop a timeline that explains which documents will need to be submitted to the auditors by when

The most important detail about a financial audit to share with your team is the timeline. The selected auditor will have discussed a timeline explaining their expectations. In the staff meeting, you’ll want to share those expectations as well as explain your own. Your team should allow 2 – 4 weeks to complete the necessary prep work for the audit.

Ask for guidance on the documents

Ask the firm that you’ve selected for a list of documents they may require before beginning the audit. Required support will likely include financial reports, bank, and debt statements, transaction receipts, tax returns, and other documents. At the staff meeting, share the list with the staff that will be working on the audit. Answer any questions your team may have or seek extra guidance from the CPA firm if you are unsure.

Assemble Documentation

Gathering the required documents will be a multi-step process. Advise team members to verify as much of the financial reports as possible, setting aside any support used for verification. Be sure all bank and ledger accounts are reconciled before or during the process. Use any lists or guidance from the auditing firm to prioritize the organization of the documents. There are also universal checklists that can be used as a guideline like the Non-profit Audit Checklist here.

Anticipate Issues

As your team prepares documents, be sure to review reports. Anticipating any issues that the auditor may encounter will save time and money for your nonprofit. Many of the discrepancies found in a financial audit can be rectified before the documentation is even submitted for audit.

Next Steps

Now that you have a better idea of what an NFP audit entails, the next important step is for you to connect with accounting experts to work with you through this process. Reach out to JFW Accounting Services and find out how we can make this process easier for you. Book now!


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