Demystifying the Nonprofit Audit Process

Demystifying the Nonprofit Audit Process

Audits are vital tools for nonprofit organizations, and while the nonprofit audit process may seem daunting, an article by Wild Apricot highlights that it is an opportunity to assess financial health, enhance accountability, identify growth areas, strengthen donor confidence, and keep missions on track.

Types of Nonprofit Audits

• Independent Financial Audit: This comprehensive review is conducted by third-party auditors, ensuring that financial statements are accurate and internal controls are sound.
• IRS Audit: Focused on compliance with federal reporting requirements.
• Internal Financial Audit: Managed in-house for routine oversight but lacks external validation.
• Compliance Audit: Assesses adherence to regulations and bylaws.
• Operational Audit: Reviews internal systems and operational effectiveness.

The Nonprofit Audit Process

The audit involves several key phases to ensure a thorough and accurate evaluation of a nonprofit’s financial health. It begins with auditor selection, where organizations must carefully choose a qualified independent auditor. 

The article suggests looking for professionals with nonprofit experience, CPA credentials, and a strong track record. To identify the best fit, nonprofits can solicit recommendations, research auditing firms, and issue requests for proposals (RFPs). 

The RFP process allows firms to present their qualifications, methodology, timelines, and cost estimates, helping organizations make an informed decision. This stage typically spans 4-12 weeks.

Once an auditor is selected, nonprofits move to the internal preparation phase. This involves gathering necessary documents such as bank statements, tax filings, grant records, and financial statements. Additional tasks include reconciling accounts, addressing discrepancies, and reviewing records for accuracy. Auditors often provide a Provided by Client (PBC) list to guide this preparation, which usually takes 2-4 weeks. Proper preparation is critical to ensuring a smooth audit process.

Next is the audit fieldwork and reporting phase, during which the auditor reviews financial records, internal controls, and compliance with accounting standards and legal obligations. They validate transactions, test revenue, and expenses, and assess operational practices. After their work, auditors issue a report detailing their findings, which may include recommendations for improvement. This phase generally takes another 2-4 weeks, depending on the scope of the audit.

Finally, nonprofits must act on audit findings by implementing recommendations to strengthen financial management and internal controls. Sharing these outcomes with stakeholders reinforces transparency and trust. 

By promptly addressing findings, nonprofits can improve efficiency and align their financial practices with their mission. This proactive approach enhances credibility with donors and grantors, setting the stage for long-term growth and success.