Most nonprofit organizations require an annual audit by a CPA. Smaller organizations can get by with what is called a review – or an “audit light.” For personnel who work in the accounting department, it’s too often anxiety time. Relax, if you are routinely generating financial statements that are accurate, timely, and relevant to the various stakeholders.
An audit can be an event to look forward to as it will affirm your worthiness and set-up high-fives all around. If, as an organization, your financial reporting falls short of five stars (i.e., a clean audit), don’t despair; you will know what must be done to get there next year.
The purpose of your nonprofit’s audit
A nonprofit audit is designed to ensure financial reports are “reasonably accurate” while presenting the information in agreement with Generally Accepted Accounting Principles (GAAP). Here are a few things to keep in mind. First, auditors only review the financial statements that you create internally. They conduct various tests and confirmations to reach an opinion on their fairness and accuracy. If you’d like information on financial reports, consider reading Interpreting Financial Reports – A Guide to Strong Nonprofit Financial Leadership or Nonprofit Accounting Reports and What to do With Them.
Also, there’s a common misconception that audits are designed to search out fraud. Auditors perform special-purpose forensic audit designed for that purpose, but not as part of the regular audit. If they fortuitously find it, of course, they are obligated to report it to management and the Board. An important part of your nonprofit’s audit is a review of the system of internal controls. A weak system puts the organization at risk of fraud and could result in a qualified opinion. Internal controls are covered in a separate article, Internal Controls for Nonprofits- Top 10 Best Practices.