Audit for Non-Profit Organization
An audit for nonprofit organization involves examining the organization's financial records to check if they follow the tax-exempt entity requirements.3 min read
An audit for nonprofit organization involves examining the organization's financial records to make sure they are complying with the requirements of a tax-exempt entity. If the auditor finds that these requirements are not being met, the organization will most likely lose its nonprofit status.
Nonprofit Audit Guide
The Nonprofit Audit guide is a tool designed to help nonprofit organizations fully understand the process of an independent audit. The National Council of Nonprofits created and provides this guide.
Regulations for charitable nonprofit organizations can vary from state to state. Because of this, the Nonprofit Audit Guide includes a chart that details the audit requirements for all 50 states. Using this chart, you can determine if your state requires independent audits of nonprofit organizations and under what conditions these audits will take place.
You can also use the Nonprofit Audit Guide to better understand what role your organization's board of directors will serve during your audit. In the Guide, there are also several tips that will help your organization successfully progress through your independent audit:
- Finding and hiring an independent auditor.
- Preparing your documents for evaluation.
- Reviewing the auditor's work.
If your nonprofit receives any federal funding, and this funding comes with special auditing requirements, you can find these requirements in the Guide.
Facts About Independent Audits
During an independent audit, virtually every aspect of your charitable nonprofit organization gets examined by an independent auditor, including:
- Your financial records.
- Your organization's accounts and business-related transactions.
- Your nonprofit's accounting practices.
- Nonprofit internal controls.
It's important to understand that an independent audit is not required of every nonprofit organization, so you should decide if you actually need to audit your organization before undertaking this process. Generally, the funding source of a nonprofit and its yearly budget will determine whether it is required by the federal or state government to schedule an independent audit. In certain circumstances, you may be able to choose whether you will conduct an audit.
The federal government has several requirements for when a nonprofit must arrange an independent audit. For instance, if your organization receives federal funding, you will likely need to schedule an audit, even if your state does not require one. This is true whether you receive the federal funding directly or the funding is passed to you by another entity. Managing an audit is a very involved project. In the Guide, you can get information about what will happen at every stage of your independent audit.
Independent Audit State Requirements
Nonprofit organizations routinely receive donations from private foundations, and these foundations will likely expect the nonprofit to undergo an independent audit at some point.
In some states, nonprofits must conduct an audit if they receive state funding. The organization must submit proof of the audit to the agency from which the funding originated. If any of your nonprofit's funding comes from the government, you should be sure to determine whether you are legally required to conduct an independent audit.
If you receive a contract from the state government, your organization may also require an audit. Nonprofits that spend more than $750,000 in federal funds in a year also must undergo an audit. If you are registering a nonprofit charitable organization in one of 26 states, you have to file audited financial statements before your organization will be legally allowed to fundraise.
Other State Audit Regulations
Filing an audit report is just one requirement you must fulfill to register your charitable organization. In the District of Columbia, as well as 39 of the 50 states, nonprofit charities must be formally registered before fundraising. As mentioned, nonprofit rules vary from state to state, so you must review the rules in your state if you want nonprofit status for your organization.
Almost every state where you register your nonprofit will require an independent audit under some circumstances. In most cases, you have to conduct an audit once your organization has reached a certain amount of revenue. In some states, this revenue threshold is very low, and in others it is very high. Most states also require that you submit audited financial statements on a yearly basis. Generally, you need to file these statements when you renew your nonprofit's registration.
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