Nonprofit organizations play a crucial role in society, providing valuable services and support to those in need. However, with the responsibility of managing funds from donations and grants, nonprofits need to maintain financial transparency and compliance.

One way to make sure that your nonprofit organization is meeting these standards is by conducting an annual audit. This process involves reviewing the organization’s financial records, processes, and procedures to guarantee accuracy and adherence to legal requirements.

Whether your organization is preparing for its first audit or conducting regular audits, this nonprofit audit checklist will help you stay on track. Understanding the audit process, the necessary documentation and the benefits of a thorough audit can help your nonprofit navigate audit season with confidence.

What is a Nonprofit Audit?

A nonprofit audit is an independent examination of a nonprofit organization’s financial records, conducted by an audit firm or an independent auditor. The primary purpose of the audit is to verify that the organization’s financial statements are accurate and compliant with generally accepted accounting principles (GAAP).

This process helps maintain the organization’s financial health by providing an unbiased review of its nonprofit accounting practices, internal controls, and financial management procedures. In short, a nonprofit audit is like a health checkup for your organization’s finances—only with a lot more paperwork!

Does My Organization Need a Financial Audit?

One of the quirks of working in the nonprofit sector is understanding that not all organizations are required to undergo an audit. This can be surprising, especially for those new to the field. Typically, smaller nonprofits, especially those with limited funding sources, might not face a mandatory audit. However, there are certain circumstances where an audit becomes essential.

For instance, if your organization receives federal funds, you might be subject to what’s known as a single audit (previously called an A-133 audit). This audit is required for nonprofits that spend $750,000 or more in federal funds in a fiscal year. The single audit is more rigorous than a standard financial audit, as it not only reviews your financial statements but also your organization’s compliance with federal regulations. If your nonprofit is managing large grants or federal funding, this audit isn’t just a recommendation—it’s a legal requirement.

But here’s where things get interesting: Even if your organization doesn’t fall under the mandatory audit requirements, I strongly believe that regular audits should be a part of your financial strategy. Why? Because audits are far more than just a regulatory hoop to jump through. They offer invaluable insight into your organization’s financial health. Think of it as a proactive measure—a way to identify and correct potential issues before they snowball into larger problems.

10 Great Benefits of an Audit

Now, you might be thinking, “Isn’t an audit just another expense?” But trust me, the benefits far outweigh the costs. Here’s why:

1. Boosts Organizational Reputation: A nonprofit audit can significantly enhance your organization’s reputation. Transparency is key in the nonprofit sector, and having audited financial statements demonstrates your commitment to accountability. Donors, grant-makers, and even volunteers are more likely to trust and support an organization that openly shares its financial health.
2. Builds Donor Confidence: Audits provide a seal of approval that reassures donors and stakeholders. Knowing that an independent auditor has reviewed and validated your financial statements gives them confidence that their contributions are being managed responsibly. This can be a deciding factor for potential donors who are considering where to allocate their funds.
3. Identifies Weaknesses in Internal Controls: One of the most valuable outcomes of an audit is the identification of weaknesses in your internal controls. Auditors scrutinize your processes for handling financial transactions, managing cash flow, and safeguarding assets. If they find gaps or inefficiencies, you’ll have the opportunity to address these issues before they lead to more significant problems.
4. Improves Financial Management: An audit isn’t just about catching errors—it’s about refining your financial management processes. The feedback from an audit can help you tighten up your financial reporting, improve the accuracy of your records, and enhance the overall efficiency of your financial operations. This proactive approach can save your organization time and resources in the long run.
5. Ensures Compliance with Accounting Standards: Audits ensure that your financial statements are prepared in accordance with generally accepted accounting principles (GAAP). This compliance is not only essential for legal and regulatory reasons but also for maintaining the trust of your stakeholders. Accurate GAAP-compliant financial reporting is a hallmark of a well-managed nonprofit.
6. Prepares for Future Growth: As your nonprofit grows, so do the complexities of managing its finances. Regular audits help you stay ahead of this growth by ensuring that your financial practices evolve with the organization. They provide a framework for scaling your operations without sacrificing financial transparency or accountability.
7. Increases Grant Eligibility: Many grant-making organizations require audited financial statements as part of the application process. By having an audit completed, you’re opening the door to more funding opportunities, as it demonstrates that your organization is financially sound and trustworthy.
8. Facilitates Long-Term Planning: Audits provide a clear and accurate picture of your nonprofit’s financial health. This information is invaluable when it comes to long-term planning and strategy development. Whether you’re looking to expand programs, launch new initiatives, or secure major funding, understanding your financial position is crucial for making informed decisions.
9. Provides Peace of Mind: Perhaps the most underrated benefit of an audit is the peace of mind it brings. Knowing that your financial house is in order allows you to focus on what truly matters—fulfilling your organization’s mission. You can rest easy knowing that your finances are being managed with the highest level of integrity and care.
10. Strengthens Organizational Governance: Regular audits reinforce the importance of strong governance within your nonprofit. They make sure that your board and audit committee are fully informed about the organization’s financial status, enabling them to fulfill their fiduciary responsibilities more effectively.

In summary, while an audit may seem like a significant investment, the benefits it brings to your organization—from enhancing your reputation to improving financial management—make it a wise and essential practice for any nonprofit serious about its mission.

How to Choose an Auditor?

Selecting the right auditor for your nonprofit is a critical decision that can impact the quality of your audit, the insights you gain, and ultimately, your organization’s financial health and reputation. Here are a few things to think about to help you make an informed choice:

• Experience with Nonprofits: One of the most important factors to consider is the auditor’s experience with nonprofits. Nonprofits operate under unique financial structures and regulations that differ significantly from for-profit entities. Look for an auditor or audit firm that has extensive experience working with nonprofit organizations similar to yours.
• Reputation and References: An auditor’s reputation is another crucial factor. Ask for references from other nonprofits that have worked with the auditor or firm you’re considering. Speaking directly with these organizations can provide valuable insights into the auditor’s reliability, thoroughness, and ability to communicate effectively. Additionally, check online reviews and industry forums to gauge the general perception of the auditor’s work.
• Understanding of Nonprofit-Specific Issues: Nonprofits face unique challenges, such as managing restricted funds, complying with donor restrictions, and navigating complex grant agreements. Your auditor should not only understand these issues but also have a track record of helping nonprofits address them. During your initial conversations, ask potential auditors how they have handled specific nonprofit challenges in the past and how they plan to approach your audit.
• Personal Approach and Communication Style: The audit process involves close collaboration, so it’s important to choose an auditor who communicates well and aligns with your organization’s values and working style. Some auditors take a more hands-on approach, offering advice and recommendations throughout the process, while others may focus strictly on the audit itself. Decide which approach works best for your team and look for an auditor who matches that style.
• Availability and Responsiveness: Audits are time-sensitive, and delays can disrupt your organization’s operations and planning. Make sure that the auditor you choose has the capacity to meet your audit timeline and is responsive to your needs. Ask about their availability during critical periods, such as year-end close, and how they handle client communications during the audit process.
• Fee Structure: Understanding the fee structure is essential to avoid any surprises later on. Nonprofit audits can vary in complexity, and so can the fees associated with them. Make sure to get a clear, detailed proposal outlining the costs involved, including any additional services or potential overruns. While it’s important to stay within budget, remember that the lowest bid isn’t always the best choice. Balance cost with the auditor’s experience, reputation, and the value they can bring to your organization.
• Compliance with Independence Requirements: Auditors must maintain independence to provide an unbiased opinion on your financial statements. Make sure that the auditor or firm you’re considering complies with the independence requirements set by professional standards and regulations. This means they should have no financial interest in your organization, nor should they provide any services that could compromise their objectivity.
• Audit Firm Size and Resources: Consider whether you want to work with a large audit firm that may have more resources but a more standardized approach, or a smaller firm that might offer a more personalized service. Both options have their advantages—larger firms can bring in specialized expertise, while smaller firms may offer more direct access to senior auditors and a deeper understanding of your organization’s unique needs.

Choosing the right nonprofit auditor involves more than just finding someone who can perform the audit. It’s about selecting a partner who understands your organization, shares your commitment to transparency, and has the expertise to guide you through the complexities of nonprofit financial management.

Nonprofit Audit Checklist

Preparing for a nonprofit audit can feel overwhelming, but with a structured approach, you can navigate the process smoothly. Below is a detailed checklist that covers all the essential steps and documentation you’ll need to assemble and organize before your audit begins.

1. Assemble Key Financial Documents in One Location

Make sure all financial records are gathered and readily accessible:

☐ Journals: Detail the organization’s business transactions and affected accounts.
☐ Ledgers: Complete set for the fiscal year being audited.
☐ Bank Statements: Include all statements and canceled checks.
☐ Payroll Records: Includes tax returns showing withholding for employees.
☐ IRS Form 1099s: For independent contractors and consultants.
☐ Tax Returns: Forms 990 and 990-T.
☐ Invoices and Paid Bills: Receipts for all expenses.
☐ Credit Card Receipts: Documentation of all credit card transactions.

2. Organize and Have Readily Available All Legal and Organizational Documents

Make sure these critical documents are up-to-date and easily accessible:

☐ Corporation or Organizational Documents: Articles of incorporation, bylaws, etc.
☐ Policies: Related to financial management and internal controls.
☐ Tax Exemption Letters: Proof of tax-exempt status.
☐ Board or Committee Meeting Minutes: Documentation of decisions made.
☐ Grant Proposals and Contracts: Commitment letters, contracts, and funding agreements.
☐ Final Reports: Submitted to funders as part of grant obligations.
☐ Vendor Contracts: Including leases and equipment maintenance agreements.
☐ Insurance Policies: Coverage details for office contents, professional liability, etc.

3. Reconcile All Bank Accounts

Make sure your bank statements align with your internal financial records:

☐ Reconcile Bank Accounts: Verify that all account balances are accurate and all transactions are accounted for.
☐ Address Uncleared Transactions: Investigate and resolve any uncleared transactions that may affect your cash balance.

4. Prepare Financial Schedules and Reports

Prepare the necessary financial reports and schedules your auditor will need:

☐ Trial Balance: Make sure debts equal credits at the end of the accounting period.
☐ Accounts Receivable Schedule: List of all amounts due to the organization.
☐ Accounts Payable Schedule: List of all amounts the organization owes.
☐ Depreciation Schedules: Track the depreciation of assets over time.
☐ Expense Account Analyses: As requested by your auditor, detail specific expense accounts.
☐ Prepaid Expenses Schedule: Track expenses that apply to the upcoming fiscal year.
☐ Fixed Asset Additions and Dispositions: Record all changes in the organization’s fixed assets.
☐ Investment Activities: Document all investment activities, gains, and losses.

5. Review and Clean Up Financial Records

Take additional steps to make sure your financial records are accurate and up to date:

☐ Review Vendors: Remove any inactive vendors from your list.
☐ Check for Unpaid Membership Dues: Resolve any outstanding dues if your nonprofit has a membership program.
☐ Deposit Undeposited Funds: Maximize your cash availability by depositing any undeposited funds.
☐ Look for Coding Errors: Identify and correct duplicate, missing, or incorrect data entries.
☐ Check Capitalization: Make sure that your nonprofit’s assets are properly categorized.
☐ Review Accounts Receivable and Payable: Confirm all outstanding cash obligations and resolve any discrepancies or disputes.

6. Compile the Auditor’s Requested Documents

In addition to the steps above, gather specific items requested by your auditor, often referred to as the Prepared by Client (PBC) list:

☐ Bank Statements
☐ Investment Statements
☐ Unpaid Invoices
☐ Details of Grants Received
☐ Details of Donations Received
☐ Payroll and Staff Compensation Information
☐ Board Member Names and Meeting Minutes
☐ Tax Documents
☐ Fiscal Policies and Procedures Handbook

By following this checklist, you’ll be well-prepared for your nonprofit audit, reducing the likelihood of surprises and ensuring a smoother audit process. Remember, the goal is to present a clear, accurate, and complete picture of your organization’s financial health to your auditors.

How Software Like Sage Intacct Can Help

If there’s one thing I’ve learned, it’s that having the right tools makes all the difference. Financial management software like Sage Intacct for nonprofits can take much of the stress out of the audit process. With Sage Intacct for nonprofits, you can automate many of the tedious tasks like financial reporting and grant management. This software makes it so that your financial statements are not only accurate but also compliant with GAAP, making the audit process smoother and more efficient.

For those managing multiple grants, Sage Intacct’s grant management capabilities are essential. It helps track every dollar, ensuring that you meet all compliance requirements and that your financial reports are audit-ready at any time. Plus, the ability to generate real-time financial reports means no more scrambling to pull everything together at the last minute.

Key Takeaways

• Understand the Importance of Audits: Audits are essential for ensuring the accuracy and transparency of your nonprofit’s financial statements, which boosts donor confidence and enhances your organization’s reputation.
• Identify If Your Organization Needs an Audit: Not all nonprofits are required to undergo an audit, but regular audits are highly beneficial for maintaining financial health and meeting grantor requirements.
• Recognize the Benefits of Audits: Audits provide invaluable insights into your nonprofit’s internal controls and financial management, helping you identify weaknesses, prepare for future growth, and strengthen governance.
• Choose the Right Auditor: Selecting an auditor experienced in the nonprofit sector, with a solid reputation and a personalized approach, is crucial for a successful audit process.
• Follow a Comprehensive Audit Checklist: Being well-prepared by organizing key financial and legal documents, reconciling bank accounts, and preparing necessary financial schedules can streamline the audit process and reduce stress.
• Leverage Financial Management Software: Tools like Sage Intacct for nonprofits can automate reporting, track grants, and ensure compliance with GAAP, making your organization audit-ready and improving overall financial management.

Conclusion on Nonprofit Audit Checklists

Preparing for a nonprofit audit doesn’t have to be an overwhelming task. With a clear understanding of the audit process, the right tools, and a comprehensive checklist, you can approach audit season with confidence. Regular audits not only guarantee compliance and financial transparency but also build trust with donors and stakeholders, paving the way for your organization’s continued growth and success.

By choosing the right auditor and utilizing financial management software like Sage Intacct, your nonprofit can maintain the integrity of its financial health and focus on what matters—making a positive impact on the communities you serve.

Next, check out our top picks for fund accounting software.

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