Are Non Profits Required to Be Audited?

Non-profit organizations serve various public interests, from education and healthcare to social services. They receive funding from diverse sources, including donations, government grants, and private foundations. Financial oversight is fundamental to their operations, ensuring accountability and maintaining stakeholder trust. An audit involves an independent examination of an organization’s financial records to determine if its financial statements accurately represent its financial position and performance. This process provides an objective assessment of financial health.

When a Nonprofit Audit Becomes Mandatory

A non-profit organization may be required to undergo an audit due to state regulations, federal funding, or requirements set by private funders or lenders. Understanding these triggers helps organizations prepare for and comply with their financial reporting obligations.

State Regulations

State laws often mandate audits for non-profits once their annual revenue reaches a certain threshold. These thresholds vary significantly, commonly ranging from $300,000 to $1,000,000 or more in annual gross revenue. For example, some states may require an audit for revenues exceeding $500,000, while others might set the bar at $1,000,000. Non-profits must consult their state’s charity registration and solicitation laws to determine their precise obligations.

Federal Funding

Federal funding significantly impacts audit requirements for non-profits. Organizations that expend $1,000,000 or more in federal awards during their fiscal year are subject to a Single Audit, as stipulated by the Single Audit Act and detailed in 2 CFR Part 200, also known as Uniform Guidance. A Single Audit is comprehensive, covering both the entity’s financial statements and its compliance with federal program requirements. This requirement applies whether federal funds are received directly or indirectly as a pass-through from a state or local government.

Private Funders

Many private foundations, corporations, and grant-making entities require audited financial statements as a condition for receiving significant funding. These funders seek assurance that the non-profit has robust financial controls and that funds will be managed responsibly. Providing audited financials can enhance a non-profit’s credibility and increase its chances of securing substantial grants.

Lenders

Lenders, such as banks and credit unions, often require audited financial statements when a non-profit seeks loans, lines of credit, or other financing. These financial institutions assess the organization’s financial health, stability, and ability to repay debt. Audited statements provide an independent verification of the non-profit’s financial position, helping lenders evaluate risk.

Voluntary Audits

A non-profit’s board of directors may voluntarily decide to conduct an audit even when not legally required. This decision is often driven by a commitment to good governance, enhanced transparency, and building greater public trust. An independent audit can also identify areas for improving internal controls and financial management practices, providing valuable insights for organizational leadership.

Distinguishing Audit Types

Non-profit organizations may encounter different types of audits, each serving a distinct purpose and having a specific scope. The two primary types are the financial statement audit and the Single Audit. Understanding their differences clarifies expectations and requirements.

Financial Statement Audit

A financial statement audit is an independent examination of an organization’s financial records and statements. Its primary purpose is to provide reasonable assurance that the financial statements are presented fairly, in accordance with an applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP). This audit assesses the organization’s overall financial health, including its assets, liabilities, revenues, and expenses. The scope involves evaluating internal controls, analyzing financial data, and testing transactions for accuracy and compliance.

Single Audit

A Single Audit is a specialized and more comprehensive audit required for non-federal entities that expend a significant amount of federal awards. Its purpose is to provide assurance on the fairness of financial statements and on the non-profit’s compliance with federal program requirements and the effectiveness of its internal controls over federal awards. This audit is triggered when a non-profit expends $1,000,000 or more in federal funds during its fiscal year.

Key Distinction

The key distinction lies in their scope and focus. While a financial statement audit provides an opinion on the organization’s financial statements as a whole, a Single Audit incorporates this financial statement audit and adds a detailed review of compliance with the Uniform Guidance. This includes testing compliance with specific federal grant terms, regulations, and the entity’s internal controls designed to ensure that federal funds are used appropriately. The results of a Single Audit are submitted to the Federal Audit Clearinghouse.

Navigating the Audit Process

Understanding the procedural steps involved can help ensure a smoother audit experience. The audit process typically involves selecting an auditor, formalizing the engagement, the auditor’s fieldwork, reporting findings, and subsequent post-audit actions by the organization.

Selecting an Auditor

The first step involves selecting a qualified and independent Certified Public Accountant (CPA) firm. It is important to choose a firm with specific experience in non-profit audits, as these organizations have unique accounting and reporting requirements. Non-profits often solicit proposals through a Request for Proposal (RFP) process, allowing them to compare experience, approach, and fees. Seeking recommendations from other non-profits or professional associations can also guide this selection.

Formalizing the Engagement

After selecting an auditor, the engagement is formalized through an engagement letter. This document outlines the scope and objectives of the audit, the responsibilities of both the auditor and the non-profit, the timeline, and the agreed-upon fees. Following the signing, a planning meeting is typically held where the auditor discusses audit significance, assesses risks, and provides a list of needed documents and information.

Fieldwork

The fieldwork phase involves the auditor’s detailed examination of the non-profit’s financial records and internal controls. This includes reviewing financial statements, testing transactions for accuracy and compliance, and evaluating the effectiveness of internal control systems. The non-profit’s role includes providing requested documentation, answering auditor inquiries, and facilitating access to relevant personnel.

Reporting Findings

Upon completion of fieldwork, the auditor issues an audit report, which contains an opinion on whether the financial statements are presented fairly. In addition to the formal report, auditors often provide a management letter. This letter communicates any significant deficiencies in internal controls or other operational recommendations observed during the audit that could help the non-profit improve its financial management practices.

Post-Audit Responsibilities

The non-profit has important post-audit responsibilities. This includes reviewing audit findings and management letter recommendations with the board of directors, particularly the audit committee. The organization should then develop an action plan to address any identified weaknesses or implement recommended improvements.