Jitasa Nonprofit Blog

Are You Audit Ready? Part 1

As many nonprofits have wrapped up their fiscal year end process, a natural next step is preparing for your annual 990 IRS filing and (if required) your annual audit.

We will save the 990 IRS filing for another day and another entry, but for now let’s tackle some of the basics as it relates to nonprofit audits.

Umm… so what exactly is the purpose of an audit?

An audit as defined by The Alliance for Nonprofit Management is a process for testing the accuracy and completeness of information presented in an organization's financial statements. This testing process enables an independent certified public accountant (CPA) to issue what is referred to as an opinion on how fairly the agency's financial statements represent its financial position and whether they comply with generally accepted accounting principles (GAAP). 

Is an audit required for my nonprofit?

It depends, while the IRS does not require an audit, various other agencies and organizations may have its own specific audit requirements to either oversee, fund, or work with nonprofits  Below are a few tests:

Test 1: State Requirement. Depending on which state(s), your nonprofit is incorporated in or where you have operations, or raise funds, your respective state agencies (either the attorney general or secretary of state) may require an audit, depending on certain requirements.

For example in California, charitable organizations with gross revenues of $2+M are required to submit independently audited financial statements to the California Attorney General by the 9th month after the fiscal year end.

To find out the audit requirements for your state, go to your respective state’s a
ttorney general or secretary of state website.  A great resource is the NASCO website (National Association of State Charity Officials) which lists the respective state agency (and website) that regulate charitable organizations.

Test 2: Funder or Grant Requirement. Often times, foundations or government agencies will require an audit either during the grant registration process or as part of their annual reporting process.

Test 3: Board Requirement. Even if a nonprofit has no audit requirements from their state or funding sources, a nonprofit board may elect to voluntarily undergo an audit for several reasons such as fiscal discipline, donor confidence, and as a safeguard / check for fraud.

Here is a great article written by Blue Avocado, to give some of the pros and cons to consider for any nonprofit board or management team that is deciding whether to voluntarily undergo an audit.

OK, so it looks like I do need to undergo an audit, what next?

You will want to understand the following key questions and critical next steps:

  1. Do I need an audit or will a financial review suffice?
  2. When should I conduct my audit?
  3. What are the most critical criteria in selecting an audit firm?
  4. What do I need to do to prepare for my audit?

Come back on Thursday for part 2 of our Are You Audit Ready series to find out some best practices around these critical next steps of the audit process.

Mary Soper, Jitasa - Director of People Development, CPA

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