Preparing for Your Organization’s Audit

Preparing for Your Organization's Audit

Although not every nonprofit organization requires an audit, I always recommend that you prepare as if you were going to be audited. Why, you ask? Well, for many reasons:

To protect the staff and board from accusations of financial mismanagement
To help ensure that donors can rely on the integrity of their gifts
To develop fiscal policies and procedures that are written and communicated
To setup up internal controls over financial reporting to ensure that operational and financial objectives are being met
To facilitate continuing IRS tax compliance
And many more!

The thought of an audit can make many nonprofit managers shudder, but, if you prepare your organization well before you have an audit, there will be far less stress and much more confidence in your outcome. In California, nonprofits generally are not required to have an audit unless they reach the point at which they general gross revenues of $2 million or more. In the year an organization reaches this threshold for revenues, they must engage an independent CPA firm to perform a financial audit covering that fiscal year. There also may be other reasons why a nonprofit needs an audit, including grantor or other government agency requirements. What does the audit entail? Well, an audit generally involves 3 main components:

Gaining an understanding and internal controls review
Substantive testing of transactions and account balances
Limited tests of compliance with laws and regulations

This can sound intimidating, but it is just validating all the great work the accounting staff and management team has done throughout the year. If you have written and board-approved internal controls policy manuals, that will certainly help the audit process. You can obtain resources for these from the AICPA, the National Council of Nonprofits, as well as Board Source, among others. Also, if you engage a CPA for audit services who is familiar with the nonprofit industry, you can ask for input from him or her as well. An important part of preparing for the substantive testing of balances and transactions is making sure that you have a comprehensive, written financial closing policy and a competent accountant to implement this. Without these key resources, you cannot be confident that your final financial statement balances are accurate, and this could pose issues during your audit. Lastly, in compliance with IRS rules and regulations for nonprofit tax compliance, you will want to be sure to maintain Publication 557, Tax-Exempt Status for Your Organization. This publication covers the range of several required compliance steps to which nonprofits should adhere in order to maintain their tax-exempt status. It also lists things nonprofits should avoid to prevent losing tax-exempt status. Nonprofits should also be aware of other federal, state, and local laws that could impact the organization, such as applicable state tax laws and local ordinances. If you are unsure about the future of your nonprofits tax-exempt status, or maybe you want to start preparing for your next audit, please contact us today for a complimentary consultation to see if we can help you!