Nonprofit Audit Best Practices: Reduce Risk, Maximize Accuracy

Donors need to trust an organization before they contribute a one-off gift or recurring funding, and an independent audit provides them with that much-needed reassurance. Since you’ll have plenty of time to plan for most audits, you can take time to research and prepare. Immediately after you receive the final auditor report, your nonprofit must begin making all suggested changes. These improvements may involve fundraising opportunities you weren’t aware of and expenses you no longer need. An independent auditor can give your organization an outside perspective when you feel stuck.

The IRS and the nonprofit’s board of directors also use financial audits to ensure that nonprofits are in compliance with all laws, regulations and their governing documents. When the Internal Revenue Service (IRS) audits a nonprofit organization, this happens under a narrow set of circumstances. A nonprofit financial audit by the IRS is initiated if a return appears to be wanting in accuracy or completeness, unsupported by the organization’s financial records. Another trigger could be notification by any number of other government agencies that the nonprofit organization has failed to operate in accordance with their rules for grant recipients. Furthermore, the division within the IRS that takes responsibility for IRS-exempt organizations is itself under review, requiring financial review of organizations under its purview. Nonprofit Audits are often used by donors, grantors and other stakeholders in an organization’s financial health.

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If the organization does business with other taxpayers and entities, the IRS audit of the latter might spill over to the former. Meanwhile, should the federal government discover discord between the organization’s financial records and the documentation submitted by employees or vendors, the audit process could very well kick in. Beyond these contingencies, any time nonprofit organizations seek abatement or money back from the IRS, an IRS agent may count these as red flags and invoke the audit how to audit a non profit organization process. So, while IRS audits are not frequent occurrences due to federal tax law requirements for a nonprofit organization, the modest possibility remains. The national and state laws governing nonprofit organizations and their audited financial statements are myriad and sometimes confusing. A financial audit might be expected for many reasons such as organization size, the nature of its work, foundations e.g. the sources of its funding, or if it is a party to government contracts.

Selecting an independent certified public accountant with the right experience can take up to 12 months. This commences with extensive research and continues with winnowing the field of auditors with interviews and deeper questions, issuing a request for proposal (RFP) by an auditing firm, and making a final choice. In brief, the IRS wants to confirm that the foundation, charity, or other nonprofit concern is following the prescribed rules of reporting and fulfilling the purpose upon which its tax exemption is based. As with audits, the appropriate company officer will receive a written heads-up that a compliance check is coming.

What is the purpose and goals of a nonprofit audit?

This Nonprofit Audit Guide will help you understand what independent audits are, and help you prepare your nonprofit for an audit. Preparing an audit for a nonprofit requires careful planning and consideration of best practices. From establishing goals to reporting findings, there is an organized process that should be followed to ensure accuracy and efficiency when conducting the audit. Absent the curiosity of the IRS, nonprofit leaders may seek audited financial records for other reasons.