Depending on your organization’s annual gross receipts and other factors, you may be required to hire an outside CPA to audit your books. Even when external audits aren’t mandated, however, they often are recommended. These audits can provide assurance that your organization is operating with integrity and within acceptable accounting guidelines.
Mandate or not
Generally, nonprofits that expend more than $750,000 in federal funding over the course of a fiscal year must submit to independent audits. States impose their own guidelines. Some require nonprofits that receive a certain level of state funding to submit independent audits to the state agency that provided the funding or to other state agencies. Ask your financial advisor about your state’s audit regulations.
If your organization isn’t subject to any independent-audit mandates, perhaps one of your staff or board members regularly conducts internal audits — reviewing financial statements and accounting policies. Such audits promote fiscal responsibility and are essential to good governance, but they don’t necessarily arrive at the most accurate conclusions. After all, they’re conducted by people who may not have had extensive audit training and experience and who have a vested interest in issuing a clean bill of health.
External auditors are in a better position to determine whether your statements offer a fair picture of your finances and adhere to recognized standards. External auditors usually work closely with accounting staffs and audit committees to ensure access to all necessary documents.
Aside from your balance sheet and income and cash flow statements, such documents include those relating to banking, accounts payable and receivable, donations, grants, payroll, leases and mortgages, inventory, budgeting, and board meetings. The auditor also may interview your staff about internal controls and any unusual findings, such as excessive unrelated business income.
After completing the fieldwork, an auditor will issue a formal opinion about the accuracy of your financial statements and, in most cases, meet with your board’s audit committee. Be sure to take advantage of this opportunity to ask questions and discuss specific issues raised by the audit, particularly if your auditor has rendered an “adverse opinion.” Such opinions indicate that the auditor discovered material misstatements or accounting irregularities. Also discuss any recommendations the auditor has made about improving operations, accounting processes or internal control procedures.
In-house audits are essential, but they’re no substitute for an external audit by a qualified CPA. Even if your nonprofit isn’t required to submit professionally audited statements, you’re sure to benefit from your independent auditor’s report.