Annual audits offer numerous benefits for nonprofits, including improved financial accountability, enhanced internal controls, compliance with legal requirements, increased donor confidence, informed decision-making, and positive public perception. By conducting regular audits, nonprofits can foster their mission, maintain transparency, and effectively manage their financial resources to serve their communities. In today’s podcast, Jason Kruger from Signature Analytics and Stephen Halasnik from Financing Solutions discuss what nonprofits need to know to breeze through the annual audits.
Summary
What Nonprofits Need to Know to Breeze through Annual Audits
For nonprofit organizations, annual audits are essential, not necessarily because you have a legal obligation to conduct them, but because they help to maintain transparency, accountability, and trust with stakeholders. However, the audit process can often be daunting and overwhelming, causing stress to nonprofit leaders. Still, nonprofits can navigate this process smoothly by understanding the critical aspects of annual audits.
In this article, we will discuss the crucial factors nonprofits need to know to breeze through annual audits effortlessly.
The purpose of nonprofit audits
Nonprofit organizations serve the public interest instead of generating profit for their owners. As such, they often rely on donations, grants, and other funding sources to support their operations. Thus, nonprofit audits ensure transparency, accountability, and compliance with relevant laws and regulations. Independent auditors or accounting firms conduct nonprofit audits to assess the financial records and practices of the organization. The main objectives of nonprofit audits are:
Financial Accountability
Audits verify the accuracy and reliability of financial statements, including the nonprofit’s income, expenses, assets, and liabilities. By examining financial records, audits help ensure owners properly manage funds.
And the organization’s financial activities comply with accounting principles and applicable laws.
Compliance
Nonprofit audits assess whether they comply with various legal and regulatory requirements, such as state and federal laws. For instance, there is a federal requirement to conduct an independent audit if a nonprofit expends $750,000 or more in federal funds in a single year. These audits help ensure nonprofits operate within the legal framework and are accountable to relevant authorities.
Internal Controls
Audits evaluate the internal control systems of the nonprofit organization, including processes and procedures for financial management, governance, and risk management. By identifying weaknesses or deficiencies in internal controls, audits help organizations strengthen their systems to prevent fraud, mismanagement, or errors.
Donor Confidence
Nonprofit audits build trust and confidence among donors, funders, and other stakeholders. Transparent financial reporting and independent audits demonstrate that the organization is managing its resources effectively and using them for the intended purposes. This can enhance the organization’s reputation and credibility, attracting more support and funding.
Board Oversight
Audits allow the organization’s board members to fulfill their fiduciary duties. Board members are responsible for the governance and financial oversight of the nonprofit organization. Audits help the board members understand the organization’s financial health, identify improvement areas, and make informed decisions about its future.
Types of nonprofit audits
There are various types of audits based on the nature and purpose of the examination. Hence, it’s essential we understand the varying nonprofit audits:
Financial Audit: This is the most well-known type of audit. It involves examining an organization’s financial statements, records, and transactions to ensure they are accurate, complete, and comply with applicable accounting principles and regulations.
Internal Audit: Internal audits are conducted by an organization’s internal audit department or an independent team. The purpose is to evaluate the effectiveness of internal controls, risk management, and operational processes. Internal audits help identify areas for improvement and ensure compliance with internal policies and procedures.
External Audit: External audits are performed by independent certified public accountants (CPAs) or auditing firms. The objective is to independently assess an organization’s financial statements to enhance its credibility and reliability. Regulatory bodies or shareholders often require external audits.
Compliance Audit: Compliance audits ensure that an organization adheres to specific laws, regulations, or industry standards. These audits evaluate whether the organization complies with applicable legal and regulatory requirements.
Operational Audit: Operational audits evaluate an organization’s operational processes and activities to assess their efficiency, effectiveness, and compliance with internal policies. The goal is to identify areas for improvement and enhance overall performance.
Tips for preparing your nonprofit’s annual audits
Preparing your nonprofit’s annual audits can be a breeze if you know the hacks. Below are the key factors that will aid your efforts.
Familiarize Yourself with Audit Requirements
To prepare for your annual audit, it is crucial you understand the specific requirements stipulated by regulatory bodies or grant providers. Ensure you know the applicable financial reporting standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Keep tabs on any changes to these standards and ensure compliance to prevent any audit issues.
Maintain Accurate Financial Records
Maintaining accurate and up-to-date financial records is the foundation of successful nonprofit audits. Keep track of all financial transactions, including revenues, expenses, assets, and liabilities. Utilize appropriate accounting software to streamline this process and ensure accuracy. Regularly reconcile bank statements, maintain supporting documents for transactions, and organize financial records to facilitate the audit process.
Implement Strong Internal Controls
Robust internal controls are essential for preventing fraud, errors, and inconsistencies in financial operations. Delegate duties by ensuring that different individuals handle financial responsibilities such as recording transactions, approving expenses, and reconciling accounts. Implement checks and balances and regularly review financial procedures.
Conduct Regular Internal Reviews
Regular internal reviews can help identify and address financial issues or discrepancies before they become audit problems. Conduct periodic self-audits or internal checks to assess your nonprofit’s financial health, compliance with policies and procedures, and adherence to accounting standards. Identify areas that need improvement and take corrective actions promptly.
Engage a Qualified Auditor
Choosing the right auditor is crucial for your smooth nonprofit audit. Look for a reputable auditor with experience working with nonprofit organizations. Ensure they have a thorough understanding of the specific requirements and challenges faced by nonprofits. Seek recommendations, review their track record, and conduct interviews to assess their expertise and compatibility with your organization’s values.
Prepare Documentation and Supporting Evidence
Compile all necessary documentation and supporting evidence in an organized manner when preparing for an audit. This may include bank statements, invoices, receipts, contracts, grant agreements, board meeting minutes, and other relevant financial documents. Proper documentation ensures auditors have the necessary evidence to support their findings and conclusions.
Communicate Openly with Auditors
Maintaining open and transparent communication with auditors is essential. Be proactive in providing requested information promptly and accurately. Address any questions or concerns raised by auditors on time. Collaborate with auditors as partners in the process, working together to achieve accurate financial reporting and compliance.
Learn from Audit Findings
The annual audit allows nonprofits to learn and improve their financial management practices. Take the time to understand the audit findings and recommendations. Use this information to enhance internal controls, address weaknesses, and refine financial procedures. Implementing the necessary changes can strengthen your organization’s financial integrity and minimize future audit issues.
Learn About Our Guest
On today’s episode, we have the pleasure of speaking with Jason Kruger, the President and Founder of Signature Analytics. Jason is shaking up the way business owners run their businesses by highlighting the gaps in data and reporting that many business owners face and sharing insights on how to improve profitability, increase productivity and run your company smarter. Jason has 20+ years of experience in the accounting and business advisory field, working with mid-market companies and nonprofits. Join us as we share actionable insights and strategies to help you run your Organization smarter.
Learn About Stephen Halasnik
Stephen Halasnik co-founded Financing Solutions, the leading provider of lines of credit for nonprofits and church financing. The credit line program for nonprofits & churches is fast, easy, inexpensive, and costs nothing to set up, making it a great backup plan when cash flow is temporarily down. Mr. Halasnik is also the host of the popular, Nonprofit MBA Podcast. The podcast brings experts to discuss fundraising, nonprofit grants, executive director leadership, nonprofit boards, and other important topics. You can learn more about the nonprofit line of credit program here or call 862-207-4118.