The word “audit” often has negative connotations. However, for many nonprofits, an annual audit is standard practice. Though the IRS does not require audits of all nonprofit organizations, other government agencies do. What is just as important for organizations that rely heavily on donations is that many private foundations and independent donors will not consider supporting organizations that are not audited on an annual basis. In the nonprofit world, conducting an annual audit has, for the most part, become a best practice.
Though few states have laws requiring an independent audit for smaller organizations, once a contribution threshold has been exceeded, it becomes mandatory. Most nonprofit audits are performed under Generally Accepted Auditing Standards (GAAS). When an organization receives over $500,000 in federal awards, a compliance audit performed under the Generally Accepted Government Auditing Standards (GAGAS), often referred to as “Yellow Book” standards is required. These standards focus heavily on aspect of internal controls.
The GAAS Audit Process
During an independent audit, using the GAAS standards, a trained auditor will review an organization and its environment, and test account balances such as payables, revenues, expenses and cash. Fraud risk and internal controls will also be considered.
Once an audit is complete, the organization will receive an opinion on the statements, along with a letter explaining them, if any internal control deficiencies are found. Auditors will also suggest ways that your organization can improve and give appropriate procedure to follow.
Agreed –Upon Procedures Engagement
An alternative to the GAAS audit is the performance of an Agreed-Upon Procedures Engagement (AUP). During this process, an auditor carries out procedures of an audit nature that are agreed upon by the auditor, the organization and any appropriate third parties. Once a report is received, an option is not issued; rather, the recipients may form their own conclusions.
Not all organizations need an audit, but still seek the input of an independent accounting firm. Alternatives do exist that can save time and expense, while ensuring that an organization is being managed efficiently and is prepared for future audits.
One option for nonprofits is a review, where an organization’s financial statements are analyzed to ensure that they meet expected results. A second option is compilation, where financial statements are not analyzed but are reviewed to ensure that they are prepared in a format consistent with Generally Accepted Accounting Principles.
When preparing for a nonprofit audit and determining which option is most appropriate for your organization, it’s helpful to seek the advice of an accounting firm with specific experience with nonprofit audits. At Ernst Wintter & Associates, we work closely with nonprofit organizations to help them reach their highest potential. Contact us to learn more about the nonprofit audit process.