The Ins and Outs of a Not-for-Profit Audit

Audit. The word is intimidating. And for a nonprofit with limited resources, it can be downright scary. But it doesn’t have to be. Understanding the necessity and subsequent process of an audit can go a long way to ease concerns.

An audit is the highest level of assurance service that a CPA provides. It is intended to provide comfort regarding the accuracy of financial statements and ensure they are free from material misstatement. Arising from either fraud or error, misstatements lead to an incorrect conclusion about financial performance.

As a not-for-profit, the benefits of securing an audit include fulfilling grant, state or contributor requirements, as well as assurance that internal controls and financial reporting are sound and in accordance with generally accepted accounting principles. Organizations should consider an audit a tool or resource to assist and enhance their financial reporting, not a negative requirement. 

Findings from an audit should be used to improve financial reporting, internal controls, and other matters within the organization. An audit can also satisfy grant requirements and provide transparency to donors.

When Is an Audit Necessary?

Not all not-for-profits are required to have an independent audit, and the requirement is not based on the size of assets. Circumstances that do trigger the requirement of an audit are:

• Federal, state, or local grants
• State law, if registered as a charitable solicitation organization (in NYS, gross annual revenue serves as a threshold)
• Bank requirements to obtain financing
• Contracts with state or local governments

Let’s look at what triggers the requirement for an audit for NYS charitable organizations.

• Less than $250K Gross Annual Revenue: Does not require an audit or review of a financial statement.
• Between $250K-$750K Gross Annual Revenue: Must file a financial statement that is reviewed by an auditor. For annual reports, the threshold rises to between $250K and $1 million with an original or extended filing due date on or after July 1, 2021.
• Over $750K Gross Annual Revenue: Must file an audited financial statement prepared by an independent CPA. For annual reports, the threshold for a required audit rises to $1 million with an original or extended filing due date on or after July 1, 2021.

If your organization is not required to have an independent audit, you might consider having a review conducted to provide your board and donors with limited assurance the financial statements are in accordance with generally accepted accounting principles.

During a review, the auditor applies analytical procedures to the financial statements but does not conduct an examination of the nonprofit’s internal controls (which would be included in the scope of an independent audit). Instead, the review provides a limited level of assurance that the financial statements are free of misrepresentations.

How Can a Not-for-Profit Prepare for an Audit?

The most beneficial thing you can do is prepare in advance for your audit. This will make the process smoother for you, your employees, and the auditor. Ensure accounting records are up-to-date and accurate as of yearend and all significant accounts are reconciled and organized.

Ask your CPA firm to provide a Request List with all significant supporting documents needed to perform the audit. Ensure everything from the list is gathered in one central location for the auditor's visit. In larger entities, know who is responsible for specific items and task those individuals with preparing the information in advance.

How Long Does It Typically Take to Complete an Audit?

The timeline of an audit varies depending on the size of the organization. There are preliminary procedures that the auditor performs before fieldwork at an organization's office, as well as additional completion and preparation procedures performed once the fieldwork is completed.

For an average-sized not-for-profit in New York, an audit typically ranges from two to five days of fieldwork at the organization's office, with significant additional time before and after fieldwork from the auditor's office. Starting with a signed engagement letter to issuing the completed auditor's report, an average audit would be one to three months.

An organization could lose grant funding, significant contributions, and other funding opportunities if any audit is required and not performed. If required filings are not kept up to date, the organization also puts its not-for-profit exempt status at the stake of being revoked.

Final Thoughts

Use your auditor or CPA as a resource at yearend and throughout the year. Then, as you come across questions or instances where further or outside input may be necessary, they are there to assist you and have significant resources or connections available.