Remember that CPAs and auditing firms work with their clients to improve financial practices and ensure accountability. Unlike for-profit audits, nonprofit audits demand deeper scrutiny of fund restrictions, donor intent, and grant compliance. Auditors must verify that funds are segregated correctly and spent in accordance with both legal and donor-imposed restrictions. They also examine how organizations track and report conditional grants, in-kind donations, and pledges—especially those that span fiscal years.

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Non-profit audits are critical to ensuring the integrity and sustainability of community foundations and non-profit organizations. Cash flow management is critical for nonprofits, which often face fluctuating donation patterns and grant disbursements. This statement helps stakeholders assess the organization’s ability to sustain operations and fund initiatives. The statement of functional expenses further breaks down expenses by program, management, and fundraising categories, highlighting the efficiency of resource allocation.

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They will then examine them to identify any internal or external risks to the nonprofit organization. Auditors will then evaluate the potential effects that these risks could have on the accuracy of the financial statements or on compliance with applicable laws and regulations. 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 process.

How to prepare for your nonprofit audit:

That helps you save back-and-forth during the process and helps avoid incurring additional expenses during the audit. That’s why our in-house team of 6 former nonprofit auditors helped put together this guide to nonprofit audit checklist to make sure  your audit goes as smoothly as possible. Audited financial statements undergo a thorough examination by an independent auditor, providing the highest level of assurance. Reviewed financial statements involve limited procedures for moderate assurance, while compiled financial statements are prepared based on information provided by the https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ organization without any assurance. In addition to this comprehensive audit checklist, you can reach out to the Charity CFO for help with audit preparation.

Nonprofit audits typically include evaluating internal controls, analyzing financial data, and assessing risks. The financial health and transparency of a nonprofit organization is paramount, not only for the leadership and beneficiaries but also for donors, sponsors, and the public. A nonprofit audit is an essential method for maintaining transparency and accountability. This article provides a comprehensive understanding of nonprofit audits and a handy checklist to guide organizations. Timely completion is essential for ensuring transparency into the finances of a nonprofit organization while also providing assurance that donors’ funds are being used in accordance with their stated goals and objectives.

• Completing the schedule ensures that the account balances roll forward from the prior year end to the current year end, which provides assurance that the income statement effects of the changes have been properly recorded.
• Among the more important questions are those pertaining to how many nonprofits they have performed independent audit reviews for.
• 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.
• Donor RequirementsSometimes, a significant donor might require an audit as a condition of their gift.
• Your organization should be maintaining detailed records of any grant-funded activities.
• The first thing to know about this report is that if it isn’t clean, that is totally fine!
• ‍An operational audit assesses your organization’s operation systems, productivity, staffing, IT, HR, and other functions to provide insight into why your organization is hitting or missing its goals.

Evaluating Internal Controls

If your auditor creates financial statements for your audit, then they will report a deficiency in operation on your audit report. The auditor will also look at the nonprofit’s financial statements from previous years, if they are available. Understanding nonprofit accounting, such as the matching principle where revenue is recognized over the duration of a multi-year grant program, is essential. This principle aligns with the broader goal of demonstrating accountability and ensuring that resources are used effectively toward the organization’s mission. The collaborative approach needed for compliance, as illustrated in the lessons from a SOC 2 audit, also speaks to the value of an audit in fostering a culture of integrity and cooperation within a nonprofit.

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They include cost principle, revenue recognition, materiality principle, and full disclosure principle, among many others. The audit helps to hold the organization accountable to its directors, its investors, and its donors. 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 accounting services for nonprofit organizations purpose upon which its tax exemption is based.

Event Report

Similarly, many states require audits for charities that surpass a certain revenue or contribution threshold. After you’ve received the grant, foundations may also ask for financial reports that show how the funds were used. An audit can provide valuable insights into your nonprofit’s financial health and help to identify any areas of weakness or governance needs in order to reduce the risk of potential fraud. However, to achieve certain certifications or seals of transparency, a nonprofit may be required to make audited financials available on its website along with current and previous year’s Form 990 filings. Lastly, an often overlooked benefit of the nonprofit audit is that it can provide constructive recommendations for improving the organization’s operations.

What is the audit timeline?

A financial audit is an independent, objective evaluation of an organization’s financial statements and related processes. Nonprofit financial audits are performed by outside public accounting firms to verify that nonprofits comply with federal tax laws and regulations. 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.