The idea of undergoing an auditing process can be daunting, time-consuming, and resource-intensive, but it holds considerable benefits for nonprofits. Especially organizations of a certain size and scope. When is it time to complete one? Or when is a financial review enough? Despite the initial reluctance some nonprofits may have, an audit can demonstrate your organization’s commitment to financial transparency and is considered a healthy, good practice. We explore these topics below and what might make the most sense for your organization’s present and future needs.

What is an audit? An independent, external audit is a process that examines your organization’s transactions and activities to ensure they are in compliance with laws and Generally Accepted Accounting Principle (GAAP) rules. Audits and financial reports can be conducted by accounting firms and CPAs that specialize in audit services.

During an audit, your organization’s financial statements will be examined and checked for any errors or omissions. The auditor may also review key risks to revenues or expenses as well as procedures and internal controls you currently have in place to prevent and detect errors and/or fraud.

As your organizational leadership consider undergoing an audit, here are seven good things to remember:

1) When to Consider a Full Audit: As a general rule, nonprofits should consider independent audits annually when any of the following circumstances are true: expenses exceed $500,000, you have more than 5,000 donors, more than 10 employees, or have operated over 10 years.

2) About Laws and Private Foundations: Each state has their own requirements about independent audits. While not all states require an independent audit, if your nonprofit plans to apply for a grant from a private foundation in a state that requires an audit, be prepared to comply!

3) Government Funding: Your organization will need an audit if you’re planning to apply for government funding, as some state and federal grants require an independent audit. Nonprofits that expend $750,000 or more in federal funds in a year are subject to special audit requirements.

4) Bank Loans: Some banks may require an independent audit as a condition of receiving a loan. If your organization needs a loan to increase capacity or to undertake a new project, , we recommend getting started on your audit process as soon as you can.

5) Price and Scope: Audits range in price, duration, and scope, depending on the size and intricacies of your organization. Be prepared to pay between $2,000 and $50,000. An audit will take approximately 6-15 weeks to complete.

6) Good news! Your auditor will provide constructive recommendations for improving your organization’s operations, as the auditor will have a comprehensive understanding of nonprofits’ operations.

7) When to Opt for a Financial Review Instead: Small nonprofits (under $1 million in annual revenue) may consider a financial review in lieu of an independent audit. While similar to an audit, a financial review is not conducted with the same level of investigation or analysis as an independent audit. It’s important to note that during a financial review, financial statements are examined but the CPA does not conduct an examination of the nonprofit’s internal controls . The auditor’s report after a review will only note whether any modifications should be made to the financial statements. To summarize, the report does not provide a professional opinion about the nonprofit’s financial health as a whole, but rather give a snapshot of current financial state and resources.

In conclusion, for larger or growing organizations especially, audits play a crucial role in enhancing your credibility and commitment to financial transparency. Audits offer valuable insights, beneficial recommendations, and access to additional funding sources (federal grants, foundations, and bank loans), making them a worthwhile investment for the long-term success of your nonprofit.

Contact info@nonprofitnavigators.net for help with an audit.