Audits give your nonprofit an excellent overview of where you need improvements. This type of audit generally addresses issues with your tax return, discrepancies between your organization’s and freelancers’ or employee returns, or if a division of the IRS issues an IRS-wide examination. In this article, we’ll discuss different types of audits, the benefits to your nonprofit, and the steps you’ll need to take.

• Whether or not the audit committee plays this role is usually addressed by the nonprofit’s whistleblower policy, which may identify the audit committee or its chair as the person to whom complaints should be directed.
• So do your due diligence when choosing one—focus on finding the right firm to suit your use case.
• The auditor may suggest ways to cut costs or recommend changing certain internal controls.
• The key benefit of a review is that many funders will accept a review in place of an audit.
• It’s recommended that you find and begin working with the auditor 4 to 12 weeks before the deadline.
• They’ll provide you with actionable recommendations and let you know when you need to change a certain practice.

Lesson 1: Inadequate Financial Documentation

It will determine whether the audited financial statements represent the financial position of the organization without inaccuracies or material misrepresentations. The obligation to file an independent audit report with the state government is https://www.bookstime.com/ generally just one requirement among many in connection with charitable solicitation registration. Thirty-nine states (plus the District of Columbia) require charitable nonprofits to register with the state in order to fundraise in that state.

Illinois State Nonprofit Audit Requirements

Just like with normal tax returns, if there are discrepancies, inconsistencies, or incomplete information, then the IRS is interested in learning more. In this situation, the IRS wants more information about your organization and the business that you do by way of an audit or a compliance check. Get our FREE guide to nonprofit financial reports, featuring illustrations, annotations, and insights to help you better understand your organization’s finances. Once you’ve selected an auditor, they should provide you with information about preparing for the audit. This will usually come in the form of a Provided by Client (PBC) list to ensure you have all of the documentation that they’ll need to effectively assess your nonprofit’s finances.

Step 1: Selecting a Nonprofit Auditing Firm

By understanding the importance of audits in the nonprofit sector, organizations can enhance their financial health, effectiveness, and overall impact on the communities they serve. This means you have more control over when, where, and how you conduct independent audits. Sometimes state and federal laws require you to audit your nonprofit, but that’s not always the case. And even if you don’t have a legal obligation to conduct an audit, a financial examination can still be a huge boost for your organization. When determining the scope of an audit, it’s important to consider any areas where there could be potential discrepancies or weak points in operations or governance.

Either way, retaining an independent auditor to perform a financial review of accounting records can only help your business. If you submit audited financial statements to donors and other sources, they will give your grant requests greater weight than those applications without such when is an audit required for a nonprofit evidence of financial health. Nonprofit audits also burnish a firm’s reputation with the general public from which a new generation of contributors may come. Thirdly, making a habit of an annual audit creates a discipline of adhering to generally accepted accounting principles.

• By assessing risk carefully and developing a plan for addressing it, nonprofits can help protect against errors or misstatements while also maintaining their reputation with donors who trust them with their donations.
• With a large pool of candidates in hand, the next task is to take one step closer to the best nonprofit auditing firm available.
• The IRS will indicate a time and date for the field audit but will nevertheless work with the organization to establish a mutually optimal day for the audit.
• If an audit is required by law, or if a third party has strict requirements that the nonprofit conduct an audit, a review or compilation will not satisfy that requirement.
• Knowing the reasons that organizations do end up getting audited by the IRS is important and can help instruct your organization on ways to operate properly in order to avoid ever being in that situation.
• A nonprofit auditing firm can unearth the discrepancies, relationships, and transactions that activated the IRS audits in the first place.

Nonprofit Accounting Terms

These efforts not only support the organization’s financial health but also build trust with donors, grantmakers, and other stakeholders. If the organization does business with other taxpayers and entities, the IRS audit of the latter might spill over to the former. Meanwhile, should the federal government discover discord between the organization’s financial records and the documentation submitted by employees or vendors, the audit process could very well kick in.

Case Study 1: Small Nonprofit Organization with Limited Resources

• Absent the curiosity of the IRS, nonprofit leaders may seek audited financial records for other reasons.
• These documents provide a clear picture of the financial health of the nonprofit and support the accuracy of its financial statements.
• Being audit-ready throughout the year ensures you won’t waste money on additional auditing fees and you won’t waste time chasing down information to answer your auditor’s questions.
• Implementing and updating policies before applying for grants, as well as after receiving them, is imperative.

Case Study 2: Large Nonprofit with Diverse Revenue Streams

Background on the federal law governing nonprofit audits