Frequently Asked Questions | Nonprofit Audit Guide

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Q. What is an independent audit of a nonprofit?

An independent audit is an examination by a certified public accountant of the financial records and business transactions of a charitable nonprofit.

Q. Is there a difference between an audit of a nonprofit and of a for-profit?

No, except that the board of directors of a charitable nonprofit has oversight responsibility for the audit function, whereas in some private businesses, there may not be a board of directors.

Q. Are there any alternatives to having an independent audit?

If an audit is required by law, there are no alternatives that will fulfill such a requirement. However, if a funder requests that the organization have an audit, the organization can request to have a review or compilation instead. More information on alternatives.

Q. Does my organization have to engage an independent auditor annually?

The Council of Nonprofits has compiled a chart of the audit requirements for nonprofits in all 50 states to help you determine whether your nonprofit is required to complete an annual audit.

Disclaimer: this is not a substitute for legal advice. 

Q. Do federal grantees need to have an audit?

If your nonprofit expends over $750,000 in federal funds annually, your organization is required to follow federal audit requirements set forth in the "Uniform Guidance"

Q. What is the role of an audit committee?

Audit Committees are generally responsible for:

  • Hiring, evaluating, and recommending the retention of an outside CPA firm. See Evaluating the external auditors (AICPA).
  • Evaluating whether staff is cooperating with external CPA and whether there is an effective flow of information between staff and CPA firm.
  • Reviewing and recommending policy or procedure changes that enhance compliance with accounting requirements. See Committee Charter for Audit Committee.

Some organizations use the audit committee as the compensation committee to review and recommend approval of the appropriate compensation and benefits of the executive director or CEO. Some organizations use the audit committee as a sort of "ombudsman" and channel complaints to the audit committee for the committee's investigation and resolution.

An audit committee is not a requirement, however, the IRS has signaled its encouragement of audit committees, consequently every tax-exempt organization that does not have an audit committee should strongly consider creating a committee or task force to oversee the audit function. See Board’s Role and Audit Committees

Q. Who should serve on an audit committee?

Typically the audit committee comprises board members and other individuals not paid by the nonprofit. In order to function effectively, the committee needs to be independent (e.g. not paid or compensated by the nonprofit.)

Ideally, those serving on the audit and finance committees of a nonprofit possess what is termed, "financial literacy." A financially literate board member is one who can look at the organization's budget and recognize whether there are warning signs. The American Institute of Certified Public Accounts has compiled a Toolkit for Nonprofit Audit Committees.  

Q. What is the difference between the Finance Committee and the Audit Committee?

View a side-by-side analysis of the difference between the responsibilities of an audit committee and the finance committee. (Nonprofit Risk Management Center)

Q. Where can we find an auditor?

Should we try to find an auditor to conduct an audit for us pro bono?You may be able to find a firm to conduct an independent audit on a pro bono basis, but this is rare. (Auditors need to maintain their independence, and some may consider a pro bono arrangement as impairing their independence. The concern with pro bono audits is that there could be the expectation (or hope) on the part of the pro bono auditor that s/he would be hired in the future by the pro bono client or referred to other paying clients, to return the "favor.") The best way to find an auditor is to talk with nonprofits similar to yours in your area, and contact your state association of nonprofits, or your state society of CPAs. Not all auditors have nonprofit experience, so you should check references and ask for a copy of their Peer Review (most states require auditors to be audited themselves by a third party, which is called a "peer review"). Once you get the names of a few CPA firms that perform audits, you can prepare a Request for Proposal (RFP) and ask them to meet with you, and provide a quote, as well as their credentials, and references that should include several from tax-exempt charitable organizations. More guidance on selecting an auditor.

Q. What's the best way to do due diligence on the background of an auditor?

Ask for references from other tax-exempt, charitable nonprofit clients, and call those references. However, don't be satisfied with the first three the audit firm gives you. Ask for a client list and then you pick who to speak with so that you are not only calling clients who are most likely to be hand-picked by the audit firm. Contact your state association of CPAs and the CPA Licensing Board in your state. All CPAs are licensed by the state. Finally, ask for the audit firm's Peer Review and a copy of their "malpractice binder" if you have any concerns.

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