Whether your nonprofit organization (“NPO”) is just getting started or has been around for years, you may one day require a nonprofit audit. While a nonprofit audit, or NPO audit, is similar to a private company audit in many ways, there are also some key differences. Here are three of the most important distinctions between nonprofit audits and what they could mean for your organization.
1. Purpose of the NPO Audit
While the purpose of private company audits is to give shareholders and investors an accurate portrayal of the company’s financials, an NPO audit ensures that the nonprofit is handling transactions correctly and its financial statements are presented honestly. An NPO audit also gives donors, funders, and stakeholders an accurate picture of how the nonprofit expends its funds by nature and function within the statement of functional expenses.
Single Audits
While nonprofit audits are not always required by law, specific organizations must have their financials audited annually and are subject to compliance and control testing procedures. These are typically organizations that receive federal funding or grants and are subject to what is known as a single audit. Single audits are an in-depth analysis of the organization’s finances, federal or state program compliance, and controls that must be conducted by an independent auditor. This audit is performed to determine whether the organization has complied with laws and regulations for the federal funds it received and expended.
2. GAAP Principles
While an NPO audit and a private company audit both typically have to adhere to Generally Accepted Accounting Principles (GAAP), some principles are applied differently based on the type of audit.
- Labeling net assets: Private companies will label their net assets as either “equity” or “liabilities and equity.” On the other hand, NPOs are required to distinguish between “unrestricted,” “temporarily restricted,” and “permanently restricted” net assets. This difference is because NPOs often receive donations stipulating how the funds can be used.
- Balance sheet versus a statement of financial position: A private for-profit company creates a balance sheet that outlines its net equity for its owners and shareholders. However, a nonprofit organization does not have shareholders or owners. Instead, it creates a financial position statement outlining its assets and debts.
- Recording contributed services: NPOs must record the value of contributed services in their financial statements, such as volunteer work. Private companies are not required to do this.
- Description of expenses: GAAP requires nonprofits to report their functional expenses, which means they have to list each expense according to the function it supports. For instance, an expense for office supplies would be listed under the “Administration” category, while an expense for a new roof would be classified as part of the “Facilities” category.
- Specific language: Nonprofits use particular terminology and designations to identify the receipts and expenditures in their accounting, which helps donors see how their contributions are spent.
- UBIT: This tax applies to a nonprofit’s income from activities unrelated to its primary mission. For example, if a nonprofit for counseling services earns income from running a coffee shop, the income from that coffee shop would be subject to the UBIT.
3. Audit Timing
Another critical difference between an NPO audit and a private company audit is timing. Generally, a company’s fiscal year runs on a calendar year, from January to December. However, many nonprofits have a fiscal year that coincides with their grant cycles. For instance, a nonprofit that relies heavily on government grants may have a fiscal year that runs from October to September. This fiscal year allows them to align their budget with the grant cycles. As a result, an NPO audit may be conducted at a different time than a private company audit.
Assurance During Your NPO Audit
Assurance Dimensions nonprofit auditors and accounting professionals work with nonprofits and their boards to better understand their financial resources and the uncertainties they face. Our knowledge and experience in various nonprofit industries, fixed fee pricing, and focus on service lead to long-lasting relationships with our clients. Contact us to help you prepare for your next nonprofit annual audit.
