Many charitable organizations are subject to a nonprofit annual audit. Nonprofit audit requirements, or what an organization needs to do to ensure compliance with regulatory agencies and stakeholders, can vary from one organization to the next based on a nonprofit’s size, funding sources, or internal policies.
Understanding the requirements allows your organization to be fully prepared for your upcoming audit and protect its financial credibility.
In this article, we’ll explain nonprofit audit requirements, common pitfalls many organizations encounter, and how to prepare for your audit to ensure success.
What Triggers Nonprofit Audit Requirements?
Most nonprofit organizations are required to undergo a nonprofit financial audit when they reach a specific contribution threshold. The threshold is $500,000 in some states, but it varies by state. Audit requirements can also vary based on federal requirements.
Some nonprofits are subject to audits based on additional requirements, such as grantor agreements or donor expectations. For example, a grant may require the recipient to complete an audit annually.
This means that those nonprofits must undergo regular reporting to ensure transparency with stakeholders, comply with internal policies or external regulations, and satisfy board governance requirements.
Once you know an audit is imminent, taking proactive steps can significantly reduce the stress for everyone involved.
Key Steps to Prepare for a Nonprofit Audit
Regardless of your nonprofit audit requirements or the circumstances that trigger an audit, staying prepared and updating your documents will ensure a smooth audit process for you and your external auditing team.
Here’s what your organization should do to prepare for a not for profit audit:
- Review and organize financial records for the fiscal year: Whether you file them digitally or keep hard copies, organize your files to eliminate unnecessary stress when it’s time for your audit. Designate a central file location for your financial records.
- Prepare supporting documentation: You must provide reconciliations, fund restriction tracking, and donor records. Ensure your records are free from obvious mistakes and up-to-date with the latest numbers.
- Document internal controls and accounting procedures: An auditing partner will evaluate and see if your key internal controls are operating effectively. By documenting your internal controls and updating your accounting procedures, you enable your audit partner to efficiently perform their job.
- Maintain clear board and finance committee minutes: Meeting minutes help your auditing professional and stakeholders understand how financial decisions were made. Providing these documents helps maintain transparency and trust.
Mistakes That Can Derail Your Audit (and How to Avoid Them)
While there might be more pressing matters to attend to within your organization, you and your team must take the time to prepare for your upcoming audit. Pushing preparation aside comes with consequences.
Here are a few common pitfalls and how to avoid them:
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- Waiting too long to start audit prep: Waiting until the last minute to organize your records can lead to delays, which will generally lead to additional audit fees. Make space in your calendar to review your records bi-weekly to stay current and audit-ready.
- Misclassifying funds: Unfortunately, misclassifying funds is a common mistake, especially when you’re in a hurry to update your financial records. Inconsistent classification of restricted or unrestricted funds can lead to additional audit time and procedures to resolve the mistakes. To avoid this, establish an internal workflow within your organization to regularly review your records and maintain oversight.
- Failing to address prior audit recommendations: Your past audits offer valuable insights to improve your financial reporting. Failing to implement those recommendations promptly will return repeat deficiencies in your audits.
Steps to Strengthen Your Audit Preparedness
Preparing for your audit beforehand ensures your organization starts its audit on the right foot. Although preparing for an audit can be time-intensive, breaking it down into smaller tasks and spreading the preparation across your calendar is a good way to stay organized and prepared.
Consider these best practices for nonprofit audit readiness:
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- Create a timeline and checklist aligned with audit deadlines: Share these with your team and assign tasks to distribute the workload.
- Conduct an internal review before handing over documentation: Double and triple-check that your financial records are accurate before passing them on to your auditing firm. This helps you catch last-minute mistakes that could result in additional costs.
- Hold a planning meeting with the auditor to clarify scope and expectations: Before you begin your audit, schedule a meeting with your nonprofit auditors to discuss your expectations. This will help clarify the auditing process.
Choose Assurance Dimensions for Your Nonprofit Audit
Planning for nonprofit audit requirements doesn’t need to be overwhelming. Audits can be smooth and beneficial with the proper documentation, timeline, and internal coordination.
It is helpful to start by partnering with an auditing firm that has experience in nonprofit audits.
Bennie Lewis, CPA, President, and Partner at Assurance Dimensions, LLC, notes, “Many nonprofits don’t have budgets that support separate accounting functions, and a small group in the organization becomes responsible for this and other financial functions. This creates an opportunity for errors or omissions that a great accountant and auditor can become a resource for them.”
At Assurance Dimensions, we understand the importance of a clean audit for nonprofit organizations. Our team brings deep expertise, a collaborative approach, and a genuine commitment to helping mission-driven teams stay compliant and confident in their financial reporting.
Whether you’re preparing for your first audit or looking for a partner who can help streamline the process year after year, Assurance Dimensions is here to support you every step of the way. Contact us today to learn more about our nonprofit audit and assurance services.