Audit Requirements for Not-For-Profit Organizations

With a compilation, an accountant compiles your financial statements from documentation you provide them. They do not audit or review the information, therefore making them unable to express an opinion on whether the statements comply with GAAP. Figuring out if your organization is mandated to obtain an annual audit is an important step in your overall compliance with the guidelines and regulations for nonprofits. If your nonprofit is not required to obtain an audit, you may still consider doing so because of the benefits. A corporation must prepare financial statements each year (refer to subsection 172(1) the Canada Not-for-profit Corporations Act (NFP Act)) which comply with the requirements of the NFP Act.

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And when you need an independent audit, consider partnering with Assurance Dimensions. If your nonprofit organization receives $750,000 or more in federal funds, you’ll be required to submit a single audit in accordance with the Uniform Guidance and the federal law requirements of the Single Audit Act. Single audits help ensure an organization properly allocates funds according to their federal grant agreements.

Understanding Audit Requirements

In fact, nonprofits are required to disclose their financial information to the public in a number of ways. During the audit, the auditor will request to speak to the management representative and selected staff or board members. These interviews help gauge understanding of processes, controls, and significant financially relevant activities. Lastly, an often overlooked benefit of the nonprofit audit is that it can provide constructive recommendations for improving the organization’s operations. Less extensive than the field audit, the office or correspondence audit rarely includes a face-to-face encounter with an IRS representative.

Step 1: Selecting an Audit Firm

• This is where an accountant assembles your financial statements from the information you provide.
• Below, we’ll walk you through everything you need to know about nonprofit audits.
• Nonprofit audits also burnish a firm’s reputation with the general public from which a new generation of contributors may come.
• Another purpose of the nonprofit audit is to assess the effectiveness of internal controls.
• This involves reviewing the audit reports, updating policies, increasing controls, and instituting new processes to ensure ongoing compliance and improved financial management.
• With your auditors spending less time assessing your internal controls, your organization will be able to reduce hours and save money.

The 990 includes a question regarding the policy’s existence as well as your organization’s process for identifying and managing conflicts. Contrary to popular belief, most audits are not conducted to detect a problem. They are actually useful tools to ensure that an organization is in compliance and can also be used to identify potential problems before they become too big. If your nonprofit is not required to have an audit, you may still choose to have one conducted on a voluntary basis. Second, nonprofits are required to make their application for tax exemption with the IRS, Form 1023, available upon request. If your nonprofit does not meet any of the criteria above, an audit is likely not required unless your state has different criteria.

Common Misconceptions About Audits and Reviews

This process will help strengthen public confidence in the organization’s financial transparency as well as give members an opportunity to share their feedback. By understanding the goals behind an audit, nonprofits can strive for greater accountability and improved long-term success. An accounting professional examines financial statements to determine whether they conform to accounting standards. Independent audits are performed by a public accounting firm or an individual who is a certified public accountant (CPA). A nonprofit auditing firm can unearth the discrepancies, relationships, and transactions that activated the IRS audits in the first place.

• An auditor seeks to understand the nature of an organization, reviews and evaluates internal control procedures, confirms major transactions and balances, and tests underlying accounting records.
• The requirements can be confusing, but nonprofits should be aware of potential impacts to their legality and industry status with the New York Attorney General’s Office (AG).
• But without at least a financial review, you’re probably out of luck when it comes to most grants.
• For example, some nonprofit bylaws require annual audits, but others state that they should occur every two, four, or five years.
• As mentioned before, an IRS audit of a nonprofit organization is fairly rare.

This form is due by the last day of the month following the end of each quarter, although some employers might be considered annual filers. Partner with the experts at Jitasa to make the most of your nonprofit audit experience. If your auditor requests access to your accounting system, make sure to grant them the correct level of user permissions (often view- or read-only) before the audit. Also, add all of the documents they’ll need to a centralized digital folder you can share with them. This isn’t a complete glossary of auditing and accounting terms, but it’s a good place to start. Terminology is critical in accounting, so don’t be afraid to check a term if you’re unsure what it means.

While most focus generally lies on federal and state income taxes, there’s also a third aspect—payroll taxes. Hollybush Academy, a small private religious high school in New York, had never The Key Benefits of Accounting Services for Nonprofit Organizations undergone a financial audit due to a lack of bank loans and exemption from filing Form 990. This document should provide a structured way to evaluate potential auditors. Whether your organization is obligated to obtain an audit or not, there are many positives that will help your nonprofit as it moves forward. In order to be fully compliant, a copy of the policy must be given to all officers, employees, trustees, directors and volunteers once adopted.

• At the same time, many large donors, foundations, or other sources of funds may request or require audited financial statements.
• Get our FREE GUIDE to nonprofit financial reports, featuring illustrations, annotations, and insights to help you better understand your organization’s finances.
• Let’s look at 501c3 audit requirements and the specific instances when your nonprofit organization must be audited.
• A financial audit by an independent CPA is performed methodically and according to rigorous criteria.
• An external audit is conducted by an independent third party to provide an unbiased assessment of the nonprofit’s financial health and compliance.

Sometimes state and federal laws require you to audit your nonprofit, but that’s not always the case. And even if you don’t have a legal obligation to conduct an audit, a financial examination can still be a huge boost for your organization. Regardless of whether an audit committee is used, all charitable nonprofits should review their practices to ensure that there is independence in the oversight of the auditor(s).

• This will involve creating controls or procedures to ensure that corrective action is taken should any issues arise during future audits.
• One circumstance where an independent audit is mandated relates to the spending of federal funds.
• Click on a state in the map below to find a link to the state law that governs audit requirements (if applicable) for charitable nonprofits in that state.
• Nonprofits often choose to conduct voluntary audits even when not legally required.
• It’s less of a financial audit (though, it normally includes that to some extent) and more of a check on compliance requirements and adherence to established bylaws.
• DCG provides comprehensive tax planning and filing services, leveraging a deep understanding of the latest tax laws to optimize businesses’ tax positions.
• They involve reviewing key processes, employee management practices, and inventory control systems.

What factors affect the cost and time of an audit engagement?

Depending on the type of audit you need, you might be https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ required to submit other documents. If you need to provide other documents, your auditor will be able to explain what is needed. Accounting, confirming, following up, and ascertaining business patterns allow the auditors to create a narrative of where a nonprofit stands. Once the initial contact letter from the agency arrives, nonprofit executives should respond and move promptly. The IRS will indicate a time and date for the field audit but will nevertheless work with the organization to establish a mutually optimal day for the audit.