Audits can be scary – and you and your team may dread them – but preparation can go a long way to a successful audit. So, where do you start? Whether you’re new to audits or perform two a year, it’s always a good idea to brush up on audit basics to begin preparations. This blog is the first in a series that will dive into in-depth audit topics. Let’s get started with the basics!
First: Why Are Financial Audits Useful?
Your organization might not be required by law to conduct an audit. So why do it at all? It comes down to three things:
- Knowing you’re doing right by donors and grantmaking organizations by exercising good stewardship over the funds they give you
- Assuring your supporters you’re managing your operations well
- Giving your board members and executives the accurate financial data they need to make informed, confident decisions for your nonprofit
Having your financials audited or reviewed by unbiased outside accounting professionals helps ensure you’re keeping good track of the money that comes into your organization, where it’s allocated, and how effectively your internal controls govern your finance operations.
Passing your annual audits – and using each one as an opportunity to hone your practices – gives greater confidence to everyone who interacts with your nonprofit, from donors to government agencies to staff members. Over the long run, that improves your ability to raise money, run effective projects, and carry out your organization’s mission.
Second: Independent Audits vs. Single Audits: What’s the Difference?
Independent Financial Audit
As the name implies, this type of audit is carried out by a certified public accountant (CPA) who is not otherwise affiliated with the organization being audited. This auditor or firm is contracted to provide an unbiased outside opinion of whether your financial statements are, in accounting parlance, “free from material misstatement.”
An independent audit typically examines your organization’s statement of financial position, related statement of activities, cash flows for the year ended, and related notes to the financial statements. The audit is conducted in accordance with Generally Accepted Accounting Principles (GAAP), and involves a range of procedures, selected at the auditor’s discretion, intended to obtain accurate data about the amounts and disclosures in the financial statements, and to assess the risks of material misstatements arising from either fraud or error. An audit also evaluates the appropriateness of accounting policies used, the reasonableness of significant accounting estimates made by management, and the overall presentation of the financial statements.
This is a special type of audit applied to nonprofits that expend $750,000 or more in federal or state funds in a single fiscal year. The Code of Federal Regulations requires this kind of audit so the government can have assurance that an organization’s use of federal funds complies with its funding requirements.
Single audits differ depending on the recipient and which federal program provides the funds, but in general, they cover the entire scope of an organization-wide independent financial audit, along with a compliance-based audit.
Auditors are required to perform compliance audits in both the planning and fieldwork stages of these federally-funded projects. In the planning stage, the auditor must determine whether there is a high risk that the nonprofit will not comply with applicable laws and regulations, plus identify the relevant federal program and evaluate the program itself. In the fieldwork stage, the auditor again audits the program, along with its use of federal or state funds.
Third: What Goes on During an Audit? Three Stages in a Nutshell
Stage One: Planning and Preparation
During this stage, your auditor will likely send you an engagement letter (essentially a vendor agreement), along with a detailed “Prepared by Client” (PBC) list that outlines the supporting schedules and other documentation the auditors need your organization to prepare so they can perform the audit.
Stage Two: Fieldwork
While the audit is actually under way, a team from the auditing firm will work on site at your organization long enough to review all the information needed to issue an opinion on your
financial statements. During this phase, the auditors are likely to have regular conversations with key staff members to clear up any questions they have.
Stage Three: Post Work
Finally, the auditors will complete their analysis and submit their final report, or opinion letter, to your board of directors or audit committee.
There’s a lot of ground to cover when you’re talking about audits – even the basics! I didn’t cover everything you need to know here, and I urge you to look at the Financial Accounting Standards Board (FASB) website: for more information and check the new audit regulations for 2018. If you want to learn more about audit basics, preparing for an audit, roles during an audit, and what you can expect during and after an audit, download our latest guide, “Nonprofit Audit Workshop 2018: Preparing for a Smooth, Successful Audit.”