It’s never too early to start planning for your not-for-profit’s first independent audit, even if you are a small organization and have never considered the need to have one.
This not-for-profit audit guide is delivered in two parts and is intended to provide a full understanding of what is entailed and how you can prepare for your first independent audit.
Perhaps you’re small, but growing, and see yourself hitting the $2 million annual revenue threshold soon. This will trigger the California Nonprofit Integrity Act (CNIA) audit requirement.
Or maybe you’re well below this threshold but you’re applying for a foundation grant that requires an independent audit as a condition for funding.
You might be wondering where to begin. This not-for-profit audit guide will show you.
What is an independent not-for-profit audit?
An independent audit is when you hire a licensed CPA firm to examine your organization’s annual financial statements (and the underlying books and records) and ultimately render an opinion on their reliability.
The idea is that financials audited by an independent third party expert can be trusted more by banks, foundations, and other external stakeholders than unaudited financial statements.
An audit also involves looking at your internal controls and identifying problem areas, and communicating to you about these. However, audits don’t typically involve rendering a formal opinion on internal control. Nonetheless, this feedback can be invaluable to not-for-profits that want to mitigate risks and conform to best practices.
For more information on this, see our previous article about audits vs. reviews.
What a not-for-profit audit CANNOT do
A not-for-profit audit is not an opportunity to clean up your books.
If your books are a mess, there are plenty of high-level bookkeeping consultants who can help you with that – and their hourly rates are typically a fraction of those for CPAs/auditors.
If you decide to use the audit process to clean up the books, your audit will likely be painful and expensive. You might incur “beyond scope” charges and the auditors will focus much of their time on bookkeeping at the expense of providing you with meaningful feedback in the areas of internal controls and best practices.
We strongly recommend against this.
Allocate resources: not-for-profit audits can be expensive & time-consuming
Only licensed CPAs are allowed to perform independent audits of financial statements. Because the public relies so much on the audit opinions rendered by these CPAs, the firms are heavily regulated by the government.
CPAs must typically have the equivalent of a master’s degree in accounting, pass a rigorous examination, have significant public accounting experience, as well as significant annual continuing education activities.
Firms must also undergo a triennial peer review process. All of these costs ultimately get built into the fee for an audit. Not to mention the fact that audits take quite a bit of time. As a result, audits can be expensive.
Although there is no “typical” audit fee, a small, basic not-for-profit organization with a $1 million annual operating budget should be prepared to pay about $10,000 for its audit, as a guide. This could be more if the organization has an endowment, significant government funding, multiple revenue streams, chapters or subsidiaries, and/or international activities.
Audits also involve a lot of work for a not-for-profit, especially a small one with limited staffing. The amount of time required to get ready for an audit will depend on how well your organization is staffed, how complicated your activities are, and how clean you keep your books (i.e. are they in accordance with U.S. Generally Accepted Accounting Principles [US GAAP]?)
Getting started: appoint a committee to oversee the audit process
Typically, a subsection of your governing board (e.g. the finance committee) will oversee the audit process.
If you are subject to the audit requirement of the CNIA, you are also required to form an audit committee (separate from your finance committee) to oversee the audit process. The CNIA stipulates who may and may not serve on the audit committee.
It’s a good idea to create an audit committee charter that delineates its duties.
The audit committee should first solicit proposals/bids from a handful of CPA firms that specialize in not-for-profit audits (because not-for-profit organizations have unique and different needs than for-profit businesses).
You can generally find these CPA firms by asking your peer organizations or funding sources (e.g. foundations and government agencies), since they likely come into contact with the auditors of their grantees.
Using a Request for Proposal (RFP) can be helpful in making sure the proposals contain the right information to make a well-informed decision, and so you can easily compare firms.
The proposal should contain information about the firm, its experience with comparable not-for-profit organizations, fees, staff biographies, scope of work, a sample timeline, client references, and the firm’s current peer review report.
After reviewing proposals and checking references, narrow down the list to 2-3 firms and conduct interviews before making a final decision. This will help you see who you fit with personality-wise, as this is important.
In Part Two of this not-for-profit audit guide, we will move on to what you should expect after you have selected an audit firm and what will happen throughout the audit process.
If you have any questions in the meantime, please don’t hesitate to contact me here: email@example.com