Financial Audits for Nonprofits and Community Agencies

Audits are an important tool to ensure that nonprofit organizations maintain accurate and complete financial statements and records.

The benefits of regular audits include:

  • Increased transparency to donors and funders
  • Regular accountability to organizations’ internal controls
  • Identification of opportunities for improvement

Not all nonprofits require audits. However, your organization may require an audit if it is:

  • Requested by federal, state, or local agencies
  • Necessary for grant proposals, contracts, or loans
  • Required by state or federal laws, based on the amount of your organization’s expenditure

Independent Audits

An independent audit is an examination of the financial records, accounts, business transactions, accounting practices, risk, and internal controls of a charitable nonprofit by an auditor/CPA who has complete independence from the organization being audited. This reduces the opportunity for a conflict of interest.

An independent auditor:

  • Is not an employee nor relative of an employee
  • Is not a board member
  • Does not have any financial interest, such as investments or custody of assets, in the organization
  • Does not hold any apparent authority in the organization’s management or decisions
  • Does not provide non-audit services (during the professional engagement period), such as bookkeeping, investment banking, human resources, or management

Be Audit-Ready!

  • Keep detailed data on the transactions and reconciliations of all balance sheet and profit & loss accounts on a monthly basis. Don’t wait until the end of the fiscal year!
    • Maintain detailed notes, board minutes, and research that explain and support any significant policy or accounting changes to the organization.
  • Maintain originals of documents and scan them and file on server in one location
  • Leverage technology:
    • Use bookkeeping software for accounting transactions
    • Consider using AP or Electronic Data Interchange (EDI) software, if needed.
    • Digitize policies and procedures, develop narrative and flowcharts for key processes, show access to source documentation, use shared drives, request vendors to send invoices electronically via PDF.
    • Document receipt approval and payment electronically
  • Review financial policies, procedures, segregation of duties, and evaluation plan to determine any areas that may need strengthening.

Preparing for an Audit

The following steps should be taken to prepare for an upcoming audit:

  • Review leases, contracts, grant agreements, and any current legal documentation (if applicable)
  • Review internal control structure
  • Review any transactions near the end and beginning of the year, which makes sure that you have not made a “cutoff” error
  • Collect and organize all financial documents into one place (electronic and hard copy)
  • Invite the auditor for a pre-audit conference to establish clear expectations, timeline, schedule requirements, and responsibilities of staff members
    • Ask for a PBC List (“Prepared by client”) – information and supporting documents needed to complete an audit
  • Have a designated point person(s) for audit correspondence

Additional Resources:

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