Nonprofits, why do you need an audit? An auditor’s advice.

Is your nonprofit organization required to have a financial statement audit for the first time? If so, the information below will help you gain an understanding of what to do before, during and after the audit.

Why do you need an audit?

In Minnesota, 501(c)(3) organizations with total revenue of $750,000 or more are required to have a financial statement audit. The audit will be filed with the organization’s annual reporting form submitted to the Office of the Attorney General. Even if your organization fell below the Minnesota revenue requirement, an audit may still be requested by the Board of Directors, your bank or an outside donor.

Auditor’s Advice: If an outside donor is requiring an audit, consider asking if they would be willing to help offset the related cost.

Before the Audit – Selecting an Auditor

Once it has been decided you need an audit, the first step is to select an independent CPA firm to perform the audit. Choose a firm with the necessary skills and nonprofit experience to provide the services your organization needs.

Here are a few simple ways to find an audit firm with nonprofit experience:

 - The Minnesota Council of Nonprofits has compiled a list of members who provide audit services.

 -  GuideStar allows you to search for and review the current Form 990 for nonprofit organizations across the country. Find an organization similar to yours and find out who does their audit.

 - If you have friends at other nonprofit organizations, ask them who does their audit. In addition, ask them about their audit experience.

After assembling a list of potential candidates, you can prepare a Request for Proposal (RFP) to send to these firms. That way, you have a number of options and can find a firm who best suits you. Don’t know how to start an RFP? Check out this template from Propel Nonprofits.

Auditor’s Advice: Auditors need to be independent of your organization, in fact and in appearance. This means the CPA who is the treasurer of your Board of Directors cannot also perform your audit.

During the Audit – Preparing and Providing Documentation

After you have selected an auditor, the most important preparation for the audit is to ensure your accounting records are updated, organized and as accurate as possible. During the audit, they will review your  financial records and transactions, and may ask for additional documentation to support any of the transactions. Some common items reviewed by auditors include:

 - Bank and investment statements

 - Grant funds received and expected

 - Listing of year end accounts payable

 - Payroll reports, W-2s and 1099s

 - Minutes of board of directors meetings

 - Financial policies

Auditor’s Advice: Place all the documents the auditors request in a single folder on your computer. Then next year, you will have a record of what the auditors reviewed and it will be easier to prepare.

Your auditor is also required to gain an understanding of the internal controls in place at your nonprofit. Some of the more common internal controls include bank reconciliations, dual signatures on checks, inventory counts, donation acknowledgements, and an expense reimbursement policy.  Your auditor must understand the controls you have in place and then also determine whether they are being followed properly.

After the Audit – Reviewing with the Auditor

After the audit has been completed, your auditor will issue three documents to your Board of Directors:

 - A report expressing an opinion as to whether the financial statements fairly present the financial position of your nonprofit organization.

 - A letter commonly referred to as a “management letter.” This letter is an overall summary of the audit and discusses your organization’s accounting policies, any difficulties encountered in performing the audit, any disagreements with management, and any other audit findings or issues that need to be brought to the Board’s attention.

 - A letter commonly referred to as an “internal control letter.” This letter is meant to identify and communicate areas of operations or procedures where your organization can strengthen or redesign internal controls.

The insights shared by the auditor in these documents should be discussed with management prior to presentation to the audit committee and/or full Board of Directors.

Auditor’s Advice: Ask questions!  If you don’t understand something, ask. If you think something is wrong, say something. The audit is a reflection of your nonprofit.

The audit process can be intimidating and overwhelming if it’s your first audit experience. However, don’t be intimidated, nonprofit auditors will be more than willing to help educate your staff on how to prepare for the audit. The most important thing is to find a firm you’re comfortable with who can provide the services you require.

Want to learn more about audits, accounting and other financial topics? The Minnesota Council of Nonprofits and Propel Nonprofits sponsor monthly financial networking lunches that are a great resource and networking opportunity.  Meetings are held on the first Thursday of the month at the MCN office and cover topics like budgeting, in-kind donations, financial oversight, employee compensation and much more.


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