Industry News

3 Reasons Nonprofits Might Have an Audit

Jan 22, 2014 | Non-Profits

An audit is an examination of your accounting records and financial statements. Not all nonprofits are required to have an audit. Generally speaking, the federal Office of Management and Budget (OMB) requires an audit if the nonprofit spends more than $500,000 in federal funds (either directly or by passing through to other nonprofits). Some states require an audit if the nonprofit has a certain amount of revenue derived from state funds. Additionally, some foundations will not fund other nonprofits that do not have audited financial statements. Many banks and other lenders may also require a nonprofit organization to have an audit. In this blog we will explain three possible reasons why a NPO might need an audit and how the audit can help the nonprofit organization.

Prove Your Finances

First of all, audits are useful to show that the organization’s financial statements are accurate and to give an unbiased view of the organizations financial status. The auditor will do an independent investigation to test the accuracy of accounting records and internal controls. The auditor will report any findings to the Board of Directors. During the audit, various transactions are examined to determine if the nonprofit is recording its transactions in an accurate manner. Since there is no way to test 100% of the transactions, the auditor uses various methods to test the accuracy of the balances in the accounts. Such tests may include sampling, third party confirmations, and detail testing of specific transactions. The auditor will also gain an understanding of the nonprofit’s internal control structure to see if the controls are operating as designed to help prevent either mistakes or intentional fraud.

Maintain Tax Exempt Status

Charitable organizations organized under section 501(3) of the Internal Revenue Code must be organized and operated exclusively for the exempt purpose. None of its earnings can benefit any private shareholder or other individual. The organization cannot attempt to influence legislation as a substantial part of its activities and it is not allowed to participate in any campaign activity for or against political candidates. Audits can be beneficial in determining if the nonprofit organization has expended funds on activities not allowed, as those listed above.

Assure Your Contributors

Audits also provide assurance that all of the organization’s funds are being managed properly. Governmental officials, banks, and others who are donating or lending money to the nonprofit organization want assurance that the nonprofit is acting in a responsible manner. They want to know that the funds that they are giving to a NPO are being used in the manner they were meant for. An unqualified audit opinion gives reasonable assurance that the financial statements are free from material misstatement. However, it should be noted that management is ultimately responsible for designing, implementing, and maintaining internal controls in order to present financial statements that are free from material misstatement, whether due to fraud or error.

Audits are not meant to harm or incriminate a nonprofit. They are used as a method of giving assurance that the financial statements of the organization are materially correct. If you are currently running a nonprofit organization and know it is time for you to receive an audit don’t wait any longer. Contact ABIP and allow one of our nonprofit accounting professionals help your NPO today!